In the Spotlight… Mexico Handbook-Competitive, open, and

Transcription

121002_50909_Mexican Economy and Markets_R3:Normal Cover 2011 v1
10/9/2012
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Economics & Equity Strategy
Mexico
October 2012
Sergio Martin joined HSBC in 2008 as the Chief Economist for Mexico. Previously he was senior economist at the International
Monetary Fund for more than 7 years. Before that he was the Chief Economist for Mexico for two major banks in Mexico. His work
experience also covers government positions in the Planning and Budget Ministry and the Council of Economic Advisors to the
President of Mexico. Mr. Martin holds a PhD in Economics from the New School for Social Research.
Juan Carlos Mateos*, CFA
Mexico Equity Strategist and Industrials Analyst; Head of Equity Research, Mexico
HSBC Mexico S.A.
+52 55 5721 3607
juan.mateos@hsbc.com.mx
In the Spotlight... Mexico Handbook
Sergio Martin
Chief Economist, Mexico
HSBC Mexico S.A.
+52 55 5721 2164
sergio.martinm@hsbc.com.mx
In the Spotlight...
Mexico Handbook
Competitive, open, and only a truck ride away
Juan Carlos Mateos joined HSBC in June 2008 as Head of Mexico Equity Research. He has more than 20 years’ experience in the
Mexican corporate and financial sectors, including stints with Procter & Gamble and Grupo Gigante, and experience from both the
buy and sell sides of the finance industry. Juan Carlos is a CFA charter holder and has an MBA from Harvard. Juan Carlos has won
several awards from the Institutional Investor and LatinFinance surveys, including being part of the top Mexico and Latin America
research teams, and being individually ranked second as a top analyst.
By Sergio Martin and Juan Carlos Mateos
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
Issuer of report: HSBC Mexico S.A., Institución de Banca Múltiple, Grupo Financiero HSBC
October 2012
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Mexico Handbook
October 2012
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In the Spotlight…
HSBC LatAm Spotlight publications focus on countries or industries and provide comprehensive
quantitative and qualitative analyses of trends, value drivers, and competitive landscapes to
enable our clients to formulate a longer-term view of risks and rewards.
Why you should read this report …
In this comprehensive reference guide, we present descriptions of the Mexican economy and its markets to
aid investors in their decisions, as Mexico has undergone significant transformations in the past 20 years.
Investors need to know that:
 Mexico has become an export platform to the US, particularly for automotive exports, and has a
newfound edge in competitiveness over countries such as China.
 The external sector is the main driver of the economy, but at the same time the domestic sector has its
own dynamics on growing employment and availability of credit.
 Mexico’s macroeconomic fundamentals provide a base for continuing strengthening of the economy,
including the political system, its participants, political parties, and the Congress, and we note its
shortcomings with respect to democracy.
 Long-delayed structural reforms to aid the economy are being debated in Congress, and we outline
the main characteristics of the financial system, the banking industry in particular.
 The equity, fixed income, and foreign exchange markets have the size and depth that are likely to build
momentum in the next three to five years because of Mexico’s sound economic policies. The stock
exchange is not liquid by emerging-market standards but it is the second most-liquid in LatAm.
Equity strategy views: What investors should know, and why
 The Mexican stock market is more defensive than peers due to its concentration of service industries
with low exposure to external cycles. Export-oriented companies represent c30% of the IPC index.
Since 2010, the Bolsa has traded at a premium to the LatAm average.
 The Bolsa is the second-largest LatAm market, but its market cap represents only 41% of GDP, in
contrast to Brazil’s c50% and Chile’s c100%, partly because the Mexican market has no publicly
traded energy companies due to constitutional ownership restrictions on oil, gas, and electricity.
 Foreign investment in the Bolsa rose from 26% pre-NAFTA before 1994 to an average of c40% in
2004-2011. Pension funds’ domestic equity allocations are low by regional standards but should
increase on more-flexible investment regulations.
 The trading value of the Mexican market now averages US500m per day, or 10.2% of the combined
turnover in LatAm equities, compared to the average over the past decade of USD334m per day.
