Why Mexico

Mexico has long been famous for miles of beautiful beaches, colonial towns, and friendly, family-oriented people. At the same time, stereotypes persist of gun-toting banditos, official corruption, and sombrero somnambulance. The truth is far more complex and reveals a country undergoing fundamental institutional reform while retaining a strong social fabric. These developments are supporting the rapid evolution of a middle-income business and professional class along with sophisticated financial institutions.

At the same time, a quickly evolving wave of aging US and Canadian baby boomers are looking for attractive retirement havens. This demographic cohort has tended to be culturally adventurous, sensitive to social and ecological issues, and connoisseurs of high quality of life. With age, this group is discovering an interest in easy living sanctuaries with temperate climates, social and recreational opportunities, easy transportation access to family and friends back home, and affordable medical care.

The evolving needs of these two cultures will continue to promote a trend of increased transmigration in the coming decade. As an emerging middle class of Mexicans seeking increased economic opportunity solidifies the consensus for ever more sound financial and political institutions in Mexico, retiring US and Canadian baby boomers are seeking the kind of community-centered, relaxed, and affordable lifestyle that can be found here.

This page and the following page (International Trends) describe five key elements driving this unprecedented investment and lifestyle opportunity:

• Institutional Reform
• Open Markets
• Tourism
• Environmental Leadership
• Retirement Trends

Institutional Reform

Mexico may well be standing at the brightest point in her history since the Mayans created the first great civilization in the Western Hemisphere. The peaceful turnover of power to political pluralism after 70 years of one-party rule has ushered in an era of optimism and across-the-board reform.

This includes a dramatic shift away from the inward-looking corporate state of the past toward a rapid integration with the world economy. Mexico is currently first in Latin America for the value of direct foreign investment. “World Investment Prospects to 2011” by The Economist and the Columbia Program on International Investment predicts that direct foreign investment in 2007-2011, in Mexico, will average USD $22.7 billion annually, fifth among developing countries and seventeenth in the world.

The push for federal reform, led by a responsive executive and a newly empowered legislature, is being met with unprecedented cooperation at all levels of government. There is wide consensus that creating effective institutions, transparent government, and sound economic policy are essential to solving Mexico’s problems.

Throughout their history, the Mexican people have been remarkably able to improvise around dysfunctional institutions. Nonetheless, the desire for economic opportunity has often been limited by an insular political system lacking real accountability. As this pent-up demand finds an outlet in emerging markets, the political will for fundamental change is developing inescapable momentum.

Entire economic sectors are coming on line with remarkable velocity. For one example, the mortgage lending industry was somewhere between moribund and nonexistent as recently as five years ago. Now it is a thriving industry with intact systems for safe and predictable transactions.

Over the past decade, the Mexican stock market index has outperformed the Dow Jones Industrial average by a factor of ten. In 2002, Mexico’s sovereign debt was rated "investment grade" by Standard and Poors, as well as Fitch and Moody. JP Morgan reported that June 2007 yields on a basket of dollar-denominated Mexican bonds were just 0.85% above comparable US debt, near the lowest spread on record. JP Morgan added Mexican government bonds to its government bond index in 2003.

Mexico is much better positioned to weather an American recession than it was in 2000. That is because inflation is low, the public-sector deficit is close to zero, and the current-account deficit is much smaller than it was six years ago.

“‘A few years of single-digit inflation have transformed the financial markets,’ says Guillermo Ortiz, governor of the central bank. ‘What’s surprising is that this has happened so quickly.’ Mexico’s government debt began to achieve investment-grade status in 2000 with dramatic effects. In 1999, the maximum term of government bonds was one year; most were denominated in dollars or linked to inflation. In 2003, the government issued a 20-year bond in pesos; last month it launched a 30-year peso bond not indexed to the inflation rate.

