MAJOR MACRO ECONOMIC INDICATORS
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(e): Estimate (f): Forecast
- Geographic proximity to the U.S. economy
- Membership of USMCA and many other agreements
- Substantial industrial base
- Prudent fiscal and monetary policies
- Free-floating exchange rate
- Adequate foreign exchange reserves
- Large population and relatively low labour cost
- High dependence on the US economy
- High criminality linked to drug cartels and trafficking, high corruption surfing on poverty and inequality
- Weaknesses in transport, health and education
- High informality in the economy (55%) and the job market
- Narrow tax base, with tax revenues representing 13% of GDP, depleted sovereign funds
- Oil sector and PEMEX undermined by years of underinvestment
Activity to decelerate throughout 2023
Growth momentum in Mexico surprised to the upside in Q1 2023, when it expanded by solid 3.7% year-on-year (from 3.6% YOY in Q4 2022) and 1% quarter-on-quarter (from 0.6% QOQ in Q4 2022). The outcome was notably driven by strong services (including retail), since income fundamentals were still supportive (including a resilient job market, remittances from expatriates in the US and a rising wage bill). Nonetheless, activity should lose steam gradually throughout the following quarters, mainly as a result of a weaker US economy, which is expected to affect Mexico´s manufacturing sector, tourism (7% of GDP in 2021) and expatriate remittances (4% of GDP). In fact, the latter, in addition to persistent historically high inflation (albeit decelerating at the margin) and tight credit conditions, should contribute to the slowdown of household consumption growth (65% of GDP). Regarding net exports, while export (39% of GDP) expansion will cool as economic momentum in the US weakens (destination of 78% of exports), it should be mitigated by lower import growth (amid decelerating domestic activity). Regarding private investment, manufacturing will remain a key destination of foreign investments and Mexico tends to benefit from the nearshoring narrative. Aiming to catch on to this tailwind and to bring development to the poorer South, the government announced in June 2023 tax incentives for companies to invest in an interoceanic industrial corridor to be developed in the southern isthmus of Tehuantepec (connecting the Pacific port of Salina Cruz in Oaxaca state with the Gulf coast hub of Coatzacoalcos in Veracruz state) in the hope of competing with the Panama Canal. However, possible downside risk for private investments are related to domestic policy uncertainty. The latter includes a controversial expropriation in May 2023 of part of a section of a private run railroad in the Gulf state of Veracruz to benefit the government´s priority isthmus project.
Solid external and fiscal accounts
The current account deficit should narrow slightly in 2023. The services account deficit (1.1% of GDP in 2022) is expected to improve as freight costs sharply correct from a high comparison base and offset an expected relatively weaker travel surplus amid fewer US visitors. In addition, the primary income deficit should also curb (2.4% of GDP), notably due to lower revenues and dividend repatriations by foreign investors. Moreover, the trade deficit (1.9% of GDP in 2022) is expected to marginally improve as relatively lower energy consumption should contribute to a lower energy trade deficit (2.5% of GDP in 2022). By contrast, the secondary income surplus (4.1% of GDP) should decline, underpinned by weaker remittances on back of a softer US job market. On the financing side, foreign direct investment (2.7% of GDP) will continue to comfortably cover the external account shortfall. In addition, external debt (excluding FDI-related debt) stood at 32.1% of GDP in December 2022 (15.7% of GDP for the public-sector portion). Overall, Mexico should keep its solid external position supported by foreign currency reserves of USD 203 billion (covering roughly 4 months of imports) and a preventive USD 50 billion Flexible Credit Line with the IMF (renewed for two years in November 2021).
Concerning the fiscal accounts, the government is expected to maintain a prudent fiscal policy despite a mild increase in the deficit. The latter can be explained by higher interest payments, an increase in allocation for priority programmes and lower oil tax revenues. Importantly, the 2023 budget departs from an optimistic 3% GDP growth forecast for the year, representing a downside for the budget balance. Last, the Stabilisation Fund is still largely depleted.