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Mexico Handbook
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Metrics to make you think …
 Exports plus imports flows: USD800bn, or c60% of GDP (p. 11)
 Largest world’s exporter: flat screens, refrigerators, silver, tomatoes, avocados, papayas (p. 10)
 Automotive industry: world’s eighth-largest producer, fourth-biggest exporter (p. 21)
 Mexicans abroad: 12 million living in the US (p. 34)
 Family remittances from the US: USD22bn annually, or 2.3% of GDP (p. 30)
 Population: more than 60% are younger than 35 years and 50% younger than 26 (pp. 32-33)
 Work force: 49.5 million people, of which 30% are in the informal sector (p. 35)
 Oil fiscal revenues: 7.6% of GDP, or 35% of public sector total revenues (p. 40)
 Bond market in Mexico: USD459bn, or 38% of GDP (p. 42)
 Equity market capitalization (mid-2012): USD468bn, or 39% of GDP, with foreigners holding 37%
(p. 52)
 Equity market concentration: Top five stocks account for 57.4% of the IPC index (p. 53)
 Life conditions: Slightly more than 46% of the population is living in poverty and 10.4% in extreme
poverty (p. 67)
 Security: 22.7 homicides per 100,000 inhabitants (p. 69)
 Credit penetration: 25% of GDP (p. 77)
 Soft drinks consumption: Mexico has the world’s highest consumption per capita of Coca-Cola
products at 728 eight-ounce servings, almost 60% more than second-place Chile (p. 111)
 Telecommunications and media: As of 2010, 93% of households had a TV set, 65% mobile services,
43% fixed-line telephony, 36% pay-TV, 29% a computer, 21% Internet access, and 10% broadband
access (p. 114)
 Aerospace companies: 249 in 2011, up from 61 in 2005 (p. 121)
 Oil: production of 2.5m barrels per day, among the world’s top 10 producers, and exports of 1.3m
barrels per day, among the world’s top 20 exporters (p. 124)
 Tourism: 8% contribution to Mexican GDP; among the top 10 top preferred countries with 23m
visitors annually (p. 128)
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Mexico Handbook
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Contents
Chapter 1: Introduction
4
Chapter 2: The country
10
Chapter 3: Outward
orientation
Chapter 16: Airport operators
93
Chapter 17: The real estate
industry
97
19
Chapter 18: The retail industry
103
Chapter 4: The domestic
market
27
Chapter 19: The beverage
industry
107
Chapter 5: The workers
31
Chapter 20: Telecoms and
media
110
Chapter 21: The industrials
115
Chapter 22: The energy sector
120
125
Chapter 6: The
macroeconomic framework
36
Chapter 7: Fixed income and
FX markets
41
Chapter 8: The stock market
51
Chapter 23: The tourism
industry
Chapter 9: The pension and
mutual funds
55
Chapter 24: The automotive
industry
129
Chapter 10: The politics
60
Appendix
133
Chapter 11: The challenges
65
Disclosure appendix
162
Chapter 12: The structural
reforms
70
Disclaimer
164
Chapter 13: The financial
industry
75
Chapter 14: The banking
system
78
Chapter 15: The infrastructure
sector
85
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Mexico Handbook
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Chapter 1: Introduction
 The Mexican economy plays a major role as a platform for exports
to the US, with trade equivalent to half of its GDP
 Manufacturing activity has favorable prospects to continue to
boost industrials
 The richly valued Mexican stock market has a high concentration
of stocks in domestically oriented companies, providing a moredefensive performance in tough times than global peers
Introduction
We present a summary of economics and the
equity market in Mexico and provide a roundup of
the contents of this publication to orient our
readers. (For an extensive treatment, see HSBC
Nutshell: A guide to equity sectors and countries
in Latin America, 29 July 2012.)
Economic basics
Mexico is the 12th-largest economy in the world
in terms of GDP and the second-largest in Latin
America, adjusted by purchasing power parity.
HSBC global economics research expects that
Mexico will be the eighth-largest economy in the
world in 2050, trailing the UK and Brazil but
ahead of France and Canada. Income distribution,
however, remains highly unequal and levels of
poverty are high.
The United Nations Human Development Index,
which measures poverty, literacy, education, life
expectancy, and other factors, ranks Mexico at
No. 57 among 187 countries. Mexico has a
favorable demographic structure, as the workingage population is significant, relative to other
4
groups, particularly old-age segments.
Nonetheless, the country faces the challenge of
improving the quality of its education system, on
which it scores unfavorably according to
international standards. Spending on education as
a percentage of GDP is higher than the average of
Organization for Economic Cooperation and
Development (OECD) member states, which have
high-income economies, but most of this is
absorbed by teacher compensation.
The supply-side GDP breakdown shows an
economy dominated by the services sector, which
accounts for about 65% of total GDP. The industrial
sector represents nearly 30% of total Mexican GDP
and has a high correlation to the US industrial cycle.
About 78% of total Mexican exports are to the US,
most of which are from the manufacturing sector.
Agriculture’s share of GDP is 4%, but the
percentage of people occupied in this industry
represents about 14% of the total workforce, which
implies low productivity in agriculture.
Among the larger economies, Mexico is the most
open, with exports plus imports reaching c60% of
GDP in 2011. This high level of trade reflects
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Mexico’s proximity to the US, reinforced by the
North American Free Trade Agreement (NAFTA)
in 1994. Mexico has deepened its trade
relationships beyond North America, having
negotiated free trade or commercial agreements
with 44 countries since the 1990s. Mexico
remains highly dependent on the US in economic
terms, however.
Economic policy primer
Over the past two decades, Mexico has
implemented measures and economic reforms that
have helped reduce external vulnerabilities,
improved its macroeconomic framework, and
reduced barriers to foreign investment, although
pending proposals seek to make the economy
more efficient and modern.
