Mexico Country Brief - September 2008
Introduction
The partnership between Australia and Mexico is strong and growing. In 2006, Australia and Mexico celebrated the 40th anniversary of the establishment of diplomatic relations, with events held in both countries. An increased level of cooperation in recent years has resulted in several commercially focused outcomes, including a bilateral Double Taxation Agreement (2004), a Memorandum of Understanding (MOU) on Mining (2002), an MOU on Education and Training (2003) an MOU on Energy (2005) and an Investment Protection and Promotion Agreement.
In 2006, Australia and Mexico agreed to commence a Joint Experts Group process to investigate ways of strengthening economic relations, including the negotiation of a possible Free Trade Agreement some time in the future. JEG meetings were held in Adelaide in April 2007 and Mexico City in June 2007. Mexico is now considering Australia’s contribution to the draft report and it is expected that this will be presented to respective Ministers responsible for trade towards the end of 2008.
A Double Taxation Agreement entered into force from 1 January 2004. This gives impetus to bilateral relations by clarifying the taxation rights of the two countries, introducing measures to relieve double taxation and prevent fiscal evasion. The Investment Promotion and Protection Agreement (IPA) between Australia and Mexico, signed in Mexico City on 23 August 2005, entered into force on 21 July 2007.
Negotiations on a bilateral Air Services Agreement were finalised in March 2005, and,although the final text is still to be agreed by both sides, Qantas and Mexicana Airlines signed a new code-share service agreement in July 2006.
Political Overview
Mexico is a congressional democracy with a directly elected President. The President serves a six-year term and cannot be re-elected. The bicameral Congress comprises 128 Senators, each serving a six-year term, and 500 members in the Chamber of Deputies, serving a three-year term. Senators and Deputies cannot stand for re-election.
Mexico’s political climate has changed significantly over the past decade. In 2000, the political hegemony of the Institutional Revolutionary Party (PRI), which had endured in Mexico for 71 years, was broken by the election of President Vicente Fox of the National Action Party (PAN). Fox, a former Chief Executive of Coca-Cola in Mexico and Governor of Guanajuato, defeated the PRI candidate, Labastida, on a platform of democratic change, an end to corruption and wider community prosperity. During six years in office, Fox’s Government pursued macroeconomic goals focused on increasing investment and employment. Sound fiscal management promoted economic growth and moved Mexico out of recession. However, the introduction of widespread structural and economic reforms, particularly fiscal, energy and labor transformation was hindered by opposition within the Congress.
In the lead up to the Presidential elections of 2 July 2006, Mexico divided along ideological and socio-geographic lines. The PAN candidate, conservative technocrat and former Energy Minister, Felipe Calderon, campaigned on a platform of continuing Fox’s economic liberalisation and stable macroeconomic policies, improving employment rates and strengthening investment. While polls indicated that Calderon had the support of the business sector and wealthier northern states, the poorer central and southern regions backed leading opposition contender and former Mayor of Mexico City, Andres Manuel Lopez Obrador, from the Democratic Revolution Party (PRD). Lopez Obrador gained the support of millions of Mexico’s lower socio-economic classes, with promises of interventionist economic policies and greater subsidies for the rural and urban poor.
Calderon won the Presidency by the slimmest margin in Mexican history. Calderon was sworn in as President on 1 December 2006, amidst a climate of continuing political division. His party -the PAN- currently holds the largest number of seats in both the Senate (52 out of 128) and the Chamber of Deputies (206 out of 500). It does not have a majority in either chamber, so it needs the support of other parties for its legislation to be adopted. Both the PAN and the PRD made significant gains in the last election at the expense of the PRI.
Calderon identified the need to enhance national security through police and judicial reform as a key priority. Alleviating poverty through enhanced social programs, generating employment and attracting investment were also central to his government’s agenda. President Calderon’s first 100 days in office were marked by a focus on security and a crackdown led by the military on drug trafficking and related violence, which has been continued in 2008. He received widespread public support for his campaign in the cities and states most affected by drug-gang related violence, and garnered praise from the US Government following the extradition of several leading drug felons in Mexico to the United States. President Calderon also effectively managed a political crisis arising from a surge in tortilla prices due to increased corn prices in the United States, by forging an accord with corn producers to set a maximum price. Despite divided political forces, the President successfully negotiated both the federal budget and a pension reform bill through Congress. He has also succeeded on continuing the adoption of economic reform by passing through congress the much debated tax and electoral reforms.