“Because of its relatively conservative fiscal policy, the government now absorbs only 16% of national savings, down from 80% in 2000. That has helped everyone else to borrow more cheaply. Big companies are now issuing ten-year peso bonds at a fixed rate of around 8%, according to Damian Fraser of UBS, a Swiss investment bank… Since 1999, the public-sector borrowing requirement has fallen from 6.3% of GDP to around 2%, despite a modest increase in public spending.”
Time to Wake Up
The Economist (11/18/06)

It is an exciting time. Ironically, the very fact that Mexico has been held back in the past is precisely what makes this an exceptional time for investing. This is a blossoming economy, on the brink of a fundamental breakthrough.

“Faster growth, low inflation, expanding credit and liberal trade are helping to create a new middle class… The new middle classes have more schooling than their parents; some have gone to mushrooming private universities… The direction of change is clear. ‘We are going faster towards a middle-class society than we could have imagined 20 years ago,’ says [sociologist and politician] Cardoso. ‘My bet is that we’re crossing the threshold.’

“If so, this carries big implications for politics in the region. [Economic consultant] Hope finds a close correlation in Mexico between home ownership and support for the ruling centre-right PAN. The old middle class believed in state protection. The new middle class is more self-reliant. Above all, it has benefited from economic stability.”
Adiós to Poverty
The Economist (8/16/07)

“Mexico has proven its stability and the economy here has not slowed down—nor will it. Business people in Mexico trust new President Felipe Calderón and his very educated team. I certainly do. Calderon’s government is democratically elected and staunchly against corruption of any kind.

“Mexican citizens are, by and large, supportive of and committed to continue the same progressive policies that President Fox began in 2000... But we believe progress may come more quickly now, with Felipe Calderón at the helm for the next six crucial years. In Mexico, the City, State and Federal governments are now aligned for the first time.

“Mexico is now in the best position to succeed (in every aspect) than it has been in the last 124 years... since Porfirio Diaz began governing, allied with the French in 1876. Don Porfirio and his PRI party abused and robbed Mexico for years—and this behavior is just not acceptable any longer.”
Jorge Sanchez reporting for Mexico Insider (an International Living publication) (09/07)

HISTORICAL BACKGROUND

The story of Mexico is complex and fascinating. Perhaps most amazing is that this tangled and often tragic story has given rise to such extraordinary people, among the happiest and most artistically creative on earth. Understanding something about this path is critical to understanding the Mexican national character and the exceptional times in which Mexicans now live.

Click here for a condensed History of Mexico.

EXTRAORDINARY SHIFT IN GOVERNMENT

“The election as president of Vicente Fox completed a long transition to democracy, ending 72 years of authoritarian rule under the Institutional Revolutionary Party (PRI). It also seemed to set the seal on the economic modernization of the world’s largest Spanish-speaking country, with a population of 106 million… In recent years, the country has enjoyed greater political freedom than perhaps at any other time in its history. The government has maintained economic and financial stability, with inflation for this year estimated at 3.7%. Easier bank credit, together with a vast housebuilding programme promoted by the government, is slowly bringing tangible benefits to an expanding middle class. Social policies have helped to cut poverty.”
Time to Wake Up
The Economist (11/18/06)

“There may not be a more significant political figure in the world at this moment than President Fox of Mexico. The mere fact that he was elected signals volumes about a nation’s desire for a radical change in national politics.”
Mexico in the New Millennium
Mitch Creekmore of Stewart Title for the
Arizona Journal of Real Estate & Business (03/01)

The great hopes that attended Fox’s election were somewhat thwarted by the political impasse that ensued. Congress was split between three parties, and although the Mexican Constitution defines a strong legislature, in fact that body had been largely toothless under the PRI. As a result, the transition to multi-party cooperation involved significant gridlock. While NAFTA was helping support economic reform, progress languished on sticky political and legal reforms such as improving the police and judiciary, creating a functional taxation system, and breaking up entrenched monopolies.

POLITICAL AND ECONOMIC REFORM

In July 2006, the very close election following Fox’s six-year term (reelection is constitutionally prohibited) ended in an election dispute, with the opposition PRD, under Lopez Obrador, taking to the streets. This potential crisis ended with Felipe Calderon, of PAN, winning the presidency, having overcome long odds within his own party and in the general election.