The trade and investment environment has been
transformed, starting with Mexico’s signing in
1986 of the General Agreement on Tariffs and
Trade (GATT) – replaced by the World Trade
Organization (WTO) as the overseer of the
multilateral trading system in 1995 – the
enactment of the NAFTA free trade agreement
with the US and Canada in 1994, and more
recently additional trade agreements or deals with
44 countries. Barriers to foreign investment have
been reduced but there is much more to do in this
respect. The central bank of Mexico (Banxico)
became independent in 1994 with a mandate to
preserve the currency’s purchasing power. In
2001, Banxico established an inflation-targeting
regime with an objective of 3% and a target range
of 2-4% and adopted a free-floating exchange rate
program. Since then, the central bank reduced
inflation to single-digit rates within its target
range in three of the past five years.
The Fiscal Responsibility Law in 2006 set
conditions that guarantee fiscal discipline and
balanced budgets. The law establishes that the
fiscal deficit must be no more than +/-1% of GDP,
excluding investment in Pemex.
Fiscal deficits have been running near 2% of
GDP, including investment in Petroleos
Mexicanos (Pemex), the government-owned oil
company. However, fiscal accounts are still
highly dependent on oil revenues. Prudently, the
government operates hedges to protect its
revenues against sudden movements in oil prices.
The vulnerability of public debt to exchange rate
swings has been reduced by decreasing the
relative importance of external debt in the central
government’s debt portfolio to about one-fourth
of total debt, or c9% of GDP.
Since the “tequila crisis” in 1995, caused by the
peso’s devaluation, the banking system’s
regulatory framework has been strengthened to
deal with any external shocks. However, the
banking segment remains highly concentrated,
with seven financial groups holding about threefourths of the banking system’s total assets.
Macroeconomic stability, however, has not resulted
in higher growth rates. Structural reforms that would
promote economic growth faster than the historical
average of 3.0% per year, such as fiscal, labor, and
energy reforms, have historically faced political
resistance by opposition parties because of different
perspectives on economic policies.
Political structure
Mexico is a federal republic with a democratic
system. It has three dominant political parties and
four small ones. The presidential term runs for six
years, and the last election was on 1 July 2012.
The Mexican congress consists of the Senate with
128 seats and the Chamber of Deputies with
500 seats. The elected deputies serve three-year
terms and may not hold office for two consecutive
terms. No political party may have more than
300 members in the lower house. This means that
a political party may have an absolute majority of
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Mexico Handbook
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seats, 251, but the law prevents it from having
two-thirds of the total seats, which is the level of
approval required for constitutional reforms.
Elected senators serve six-year terms and may
not hold office for two consecutive terms.
Gubernatorial elections are staggered
throughout the six-year presidential period.
Usually, no more than six governorships are
contested in any given year.
Market structure
The equity market
The stock with the largest weighting in the Bolsa,
America Movil (known as AMX), is the main
telecom-service provider in Latin America and
accounts for 30.5% of MSCI Mexico. As a result,
the telecom services industry represents 30.7% of
the stock market. Telecom services and consumer
staples account for c60% of the MSCI Mexico.
Due to this high stock and industry concentration,
it is important for the performance of any
portfolio that invests in Mexico to make the right
call on AMX and on stock selections in consumer
staples. Even though exports are a significant
driver of Mexico’s economic growth, exportoriented groups such as materials, industrial, and
consumer discretionary companies account for
only one-third of the MSCI Mexico’s weighting.
The remainder is related to domestically oriented
The Mexican stock index, the IPC, plunged 74%
in USD terms from December 1994 to February
1995 following the “tequila” currency crisis.
Afterward, the MSCI Mexico index outperformed
the MSCI EM LatAm index from 1996 to 2002,
reflecting the impact of the North American Free
Trade Agreement (NAFTA), which took effect on
1 January 1994. Investors chose to go to Mexico
as NAFTA’S benefits became evident, including
production of manufactured goods in Mexico for
export to the US and Canada. This resulted in
expansion of manufacturing facilities, mainly in
auto parts. Also, US companies invested in retail
stores, as it became easier for Mexican consumers
to buy products imported from the US and
Canada. In the 1990s, there were many initial
public offerings (IPOs) in several industries,
including retail, food, steel, and entertainment.
In the past decade, Mexico has had a lower-beta,
defensive performance versus its peers. This
reflected the Mexican stock market’s high
concentration of domestically oriented industries
that have low exposures to the external growth
cycle. This has contributed to a re-rating on a PE
basis of the Mexican Bolsa, which has traded at a
premium versus the average of LatAm stock
markets since early 2010. Although the Bolsa is
dominated by domestically oriented industries
such as telecom services and consumer staples,
developments in the US economy, Mexico’s
largest trading partner, remain a leading indicator
of future performance.