The main political – and economic – development in recent months has been the debate on energy reform. After months of foreshadowing his energy sector reform proposal, on 8 April President Calderón presented the proposal to the Mexican Congress, and, in a televised speech, to the Mexican people. The proposal claims to strengthen and enhance the competitivity of the state oil monopoly Pemex, through a number of changes, many aimed at allowing it greater operating autonomy. Other elements of the proposal include: a system of citizen bonds, new modernising functions to be accorded to Pemex’s governing Board, and the creation of an Oil Commission to take over strategic planning for the sector. Perhaps the most controversial aspect of the proposal is to allow Pemex to grant service contracts to private companies. The Calderón administration rejects the criticism that the proposal envisages privatisation of any part of the oil exploration or exploitation, repeatedly stating that oil and its derivatives will remain the exclusively in the hands of Mexicans.
The Partido de la Revolución Democractica (PRD) is the strongest and most vocal opponent to the reform proposal. Following the presentation of the proposal to the Congress, PRD deputies took over and occupied both the Chambers of Congress in order to prevent the initiative being discussed and voted upon before the Congressional recess at the end of April. Since then, former Presidential candidate Lopez Obrador, has been travelling Mexico campaigning against the reform, and garnering support for his call for a referendum on the issue. The Senate is continuing to hold a series of debates on the proposal and the Partido Revolucionario Institucional (PRI) has prepared its own reform proposal.
Commentators generally seem to agree that the reform proposed by President Calderón is a watered-down version of what the PAN (Partido de Accion Nacional) would have liked to achieve. Significantly, the reforms proposed do not require constitutional amendment, which will make it much easier to gain Congressional approval. Debate continues in the Congress.
Economic overview
Bilateral Trade and Investment
In recent years, Mexico's economic policy has been characterised by sound fiscal management and efforts to build the confidence of international markets and investors. Despite some spending increases, windfall profits from the sale of Mexico's substantial oil reserves have enabled the retirement of considerable foreign debt. Mexico is one of only two countries in Latin America that currently has 'investment grade' ratings from the major international ratings agencies.
However, failure to complete further and much needed structural reforms has seen Mexico's competitiveness fall, raising serious concerns about the country's ability to continue to attract the high levels of foreign direct investment that have driven economic growth since the conclusion of the North America Free Trade Agreement (NAFTA) with the US and Canada. The comparatively high costs of labour, capital, and services and relatively poor infrastructure within Mexico continue to be a brake on stronger economic growth. Cautious fiscal and monetary policies over the past six years have reinforced expectations of sustainable macroeconomic stability, but so far, these policies have not produced the rapid growth on the scale needed to boost employment and reduce poverty substantially: nearly half of the population live below the poverty line.
Notwithstanding these ongoing challenges, the Mexican economy has gradually gathered momentum since moving out of recession in 2002. Mexico's GDP grew by around five per cent in 2006, the highest rate of growth for several years. Growth slowed in 2007 to around 2.9 per cent - largely as a result of a fall in external demand in the US for Mexican exports due in part to increased competition from China. The US currently accounts for over 80 per cent of Mexican exports. The surge in tortilla prices prompted calls for wages increases and concerns about a rise in inflation. Inflation for 2007 was estimated to have reached 4.0%. It is then expected to decline to 3.8% by the end of 2008.
Mexico has transformed itself from a highly protected economy in the early 1980s to a more open, regionalised and market-based economy today. Trade liberalisation over the past several decades has encouraged foreign firms to set up plants to take advantage of relatively low labour costs and proximity to the US market. Economic activity is increasingly dominated by the private sector, but is characterised by a mixture of modern, export-oriented industry and agriculture, alongside more outmoded sections of the domestic economy. Much of the modern economy has been driven by competition and export opportunities stemming from Mexico's extensive network of Free Trade Agreements (FTAs), covering more than 90 per cent of the country's trade. They include FTAs with Chile, the United States and Canada (North American Free Trade Agreement, NAFTA), the European Union; Israel; Colombia and Venezuela; Bolivia; Guatemala, El Salvador and Honduras; Uruguay; the European Free Trade Area (Norway, Iceland, Switzerland and Liechtenstein), and Japan. Mexico is currently negotiating an FTA with Korea and Peru.