Despite the challenging beginning, Calderón has proved himself an adroit politician and a deft consensus-builder, stating, “We will give accounts of every peso that citizens have given to the government. Transparency and accountability is the responsibility of every democratic government.” Calderón took office promising to build an economy that mitigates the need for millions of Mexicans to cross into the United States for work.

“Migration continues to divide our families… Mexico has all it needs to be a country that receives investment and generates employment for its people,” he said in his inaugural address, vowing to alleviate poverty by giving Mexicans “dignified work” and describing job creation as “the only effective path to fighting poverty.” Calderón called on his cabinet to encourage homegrown, small-and medium-sized businesses, saying Mexico’s internal market must be the “motor” of the economy.

Here are some of the milestones he has achieved in a little over a year.

Guaranteed open and responsible government:

1. Decreed a 10% pay cut for himself and his cabinet
2. Promised to slash government spending, from cell phone calls to foreign trips
3. Is fighting corruption by promoting government transparency

Promised to overcome long-term impasses to fiscal reform:

1. Successfully challenged entrenched interests to pass a State pension reform bill (this was the first major new economic legislation since 1995)
2. Broke a long-standing deadlock to approve a tax reform bill (this frees desperately needed investment capital for oil exploration)
3. Signed spending cuts worth USD $2.5 billion
4. Pledged to promote a public spending bill to increase long-term savings
   

Committed to boost economic growth by improving competition:

1. Launched two antitrust probes into the telecommunications sector
2. Ordered Telmex to provide other operators access to its network

Promised aggressive initiatives to break heavily armed drug cartels:

1. Deployed the armed forces to combat violence related to drug-trafficking
2. Pledged an increase in pay for the troops
3. In an unprecedented move, accepted USD $1.4 billion for drug-control initiatives

These changes build on a comprehensive structural transformation to the economy begun under the PRI-led Salinas government in the 1990s that were strongly endorsed by the United States and international financial organizations. This involved the following key initiatives:

• Privatization of state industries (more than 700 were sold, including banks, broadcasters, telecoms, airlines, mines, industrial plants, agricultural and manufacturing enterprises, steel production, and maritime ports)
• Liberalization of foreign trade (including dramatically lowering tariff barriers, as well as import licenses and fees)
• A complete modernization of the banking and financial system (including a complete reversal of myriad and byzantine barriers to foreign investment)

These sales generated USD $22 billion, the majority of which was used to reduce the massive foreign debt and to finance new infrastructure and social expenditures, transforming the country’s economic footing. Total external debt has gradually fallen from the equivalent of 58% of GDP in 1995 to an estimated 20% of GDP in 2006. In the same period, the debt-service ratio (due) has fallen from 35% to an estimated 14%.

An explosive growth of foreign capital followed these reforms, in particular investments in manufacturing plants along the border. Inflation fell dramatically and has remained low. In addition, the capitalization of the Mexican stock market soared, as US and other investors sought the higher returns afforded by emerging markets.

The Economist’s Business Intelligence Unit makes the following predictions in its Mexican Country Forecast for 2007-2011:

• Disciplined macroeconomic policy will continue to anchor economic stability
• Fiscal discipline will be maintained, containing deficits and public debt
• Inflation-fighting policies of the central bank will remain effective
• Broad price stability will be maintained at around 3% annual consumer inflation
• The peso will remain stable, transparency will reduce volatility
• Property rights will remain well-protected
• Weaknesses in the cumbersome land registration process will be eased
• Having improved its financial fundamentals and reduced its external liabilities, Mexico is in a good position to weather volatility in the markets
• Broad stability will be underpinned by highly credible fiscal and monetary policies and a sizeable reserves cushion
• Healthy demographics, workforce improvements, and ongoing reforms will boost competitiveness