6
The Mexican stock exchange is highly
concentrated, with the top five stocks in terms of
weighting accounting for 62% of the MSCI
market universe and the top 10 for 82%. This is
similar to the structure of other LatAm markets
such as Colombia, Peru, and Chile. Brazil has a
lower concentration of its top 10 stocks.
industries, which have low correlations with
global macroeconomic developments. These
factors explain Mexico’s more-defensive
performance compared to peers when global
growth has been at risk. The Bolsa’s correlation
with domestic Mexican macroeconomic
indicators, such as retail sales, is relatively high.
The trading value in the Mexican market averages
about USD500m per day (USD670m including
exchange-traded funds, or ETFs), which
represents only 10.2% of the combined turnover
in LatAm equities; by contrast, Brazil trading
value is USD3,700m per day, or 81% of total
LatAm equities, according to the World
Federation of Exchanges).
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Mexico Handbook
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According to the World Bank, Mexico’s foreign
equity ownership restrictions are stricter than the
LatAm average. Foreign ownership is not allowed in
the oil, gas, and electricity (transmission and
distribution) industries. Foreign ownership of
nationwide television channels is not allowed. There
is a limit of less than 50% for agriculture, forestry,
fixed-line telecommunications, railway freight
transportation, and port and airport operations.
As well as being among the largest economies,
Mexico is also the most open, with exports plus
imports accounting for 60% of GDP in 2011.
Mexico’s geopolitical situation at the border of
US and in close proximity to Canada made it
possible for Mexico to join in forming the North
America Free Trade Agreement (NAFTA), the
largest regional trade agreement in the world
measured by GDP.
Content in our handbook
Chapter 3: The outward orientation
Our aim in this report is to offer readers a bird’s
eye view of the Mexican economy and its
markets, as well as the political and social issues
facing the country. In addition, we detail some
challenges in terms of democracy, education,
poverty, income distribution, and security.
The Mexican economy has become an export
platform to the US: It sends 78% of its total
exports to the US and has a market share of 12%
in US imports in 2011. Its exports to the rest of
the world also have been growing, more than
doubling their share of the total in the past decade.
This publication is divided into two sections and an
appendix. The first section, “The country, the
society, and the economics,” covers diverse aspects
of the country such as geography, population, and
politics, as well as macroeconomic issues. The
second part, “The economic sectors,” deals with the
important groups in the economy, distinguishing
between those that are most relevant to the capital
markets and those that are intrinsically important to
Mexico, such as energy, tourism, and automotive.
The appendix presents important data and charts
related to economics, as well as the FX, fixedincome, and equity markets. Additionally, we
provide a section with Mexico’s main economic
indicators including descriptions, computations, and
data sources used for major economic releases.
The manufacturing sector has been the main
driving force behind this outward course,
accounting for 80% of non-oil exports. The
automotive industry has been contributing 28% of
total manufacturing exports. In contrast,
commodities, such as oil, have taken a more
secondary role than in the past.
The country, society,
economics, markets, and
government
Mexico is the world’s 14th-largest country by
land area and its 12th-largest economy. As in any
modern economy, the services sector
predominates in Mexico, but manufacturing is a
strategic sector because of its role in exports.
Chapter 4: The domestic market
Although the export sector is the main driver of
the economy, the domestic market also is
strengthening through higher levels of
consumption. This has been reflected by healthy
growth rates in retail sales, which now are above
levels before the global financial crisis occurred.
Higher employment and credit availability have
supported this recovery.
The Mexican economy has a low-cost and a
workforce capable of competing with strong
exporters such as China. The country has a
young, relatively skilled, healthy, and
homogeneous population.
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Mexico Handbook
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Labor conditions are characterised by plentiful supply
and constant real wages over the medium term and
long term, according to demographic trends.
Chapter 6: The macroeconomic
framework
The Mexican economy has a macroeconomic
framework that has allowed the country to
maintain relatively low inflation rates and a
disciplined fiscal policy. Although economic
growth was hit hard by the 2008-09 crisis, this
macro stability helped the economy weather the
crisis relatively well and, most important, the
post-crisis period, too.
Mexico’s economic policies are underpinned by a
market-oriented institutional arrangement
consisting of an autonomous central bank, a
Fiscal Responsibility Law (FRL), and the
Exchange Rate Commission.
Chapter 7: The fixed income and FX
markets
We view the fixed-income and FX markets as
deep, and these have attracted foreign investors.
Indeed, the amount of foreign investment in the
M-bond market, for example, accounts for 45% of
the total.
Chapter 8: The equity market
The equity market is not liquid under emergingmarket standards, but it also has attracted foreign
investors. It had a capitalization of about
USD468bn at mid-2012, and foreigners have
c37% of total assets.
Chapter 9: The pension and mutual
funds
With USD248bn in assets under management
(AUM) equivalent to 21.5% of GDP, pension and
mutual funds have played a role in the
development of Mexican financial markets,
particularly the yield curve in the fixed income
market. Pension funds have been gradually
liberalized to increase equity allocation, which is
still low by regional standards.
