News, Insights and Best Practices for Manufacturing in Mexico

Mexican economy picking up amidst trade agreements, tax incentives

09 Apr 2014

Category: Politics & Regulations

Mexico has had some good news from its recent economic reports. The first quarter of the year saw sluggish economy growth, but currently things are beginning to pick up as had been predicted, according to Bloomberg.

Governor of the Central Bank Agustin Carstens said Mexico doesn't face the same pressures as other countries due to its unique position as a developing country that is also closely tied to the U.S. Although there had been a brief shock of inflation when taxes were raised, that has proven to be transitory, and the theory some may have suggested about demand-side pressures leading to inflation have proven to be incorrect.

Carstens believes that the inflation rate will soon return to the target of 3 percent within the next year.

Although some in the central bank believe estimated growth rates for Mexico are overestimated and should be lowered, Carstens remains optimistic, and says that he is keeping track of the situation to see if a reduction is really warranted.

"Without a doubt there have been some weak growth figures, but on the other hand we've also seen figures more recently that are a bit more encouraging," Carstens said on the sidelines on the Mexican Banking Association's annual meeting in Acapulco. "It's possible the first quarter has seen growth a little bit weaker, but it's also probable that there will be an acceleration in growth in the rest of the year. Seeing exactly how to balance this is the challenge."

Mexico is entering a period where it will grow stronger
Local Arizona newspaper The White Mountain Independent wrote that Mexico is ready to become an even stronger force in the global manufacturing industry than it is right now.

The author of the piece, Glenn Hamer, is a member of the Arizona Chamber of Commerce and Industry. He recently visited Mexico and met with several senators and high-ranking government officials. The results of the meetings were promising.

Although much of the discussion centered on the regions around Sonoma and Arizona, the group spoke about Mexico as a whole, including its energy reforms and embrace of the Trans-Pacific Partnership (TPP), which is a trade agreement between countries as diverse as Chile, Singapore and New Zealand. According to Consumerist, 40 percent of the global economy is part of this group. One country in the Pacific Rim that is not a part of the TPP is China. This is one of China's blind spots when it comes to offshoring. Those who offshore to China will not enjoy nearly as many trade agreements in comparison with Mexico.

Another factor that will make Mexico strong, according to The White Mountain, is its energy reforms. According to Hamer, Mexico's revitalized energy sector is "palpably" exciting for those who wish to profit off Mexico's many available natural resources.

Fixing the tax model for oil and gas
To achieve Mexico's ambition to become an energy giant by opening up the sector to foreign investors, there is a need for a flexible tax code that will incentivize an international group of oil and gas companies to invest in the Mexican economy. According to the Wall Street Journal, this is important because the amount of money that companies make will directly depend on how much oil and gas money the government will tax.

Investors are standing by to see what happens. Many different options, including royalties on a sliding scale, and making taxes vary based upon what type of field is being drilled, as well as the production of the field and the price of oil and gas at the time that these products are sold.

According to the Journal, those involved with writing the tax code are looking carefully at other oil producing nations to see how these countries have solved the problem of incentivizing oil production while still getting a cut.


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