“Under Calderón, the maintenance of the pro-market policy orientation appears assured and the risk of destabilizing policy reversals appears low. Since 2000, the legislature has been able to assert its independence from the executive and for the first time plays a crucial role in the policymaking process… Calderón is proving markedly more successful than Fox in obtaining legislative backing, despite facing a similarly opposition-dominated Congress…”
Mexico’s New President Cuts Own Salary
Ioan Grillo for The Associated Press (12/03/06)

“Felipe Calderón has barely been Mexico’s president for six months, but local and foreign investors are impressed and are bullish about the country’s outlook. ‘The country’s new, business friendly and reform-minded government has made Mexico even more desirable for business activity,’ says Thurston R. Hamer, the senior client partner at the Mexico office of US-based Korn/Ferry, the world’s largest executive recruitment firm. ‘The administration of President Felipe Calderón is committed to push badly needed reforms to fiscal policies, labor regulations and the legal structure, among others, and has made job creation one of the major objectives of its current six-year term, which has just begun. Calderón’s reputation as a shrewd politician and negotiator, and his early success in dealing with opposition legislators have encouraged businessmen at home and abroad regarding positive projections for the future.’

“John Bruton, the Mexico-based senior managing director of Manatt Jones Global Strategies, agrees. ‘Mexico’s new administration is a promising one [and] seems to be emphasizing increasingly good relations between the legislative branch and the executive,’ he says, alluding to Calderón’s ability to forge alliances with the opposition PRI party to pass key legislation for social security reform and future fiscal reform. ‘Mexico’s international prestige as a destination for investment is growing.’

“US-based Continental Airlines, which flies non-stop to 30 destinations in Mexico from the United States, is also bullish. ‘The new policies established by President Felipe Calderón are leading Mexico towards growth,’ says Carlos Enrique Hernandez, the airline’s general director in Mexico. The confidence in Calderón is resulting in record growth in foreign direct investment.
Mexico: Strong Business Optimism
Joachim Baud for the Latin Business Chronicle (6/11/07)

“As a man who touts creating jobs as the cure-all for Mexico’s ills, President-elect Felipe Calderón couldn’t be taking office at a better time. The economy is projected to expand by as much as 4.8% by year’s end—its fastest growth in six years—thanks to exploding business in the construction, automobile and service industries. High oil prices have poured money into government coffers, the peso has remained stable, and Mexico is on track to create one million jobs this year.”
Mexico’s New Leader Starts Amid Economic Upswing
Julie Watson for The Associated Press (04/12/06)

SOLVING THE POVERTY PROBLEM

It is widely recognized that creating broader economic opportunity (coupled with improved education and health care) is the only viable solution to solving the poverty problem. This issue is particularly acute among the indigenous population, which is more concentrated in the southeastern part of Mexico.

Mexico Oportunidades offers aid to approximately five million families at a cost of USD $2 billion a year. The program’s main aim is to prevent poverty in the next generation by requiring health check-ups and school attendance as a condition of aid. Online learning programs are being developed to deliver secondary education in remote areas. The idea is to expedite Mexico’s transition to a labor force that has finished secondary school.

Tecnológico has set up 30 campuses across Mexico that offer degrees in engineering and computing, linked to small-business incubators. Mexico trains more engineers each year than the United States, China, or India.

“Mexico is one of the fastest growing economies in Latin America, having succeeded in maintaining high economic performance through the recent years of international financial volatility. It is addressing poverty reduction on a wide front, through fiscal, financial and administrative reforms, targeting societal issues in sectors such as health, rural development and employment generation.”
Francisco Jaime Viegas
European Union-Mexico Joint Committee on Cooperation in Science and Technology

“Something rather exciting is happening in Latin America… In many countries in the region, and especially in Brazil and Mexico, Latin America’s two giants, things are in fact going better today than they have done since the mid-1970s. The region is in its fourth successive year of economic growth, averaging a steady 5%. In most places, inflation is in low single digits. And for the first time in memory, growth has gone hand-in-hand with a current-account surplus…