The political spectrum influenced by the 2024 general elections
The leftist President Andrés Manuel López Obrador from the Morena party has maintained widespread popularity (approval rating stood at 67% in May 2023). Alongside, the ruling coalition has also increased its dominance among state governments. Its most recent and representative victory was in the state of Mexico in June 2023, bringing the total number of ruled states to 23 out of 31 and encompassing 73% of the population. That said, the government boasts the strongest representation in Congress, holding 277 (out 500) seats in the Lower House and 72 (out of 128) in the Senate, but short of the two-thirds majority needed to amend the Constitution. Nonetheless, when it comes to the judiciary, the government has maintained a somewhat conflicting relationship with the Supreme Court. The Court has often ruled against the President’s reform agenda. For instance, in June 2023, it struck out the remaining segment of an electoral reform which would have significantly eroded the national electoral agency INE’s power. Importantly, with less than a year remaining until the general elections, the political environment has started to be influenced by this event. A new president will be elected to serve for a six-year term (Mexico’s presidency is limited to a single term), alongside the 500 members of the Chamber of Deputies and 128 members of the Senate. Marcelo Ebrard and Claudia Scheinbaum, the former Foreign Affairs Minister and Mexico City’s mayor, respectively, have proven themselves to be the ruling party's most competitive candidates for the presidential ticket (the party will elect its candidate on 6 September 2023). Both stepped down from their positions in June 2023 to dedicate themselves to the race. According to preliminary pollsters, the Morena party has maintained a comfortable lead of more than 20 percentage points over the conservative Nationalist Action Party (PAN) and the centrist Institutional Revolutionary Party (PRI).
Last updated: September 2023
Debts are commonly paid in Mexico by cheques, wire transfers and – in some special cases – credit cards. Corporate payment processes are governed by companies’ internal policies. Most companies request supporting documentation from the other party before proceeding with a transaction (e.g. the company’s articles of incorporation, or its tax identification, known as the Registro Federal de Contribuyentes). The documents most frequently related to commercial transaction are invoices, promissory notes, and cheques. Promissory notes are unconditional promises, in writing, to pay a person a sum of money. In Mexico, this document is normally used as a guarantee of payment from the buyer. It is signed by the legal representative of the buyer – and hence, the debtor – for an amount which is superior to the total amount of the debt. Promissory notes and cheques also serve as certificates of indebtedness. Once buyers possess the relevant information, they can proceed to make payments by wire transfer or cheque, with both methods taking approximately ten to fifteen working days. Wire transfers are more common, as cheques can be post-dated, thus presenting the risk that buyers will issue cheques that they cannot finance.
In terms of debt collection, original invoices act as proof of the acceptance of the debt and the establishment of a commercial relationship between the parties. According to commercial and civil laws, the commercial agreement is sealed by two elements: an object (in this case the product or the service), and the price of the object as agreed by the parties. Even in the absence of a written agreement, an invoice provides both of these elements. Invoices are therefore the most effective form of proof in a lawsuit situation, as they show that the parties made a sale agreement and have a reciprocal obligation to pay the price agreed and to deliver the goods or provide the service.
In 2014, the Mexican Tax Authorities (Servicio de Administraci Servicio de Administración Tributaria) ruled that all invoices must be electronic, with an XML file. They must also be verified by the tax authority system in order to be validated. The tax authority also requests electronic confirmation when the creditor receives payment, along with a receipt in an XML file as legal confirmation. These new requirements entered into force in December 2017. The goal of these changes is to limit the amount of fraud cases and ghost companies, both of which are prevalent in Mexico.