Economic Outlook
Mexico’s economy needs to grow by at least 6 per cent to create the one million jobs required annually to keep pace with additions to the workforce from population growth. Real GDP only grew by around 3.3 per cent in 2007. Economic growth remains closely interlinked with the US economic cycle. Over the medium-to-long-term, the outlook for the Mexican economy is mixed. Favourable demographic developments, steady increases in investment and migrant remittances, increases in manufacturing exports and a rise in human capital would all drive growth. However, the Calderon administration’s capacity to push through much-needed structural and microeconomic reforms will continue to affect overall growth and market competitiveness.
The Mexican economy performed generally better than expected in the first half of 2008. Export performance was steady and the employment rate has remained stable. The Mexican Central Bank estimated that net GDP growth for the first trimester in the order of 3 per cent. However, unsurprisingly given the number of Mexican workers concentrated in the construction sector in the United States, remittances have decreased.
In the latter part of the reporting period, the effects of increasing world food prices were becoming more marked. The Central Bank has to date left interest rates unchanged but it has revised upwards its inflation forecast for the rest of 2008. In an attempt to alleviate the effects on the more disadvantaged segments of the Mexican population, the Government introduced a package of measures in May. This included tariff and duty reductions on selected agricultural products and other measure aimed at supporting the Mexican agricultural sector, and subsidies on fuel prices. The Government’s proposed reform of the energy sector, described above, remains a central plank in its economic program.
Bilateral relationship
In recent years former Australian Minister for Foreign Affairs Mr. Downer and the former Minister for Industry, Tourism and Resources, Mr. MacFarlane have visited Mexico. Visits by Mexican Minister and by President Calderon to Australia for the September 2007 APEC Summit underscored our mutual interest in strengthening bilateral trade, investment, political and people-to-people links.
The 2006 Australian Census revealed that there were around 1800 Mexican-born persons resident in Australia at that time. In 2006, around 25,000 Australians traveled to Mexico. During the same period, nearly 7,000 Mexican nationals visited Australia.
Mrs. Katrina Cooper is Australia’s Ambassador to Mexico and took up her appointment in January 2008.
Bilateral economic and trade Relationship
For detailed information, see our Mexico fact sheet (pdf)
Australian Trade and Investment Interest
The Australia-Mexico bilateral economic and trade relationship is in very good shape. Mexico was Australia’s largest merchandise trading partner in Latin America in 2007 (just ahead of Brazil) with two-way trade worth $1.8 billion. Australia’s merchandise exports to Mexico are valued at approximately $665 million, dominated by coal. Meat, leather live animals, dairy and a growing range of services are also exported. The trade in Australian education and training services has been especially strong. Student numbers continue to grow and, in 2007, Mexico was Australia’s third largest education and training market in Latin America, after Brazil and Colombia. Australian food and wine brands are increasingly on sale in Mexico. Tourist numbers have been trending upwards and more growth is expected as a result of the inclusion of Mexico in the 'Aussie Specialists' visa program and the new Qantas-Mexicana code-share arrangement.
Imports of merchandise goods from Mexico have increased significantly over the last decade and were valued at $1.1 billion in 2007. The major imports from Mexico were internal combustion piston engines, motor vehicle parts, telecommunications equipment and computers. Mexican investment in Australia had been concentrated in private real estate and manufacturing, although one of Mexico’s largest food companies, Grupo Gruma, bought two Australian companies, Rosita’s and Oz-Mex Foods, in 2006. In June 2007, the Mexican giant Cemex, the world’s third largest cement producer, took a 54.9 per cent stake and majority control of Australia’s Rinker Group Ltd. The US$14.2 billion deal represented the largest takeover in the history of the global building-materials industry.
Mexico is one of the world’s most important developing countries and a key economy in Latin America. Its size and geographical proximity to the world’s largest economy and NAFTA partner, the United States, and very good links to markets in Central and South America, make it an attractive trading partner for Australia. Given complementary economic and trade profiles, there are strong prospects for expanding Australia-Mexico trade and investment.
The energy sector is becoming an increasingly important element of the trade relationship, with the sale of Australian coal, and potentially Australian liquefied natural gas (LNG), to Mexico creating new opportunities for Australian business. Expansion of energy and mining-related services also offers strong potential for future growth. The relationship has grown as Australian companies in a range of industries (mining services and technology, agribusiness, food and beverages, IT, software, biotechnology, automotive parts and education and professional services) enjoy success in Mexico.