“What is more, financial stability and faster growth are starting to transform social conditions with astonishing speed. The number of people living in poverty is falling, not only because of growth but also thanks to the social policies of reforming democratic governments. The incomes of the poor are rising faster than those of the rich in [Mexico]…

“A new lower-middle class is emerging from poverty. Low inflation, achieved through more disciplined public finances and trade liberalization, has brought falling interest rates. Credit has at last returned. So these new consumers are buying cars and DVD players or taking out mortgages. No wonder Latin Americans are in an optimistic mood: earlier this year a poll by the Pew Global Attitudes Project found a greater increase in personal satisfaction in Brazil and Mexico over the past five years than in any of the other 45 countries it surveyed…

“The important point is that the course upon which most Latin American countries are set—of democracy and open-market economies—is finally bearing fruit. The new middle class in countries like Brazil and Mexico derives its income from the private sector, not from public employment… Latin America’s democracies could turn an important corner, in which inequality, poverty and populism give way to prosperous middle-class democracies where the majority has an interest in stability.”
Up from the Bottom of the Pile
The Economist (8/16/07)

Income distribution is becoming less unequal... Although growth has been only moderate, poverty, defined as income insufficient to feed a family, fell from 37% to 14% over the decade to 2006. The other crucial factor… is low inflation, achieved because most governments have abjured deficit spending and because trade liberalization has made many goods cheaper. Low inflation benefits the poor more than the rich, who can find ways to protect the value of their incomes. And as interest rates have fallen, credit has returned. Credit is still much scarcer than in developed countries, but it is growing fast… It typically starts with consumer loans for cars and durable goods, and moves on to mortgages. In Mexico the value of new mortgages has been growing by around 35% a year. That in turn has stimulated a boom in the building of new housing projects for lower-middle-class families.
Adiós to Poverty
The Economist (8/16/07)

Open Markets

The Economist Intelligence Unit Country Forecast for 2007-2011 moves Mexico from 13th to 10th place among the 82 ranked countries for “market opportunities,” retaining first position among Central and South American economies. For the ranking “foreign trade and exchange controls,” Mexico moves from 15th to 3rd position globally and from second to first regionally.

In reaching this conclusion, the report cites the following elements:

• The large size of Mexico's market
• An open and proactive trade policy
• Integration into US manufacturing supply chains
• A burgeoning network of free-trade agreements with other major world markets
• Reduced tariff and non-tariff trade barriers
• Fiscal and monetary policies that underpin low inflation rates
• A relatively stable exchange-rate environment
• Commitment to orthodox fiscal and monetary policies
• Policy credibility and macroeconomic stability

“President Felipe Calderón said Mexico’s economic growth will be ‘significantly higher’ than 3 percent in 2007, topping analysts’ estimates. ‘Some estimate growth this year of about 3 percent,’ Calderón said in an interview with Mexico City-based Radio Formula today. ‘I believe that we will end the year with a significantly higher number than that…’

“Mexico plans to spur growth next year by spending more on infrastructure, housing, farming and tourism, and diversifying its exports. The moves will help the country weather an economic slowdown in the US, which buys about 80 percent of Mexico’s exports, Calderón said today. The government is targeting annual economic growth of about 5 percent and the creation of a million jobs a year by 2012, when Calderón’s term ends.”
Calderón Says Mexico to Expand More Than 3% in 2007
Valerie Rota and Andres R. Martinez for Bloomberg (12/04/07)

NAFTA

Perhaps the single most important catalyst for the transformation of Mexican economic policy was the ambitious decision by the Salinas administration to participate as a full partner in the North American Free-Trade zone established by Canada and the US in the early 1990s. President Salinas and his advisers viewed Mexico’s integration into the world trading system as the only viable basis for their country’s future long-term growth. In bowing to geographical reality, Salinas discarded decades of protectionist and nationalistic practices to forge a close and lasting economic and political partnership with the United States to ensure Mexico’s full incorporation into the emerging financial and trading bloc.