8
The Mexican political structure is based on
democratic principles, but has still many
shortcomings.
In this report, we present the basics on Mexican
politics, identifying the main players and
institutions to help investors understand the
context in which the economy works. We also
detail some considerations about shortcomings
that political analysts have noted in the country’s
democratic practices.
Chapter 11: The challenges
Challenges remain in many areas.
First is potential consolidation of democracy
and democratic practices in the country, in
particular, a need to create a culture in which
decisions by institutions such as the Electoral
Institute are respected.
Second, a pending task is to improve the quantity
and quality of education. Although we find that
spending on education is relatively high by
international standards, widely published news
reports have said that the efficiency of the education
system is unsatisfactory, and that Mexico needs
better teachers and more technology.
Third is a crucial objective is to reduce poverty,
which affects close to 40% of the population.
Despite programs to support this population, creation
of better conditions could provide work and
infrastructure to allow these people to advance.
Fourth is unequal income distribution, as imbalances
distort consumption and create social discontent.
Correcting this would not be an easy task, but
fighting poverty, widening educational coverage,
and creating more employment could help.
Fifth is an urgent need to regain security, which
has been lost mostly as a result of drug-related
crimes. The crime wave, which has been intense
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Mexico Handbook
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since 2006, peaked in mid-2010. Signs have
emerged that this is slowing.
Chapter 12: The structural reforms
We present a summary of long-delayed structural
reforms that could make the Mexican economy
more flexible if they are materialized. During his
electoral campaign, Enrique Peña Nieto of the
Revolutionary Institutional Party (PRI) and
president-elect to serve from 2012-18, displayed
willingness to pursue these reforms in his coming
administration.
Chapters 13-24: Mexican industries
We present overviews of the most relevant
economic activities likely to be of interest to
investors. These include industries that are
relevant to equity markets and those that are
strategic for the Mexican economy.
The first group consists of financials, banking,
infrastructure, airports operators, real state, retail,
beverages, telecoms and media, and industrials.
The second group includes the energy – oil, gas, and
electricity – tourism, and automotive industries.
Appendix
We present charts and tables relevant to the
economy and markets that could be useful to
investors, as well as a guide to economic
indicators in Mexico previously published (see
North and Latin America Economic Indicators,
Reference Guide, by Andre Loes and Kevin
Logan and the HSBC Global Economics team, 20
March 2012).
Section I: Economics
Section II: FX markets
Section III: Fixed income markets
Section IV: Equity
Section V: Economic indicators
HSBC contributors to this report include
economists Lorena Dominguez and Claudia
Navarrete; strategists Jaime Aguilera, Alejandro
Martinez-Cruz and Clyde Wardle; and equity
research analysts Francisco Chevez, Manisha
Chaudhry, Richard Dineen, Ivan Enriquez, Victor
Galliano, Enrique Gomez Tagle, Berenice Muñoz,
Mariel Santiago, Francisco Suarez, Lauren Torres,
and James Watson.
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Mexico Handbook
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 Mexico’s economy is the 12th-largest in the world and will rank
No. 8 by 2050 on HSBC economists’ forecasts
 The economy is also open: exports plus imports stand at almost
60% of GDP
 And it is competitive, with low unit-labor costs, an efficient supply
chain, low transportation costs, adequate infrastructure, and
sound business practices
Geography and resources
Mexico is in the middle of the Western
Hemisphere and shares borders of 3,141 km
(1,952 miles) with the US, 962 km (598 miles)
with Guatemala, and 250 km (155 miles) with
Belize. It has extensive access to the Pacific
Ocean and to the Atlantic Ocean through the Gulf
of Mexico and the Caribbean Sea.
Its surface area of 1,964,375 sq km makes Mexico
the 14th-largest country in the world. The country’s
climate varies extensively, depending on location
and altitude; conditions range from desert to
tropical to temperate because of Mexico’s
mountain systems and extensive coastlines.
Mexico possesses important natural resources. It
is the world’s seventh-largest oil producer and the
global leader in silver production. The country
also is an important producer of copper, gold,
lead, zinc, and natural gas.
In agriculture, Mexico is the world’s largest
exporter of tomatoes, avocadoes, onions, papayas,
eggplants, lemons, organic coffee, and pepper,
according to the Ministry of Economy. These
products are exported mostly to the US because of
proximity, but also to other countries.
A large and open economy
Mexico is a large economy, the 12th-biggest in
the world with GDP of USD1,683bn in terms of
purchasing power parity. In Latin America, it is
the second-largest economy after Brazil. HSBC’s
global economics research team expects Mexico
to be the eighth-largest economy in the world by
2050 – trailing the UK and Brazil but ahead of
France and Canada.