Before entering into legal proceedings in Mexico, creditors normally attempt to contact their debtors via telephone. A written letter is sent to the debtor, in which the debtor is notified of the amount of the debt and the creditor’s intentions to negotiate payment terms, other steps include a visit to the debtor by a collection specialist. During this visit, the collection specialist will attempt to develop a more detailed perspective on the debtor’s situation. The specialist will endeavour to ascertain if the company is still in business and if it has assets (such as real estate, merchandise or other rights) that could be seized in the event of a legal process.
When creditors initiate collection actions with an amicable phase, it is common for debtor companies to disappear altogether. This means the discontinuation of commercial activities that could potentially enable the payment of sums due.
When entering into commercial export relationships, companies are advised to ensure that all documentation conforms to Mexican law. A lack of correct information and documentation opens exporters up to the possibility of fraud committed by Mexican companies and reduces the likelihood of successful debt recovery during the amicable phase.
The Medios Preparatorios a Juicio Ejecutivo Mercantil is a pre-legal process takes place when there is an invoice as a proof of the pending payment and of the commercial relationship. Creditors request that the judge obtains a citation from the debtor or its legal representative. He then obtains the confession and acceptance of debt from the debtor, as well as the pending payment. As the confession before the judge is an executive document, the creditor is then able to initiate the Summary Business Proceeding legal process. This pre-legal process takes approximately two or three months. There are subsequently three types of proceedings that can be initiated against debtors:
Summary Business Proceeding
This legal process takes place when there is a Certificate of Indebtedness (promissory notes, cheques or legal confessions before the judge by the debtor or its legal representative). The process begins with the phase of citation, when the creditor initiates the lawsuit by requesting that the debtor pays the total amount of the debt due. If the debtor does not have sufficient funds, the creditor can request that some of its assets be seized. These assets can include real estate, merchandise, bank accounts, industrial property rights and trademarks, to be used as a guarantee against the total amount of the debt. Once the assets are seized as a guarantee of the debt, the legal process continues until the judge renders his final resolution. Then, if there is no negotiation or payment, the creditor can initiate the auction of assets to recover the debt. This legal process takes approximately six to eighteen months, although this can vary from case to case.
Ordinary Business Proceeding
Ordinary Business Proceedings are the most time consuming procedure in Mexican commercial law. They can take place in the absence of a Certificate of Indebtedness, which means that the only proof of a commercial sale between the parties is the commercial agreement with invoices. In this type of process, assets can only be seized as a guarantee of the total amount of the debt when the judge has rendered his final sentence condemning the debtor to make payment. This legal process takes approximately one to two years.
Oral proceedings take place when the total amount of the debt does not exceed EUR 31,856.68. As with Ordinary Business Proceedings, assets can only be seized as a guarantee of the total amount of the debt when the judge has rendered his final judgment condemning the debtor to pay the amount due. This process takes approximately four to six months. On May 2, 2017, Mexican congress made a modification which ruled that all commercial disputes be processed through Oral Proceedings, with no limitations on amounts, with effect from January 25, 2018.
Enforcement of a legal decision
A judgment is enforceable as soon as it becomes final. If the debtor does not comply with the judgment, the creditor can request a mandatory enforcement order from the court, in the form of an attachment order, sale of specific assets, or liquidation of the company. This takes between six months to two years.
Foreign judgments can be enforced through exequatur proceedings. The court will verify that certain requirements are fulfilled, prior to recognising the foreign decision. The court establishes whether the foreign court had jurisdiction to decide on the issue and whether enforcing the decision will not conflict with Mexican law or public policy.
Out of court proceedings
With the approval of creditors holding 40% of the debt, debtors can constitute a “pre-packaged” reorganisation agreement. This enables the court to issue an insolvency declaration and declare the company in concurso mercantile.
Liquidation can only be requested by the debtor itself, but the debtor can be placed into liquidation as a result of its failure to submit an acceptable debt restructuration proposal to its creditors through the concurso mercantile proceedings. A liquidator is appointed and given the responsibility for managing the company, selling its assets and distributing the proceeds to the creditors according to their rank.