NAFTA became the cornerstone of Mexico's reform efforts and the ultimate test of its recognition as a new entrant in the community of modern nations. In preparation for Mexico's accession to NAFTA, efforts to open its markets and increase the competitiveness of its domestic economy were redoubled. Mexico also became more receptive to US concerns on narcotics trafficking and illegal immigration. In response to international pressure, the Mexican government improved its human rights practices and made the electoral process more transparent. In the weeks preceding the NAFTA ratification vote by the US Congress, Mexico and the United States negotiated a series of side agreements on environmental protection.

The ratification of NAFTA in 1994 boosted international confidence in the Mexican economy, spurring an influx of foreign capital. Since the passage of NAFTA, Mexico has been a major player in world politics and economy.

Post-NAFTA Mexico boasts an incredibly resilient economic environment. In the first 10 years NAFTA was in effect, foreign investment almost doubled, from $5-6 billion to $10-12 billion a year. In 2001, inflation in Mexico fell to a 30-year low, and the flow of foreign capital into the Mexican stock market rose more than 6%, helping make it the seventh-best performing stock market on the planet.

Mexico is among Latin America’s most open economies, accounting for over 40% of the region’s export earnings and close to 60% of import spending. With the aim of attracting fresh foreign direct investment inflows and diversifying export sectors and partners, the promotion of free trade will remain a high priority.

DIRECT FOREIGN INVESTMENT

Investing in any foreign country comes with risks. One must consider the stability of the currency, long-term economic health, openness to foreign investment, political stability, and the transparency of its political and legal systems. In many counties, risks are high in nearly all these categories.

Mexico offers key positives with its growing GDP, a high level of foreign direct investment, close geographic proximity to major markets, pluralistic political system, broad consensus for an open economy, low inflation, relatively low indebtedness, stable currency and a high-performance stock market.

Mexico has witnessed the most rapid and intense commercial opening of any country, with the possible exception of Turkey (which is experiencing a similar rapid integration into the European Union, except with more challenging cultural issues). Open economies tend to have greater growth given the free flow of information and technology and better institutions.

The largest source of direct foreign investment in Mexico is the US, followed by Spain and more recently by Japan and Germany. Over 25,700 foreign companies have offices in Mexico, which ranks fifth in the world for this measure.

Mexico is the seventh-most visited tourist destination in the world. The Mexican auto industry is eleventh in world auto production. Mexico is the fifth-most prolific producer of crude oil.

Thanks to:
J. Ramiro Montemayor Dingler
Actinver-Lloyd Brokerage House
(322) 221-3101 MX

“President Felipe Calderón assured investors that his administration would work to provide a safe business climate, battling crime and corruption while improving the nation’s infrastructure…

“‘Be assured that my government is working hard to win the war against crime, to ensure that people’s rights and property and investment rights are respected, to fight without rest in the struggle against corruption,’ Calderón said at the opening of a Spain-Mexico investment forum…”
Mexico’s New President Promises Investors Safe Environment
The Associated Press (12/04/06)

POSITIVE DEMOGRAPHIC TRENDS

The domestic market is increasingly attractive. Mexico has the 11th-largest population in the world (second in Latin America) and the highest levels of income per head of all the region’s major economies. One third of the population is under the age of 15 and only 5% are 65 or older. This means that the majority will be at working age in the next 15 years, a situation that is very positive for economic growth. Between 2006 and 2020, Mexico is predicted to add 17 million people to its population.

STOCK MARKET

The Mexican Stock Exchange (Bolsa Mexicana de Valores or BMV) ranks second in volume in Latin America, after Brazil. An impressive BMV performance in the past three years is indicated by an annual average index rise of 45% in terms of the US dollar, closing 2006 at 26,448. Market capitalization rose by an average of 42% annually in the same period, to USD $347 billion. Growth is largely attributable to better earnings, Mexico’s elevation to investment-grade status in 2001 (which helped expand the investor base), greater international liquidity, and a growing thirst for markets not denominated in US dollars.