Mexico: Size of the economy in 2050e
(real GDP in constant USDbn, 2000)
Russian Fed era ti on
Spa in
Korea, Re p.
Turkey
Ita ly
Canada
France
M ex ico
Brazil
Un ited Kingdo m
Ge rmany
Japan
Ind ia
United States
China
0
Source: HSBC
10
50 00
1 0000 15000 200 00 2500 0
(USDbn)
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Mexico Handbook
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Mexico: Growth rates, 1996-2011
8
6
4
2010
2008
2006
-2
2004
World
OEC D m embe rs
Brazil
United States
Turkey
India
Russian Fed era ti on
China
Mex ico
Chile
Ge rmany
Korea, Re p.
Sin gapo re
2002
0
2000
Degree of openness
1998
2
1996
The openness of the economy, measured as the
sum of exports plus imports, is close to 60% of
GDP. More important, though, our projections
indicate that this level could rise to 80% in five
years’ time.
-4
-6
-8
Source: INEGI
0
10 0
2 00
300
(de gree of ope nness )
400
Source: World Bank
Growth trends and sectors
Mexico’s GDP growth dynamics are not
impressive. The economy has been growing at a
relatively slow pace, an average of 3.0% in the
past 16 years, since the “Tequila crisis” in 1995
when the peso was devalued. On our estimates,
this growth rate could increase by 1-2ppt, to 4.55.0%, in the medium term, if important structural
reforms could be implemented in areas such as
energy, fiscal, labor, and education. Our estimates
of the growth rates in variables and sensitivity
analyses of various kinds if reforms are enacted
are calculated using our macroeconometric model
of the Mexican economy.
As in any other modern economy, services
dominate in Mexico with a 65% share; however,
from an economic perspective, industry is more
strategic, despite representing only about 30% of
the total. Indeed, the export content of this activity
is important and has been defining the outward
orientation of the economy as a whole. The
agricultural sector has a modest share of 3.5%,
which is also typical of modern economies, in
which the rural segment is becoming smaller.
An open economy
Mexico has an advantageous geopolitical position,
in that it shares a border with the US, the world’s
largest economy, with GDP of USD15,290bn. It is
also relatively close to Canada, the 15th-largest
economy in the world, with GDP of USD1,414bn.
These figures imply that more than one-fourth of
global GDP is concentrated in this zone.
Given the huge scale of potential demand in the US
and Canada, Mexico concentrates its trading efforts
on its northern neighbors, which absorb about 81%
of its total exports. The North American Free Trade
Agreement (NAFTA), which was enacted in 1994,
formalized commercial links between Mexico and
these two countries.
Mexico also has cultural and historical ties to
Central America and South America that facilitate
trade and diverse economic relations. Trade with
Latin America is important, accounting for 7.6%
of Mexico’s total exports.
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Mexico Handbook
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Mexico: Net migration balance
Agriculture
Industrial
Manufacturing
Construction
Mining
Electricity
Services
Commerce
Real estate and rentals
Transport, mailing and
warehousing
Financial and insurance services
Education services
Media
Government activities
Professional, scientific, and
technical services
Other services except
government activities
Business consulting
Hospitality
Business and corporations
management
Communal services
1994
(% GDP)
2011
(% GDP)
Change
’94-11
3.8
30.8
17.0
6.7
5.9
1.2
63.0
12.4
10.0
3.3
30.1
17.6
6.3
4.7
1.5
65.0
15.7
10.4
-12.8
-2.3
3.7
-5.6
-21.2
26.9
3.1
26.8
4.5
6.6
4.2
4.8
2.2
5.4
7.0
5.2
4.4
3.8
3.8
6.0
21.6
-6.7
78.0
-29.5
3.7
3.3
-9.5
3.0
2.8
3.6
2.6
2.5
2.5
-12.1
-10.0
-31.3
0.4
0.5
0.4
0.4
14.0
-14.5
Source: INEGI
Mexico has trade agreements with 44 countries,
negotiated since the 1990s. The economies
involved represent two-thirds of global GDP and
include all of the world’s most important
countries, with the exception of the BRIC nations:
Brazil, Russia, India, and China.
Mexico: Trade agreements
Source: Ministry of Economy
12
(100 ,00 0)
(numbe r o f peopl e)
Mexico: GDP by sectors
(200 ,00 0)
(300 ,00 0)
(400 ,00 0)
(500 ,00 0)
(600 ,00 0)
(700 ,00 0)
(800 ,00 0)
2 006 2 007 2 008 20 09 201 0 20 11 1Q12
Source: Source: INEGI
Nexus with the US
History and a large shared border make Mexico
and the US close neighbors, and this relationship
is expressed in many ways. For example, the main
source of tourism is the US. About 73 million
people visit Mexico annually, about 80% of them
from the U, but at least two-thirds of them cross
the border just for the day; 23m tourists spend at
least one night in the country, but only about 13m
are international tourists, who account for 94% of
total tourist spending in Mexico. Moreover,
Mexicans or people of Mexican descent account
for a substantial 15% of all people of Hispanic
origin in the US population. Net migration of
Mexicans to the US peaked at about 725,000 in
2006, but the level has fallen to almost zero in the
past few years owing to lack of work for migrants
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Mexico Handbook
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in the US – particularly in the construction
industry – and difficulty in crossing the border
illegally because of stricter US security measures.