Mexico attracts significant foreign direct investment (over US$15 billion per year for the last 10 years) due to NAFTA membership and its generally liberal investment laws. The investment environment has improved markedly over the last several decades as a result of domestic reform and the introduction of more simplified procedures, higher ceilings on foreign equity and greater intellectual property protections. Australian direct investment in Mexico is modest, and concentrated in mining, consolidated services (linked to finance and leasing arrangements) followed by manufacturing. Australian companies with interests in Mexico include Orica, Kings Minerals, Bolnisi Gold, Howe Leather, Mincom, Australian Elite Genetics, Elders, Baja Aqua Farms and TNA Packaging Systems. The Australian firm Securency, a Melbourne-based company that uses polymer substrate to incorporate new security features in bank notes, has a joint venture with the Central Bank of Mexico and expects to open a manufacturing plant in Mexico before the end of 2008. Several companies such as Rio Tinto Australia, Xstrata Coal and Shell Australia have an interest in Mexico’s energy and resources sectors.
Export Opportunities
The Australian Government is working actively to promote and facilitate bilateral trade. The Australian Embassy and Austrade work closely with Australian companies in a range of sectors to help enhance new market opportunities in Mexico. Promotional events are conducted regularly to boost sales of Australian food and wine, education, tourism and mining technology and services. In most sectors, Australian exporters face competition from other sources that benefit from significantly lower tariffs, due to Mexico’s existing free trade agreements. However, Mexican companies are continually looking at diversifying their trade relationship and doing business with Australia is now a viable option for many. In addition, the Australian Government devotes considerable effort to improving the regulatory environment for Australian exporters and investors and in assisting Australian exporters to resolve market access issues as they arise.
Energy
Australia is well placed to benefit from Mexico’s fast rising energy requirements: real potential exists to increase Australian energy exports in response to Mexico’s tightening energy supply/demand balance. The potential supply of LNG to Mexico presents a promising opportunity for Australia, given the shift towards natural gas usage in Mexico’s overall energy mix. Australia has also emerged as a major and continuing supplier of thermal coal to Mexico.
Food and Agriculture
Opportunity exists for Australian investment in Mexico’s food processing sector and for wider engagement on agriculture. Australia currently exports live animals, meat (beef and sheep meat), dairy, wool, leather and wine to Mexico. There is considerable potential to increase export volumes out of Australia and to boost Australian investment in Mexico’s food processing industry. Australian wine is also well positioned to increase sales among Mexico’s growing middle class (20-25 million people) and the number of Australian wine brands available in Mexico has grown from 3 to over 40 in the last three years alone.
Infrastructure
Construction and engineering account for some 4 per cent of Mexican GDP. New investment in highways (US$5.5 billion), utilities (US$9.1 billion), resorts (US$1.2 billion) as well as the need to build over 5.1 million new homes by 2010 make Mexico a very attractive potential market for the Australian building, construction and engineering industries. Australian companies are already enjoying success in supplying high-end building products, water treatment technology and a range of services (source: BMI Mexico Infrastructure Report 2005).
Mining
Mexico is the world’s largest producer of silver and bismuth. It is the world’s fifth largest lead, sixth largest zinc and tenth largest copper producer. Mexico has a long history of mining and has an attractive regulatory regime and business environment for foreign investment and participation in the sector. Australian mining ‘juniors’ are active in the industry. They have been joined by a number of Australian technology and services exporters. Two of the major Mexican players (Grupo Mexico and Luismin) have mining investments in Australia.
Education and Training
There are excellent prospects for expanding Australia’s education and training relationship with Mexico. Mexico is now Australia’s third largest education and training market in Latin America, after Brazil and Colombia. There were over 1000 Mexicans who commenced studies at Australian educational institutions in 2007. Increased training needs to improve productivity and skills are also expected to provide new opportunities for Australia's Vocational and Training Education sector (VTE). Australian education services are well regarded in Mexico and the Department of Foreign Affairs and Trade, Austrade and Australian Education International work to continue to promote Australia as a quality provider of education services.
Other Services
Market opportunities exist for Australian businesses providing services linked to productivity gains, efficiency gains across the major industry sectors (energy, mining, construction, agriculture and food processing). The growth of Mexico’s middle-class also presents the chance for expansion in tourism, financial, professional services and franchising. Australia now has some eight active franchises in the Mexican market.
For further information or assistance developing business opportunities in Mexico, please contact Austrade on 13 28 78 (anywhere within Australia), visit www.austrade.gov.au or email info@austrade.gov.au.