Given the high numbers of people who are Mexican
or of Mexican descent working in the US, annual
family or wage remittances to Mexico reach close to
USD23bn. This figure is similar to the net value of
crude oil exports minus gasoline imports.
US and Mexico: Industrial production
101
125
98
120
95
115
92
110
89
105
86
100
83
95
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
However, the most important connection between
Mexico and the US is through trade, and in
particular, via the manufacturing sector. Indeed, the
degree of correlation between US and Mexican
manufacturing is very close, while the correlation for
the economy as whole in terms of GDP is slightly
less important. The degree of association or the
correlation coefficient between Mexican and US
manufacturing activities is 0.9, where 1.0 implies
perfect association and zero none. In the case of
GDP, the association between the two countries is
slightly lower, at 0.8.
One important development has been the
relatively recent shift in trend for exports to the
US. Auto sales in the US declined 21% from 2007
to 2011, reflecting difficulties caused by the
financial crisis in 2008-09, while Mexican exports
increased 13% during the same period, allowing it
to consolidate a significant market share in this
market. In particular, Mexico’s market share in
the US automobile industry rose to 11% from 7%.
Mexico: Wage remittances
3, 000
2, 500
(USDm)
2, 000
United States (left axis)
Mexico (right axis)
Source: BEA, INEGI
US automobile market
(as a percentage of light vehicles sold in the US)
Light vehicles sold in the US
Produced in the US
Imported
Imported from Mexico
Imported from Germany
Imported from Japan
Imported from Korea
Imported from other countries
2007
2011
16,089
69%
31%
7%
4%
13%
4%
3%
12,734
67%
33%
11%
5%
11%
4%
2%
Source: Ward’s Automotive Reports
Competitive economy
Mexico has several characteristics that make it
highly competitive.
First, though it does have some shortcomings, the
political system is open and democratic, with free
media and autonomous electoral authorities made
up of citizens. In contrast to the past, congress and
the judiciary, the supreme court, and election
authorities are no longer under the influence of
executive power. Mexico also has a legal
framework that helps safeguard foreign
investment and property rights.
Second, the country has developed a marketfriendly environment with a stable
1, 500
macroeconomic framework. It has strong
economic institutions, such as its autonomous
1, 000
500
0
1 995 1997 19 99
2001 2003 2005 200 7 2 009
Remitta nces
2011
3 per. M ov . Av g.
central bank, and in 2006 it passed the Fiscal
Responsibility Law, which stipulated conditions
that guarantee fiscal discipline. Mexico also has
Source: INEGI
13
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Mexico Handbook
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membership in major international organizations
such as the International Monetary Fund, World
Bank, Organization for Economic Cooperation
and Development, and World Trade Organization.
Moreover, it has a market-determined floating
exchange rate.
Ease of doing business
World
OECD members
United States
Korea, Rep.
Germany
Chile
Mex ico
Turkey
China
Russian Federation
Brazil
India
Country
________2010-11 _______ _______ 2011-12 ______
Rank
Score
Rank
Change
US
Germany
Korea, Rep.
China
Chile
South Africa
Brazil
India
Mexico
Turkey
Russian
Federation
Argentina
5
6
24
26
31
50
53
56
58
59
5.42
5.41
5.02
4.89
4.70
4.34
4.32
4.30
4.29
4.28
4
5
22
27
30
54
58
51
66
61
-1
-1
-2
1
-1
4
5
-5
8
2
66
85
4.21
3.99
63
87
-3
2
Source: World Economic Forum
0
20 40 60 80 100 120 140
(ease of doing business index)
Source: World Bank
Third, the Mexican economy has efficient
financial institutions and markets that cover needs
of foreign capital at the worldwide level.
Fourth, its business culture is highly compatible
with those of the US, Europe, and other developed
countries and regions, and most executives speak
English and subscribe to best business practices.
This competitiveness has enabled Mexico to
advance to become the third-largest trade partner
of the US measured in terms of US imports, with
a market share of 12%.
Competing head-to-head with China
When China became part of the World Trade
Organization in 2001, it was more competitive
than Mexico in terms of wages. At that time, this
resulted in a decrease in Mexican exports, as both
countries specialize in production of
manufactured goods. Indeed, Mexican exports of
goods declined 4.4% in 2001 and grew an average
of only 2.0% in 2002 and 2003, whereas the
average growth rate in the previous five years had
14
Global Competitiveness Index
been 16%. At the same time, China increased its
market share in US total imports to 12% from 9%,
while Mexico’s position declined to 11.0% from
11.5%. However, Mexico’s disadvantage has been
steadily fading.
Now, average manufacturing industry wages in
Mexico are fairly comparable to those in China:
Mexican wages were USD2.10 per hour in 2011,
up 19% from USD1.72 in 2001. In contrast,
China’s average wage was USD1.63 in 2011, or
almost four times the 2001 level of USD0.35. In
other words, the gap has been reduced to
USD0.50 in favor of China, whereas before,
wages there were almost five times lower than
those in Mexico.
The Chinese government’s announcement of a
reduction in its medium-term growth target
implies structural changes geared toward
strengthening its domestic market that could be
accompanied by minimum wage increases. This
means the wage gap between Mexico and China
could close even faster.
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Mexico Handbook
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Indeed, yuan appreciation is another factor that
appears likely to erode China’s competitiveness,
as wage growth would be magnified when
measured in US dollars. HSBC FX analysts
forecast that the yuan will appreciate consistently,
reaching CNY/USD5.95 in 2013 versus
CNY/USD6.30 in 2011.
Manufacturing wages: China and Mexico
2.5
(USD per hour)
2
1.5
1
0.5
0
2007
2008
China
2009
2010
2011
M exico
Source: Bloomberg, INEGI
Writing on the negative impact of high wages in
China, HSBC economist Frederic Neumann said that
countries such as Indonesia, Thailand, and Malaysia
“…have regained a competitive niche as wages in
China soar…” (see Asian Economics Comment:
Little Asia vs Big Asia, 19 March 2012).
This view of high labor costs and the likelihood of
diversification to other smaller Asian countries is
confirmed by a report from The Economist, which
stated that “…the era of cheap China may be
drawing to a close” (10 March 2012). It added that
“Costs are soaring,” indicating that labor is the
biggest factor behind this shift. The opinions of
analysts quoted in this article suggest that
manufacturing costs in China could display a sharp
rising trend in the near future, as much “twofold or
even threefold by 2020.” One analyst was quoted as
saying that “labor costs … for blue-collar workers in
Guangdong rose by 12% a year, in USD terms, from
2002 to 2009; in Shanghai, 14% a year, from 2002 to
2009, a comparable figure was only 8% in the
Philippines and 1% in Mexico.”
We find that the production diverted from China
is not going exclusively to other smaller Asian
economies; some of it is also going to Mexico,
because of advantageous labor and transportation
costs, as well as Chinese currency appreciation.
In the case of Mexico, the current free-floating
exchange-rate regime makes the peso competitive
by allowing it to adjust to trade disequilibria.
Additionally, under the assumption of a constant
real exchange rate, a standard assumption, the
projected peso may be likely to remain
competitive. It is important to note, however, that
Mexico’s competitiveness is not especially reliant
on its currency, but rather on factors such as low
labor costs, demographics, reliability of the
supply chain, and distance from the US.
Transportation costs
Transportation costs have become a relevant factor
for competitiveness. Current trends indicate that
industries seek to be located close to consumption
centers. The reason for this is clear: Oil prices have
increased an average of 20% in the past decade, or
10 times the rate of global inflation.
For obvious reasons, Mexico has the strongest
advantage in transportation costs with respect to
the US. It shares 3,141 km of border, has access to
both the Atlantic and Pacific coasts by ship, and
benefits from US railroads, seaports, and road
networks to distribute to US cities.
One important recent development has been the
enactment of legislation ensuring the free passage
of Mexican trucks and drivers into the US, an
agreement that was long delayed owing to
pressure from the Teamsters union. This measure
alone could lower transportation costs by 5-10%,
as it avoids the discharge of merchandise and
changes of trucks and drivers at the border, as
15
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Mexico Handbook
October 2012
well as similar maneuvers with US trucks and
drivers in the opposite direction.
Quality of trade-related transport*
World
OE CD m em bers
Ru ssian
Ch il e
Cost to export*
C hina
India
Mex ico
Turkey
Bra zil
China
Korea, Rep .
Ko rea
C hile
Ge rm any
T urkey
US
Un ited States
Germ any
Ind ia
M ex ico
2
2. 5
3
3. 5
4
4 .5
(qual ity of tr ade and tr anspor t re lated infra str ucture)
R uss ia
Brazil
0
5 00
10 00
1 500
2000
(U SD per c o nta in er )
250 0
*The cost associated with all procedures required to export goods. Includes the costs of
documents, administrative fees for customs clearance and technical control, customs
broker fees, terminal handling charges, and inland transport.
Source: World Bank
*Respondents evaluated the quality of trade- and transport-related infrastructure (e.g.
ports, railroads, roads, information technology), on a rating ranging from 1 (very low) to
5 (very high). Scores are averaged across all respondents
Source: World Bank.
Manufacturing Outsourcing Cost Index
105
Landed costs
Mexico has the lowest landed costs for US
customers, ranking ahead of China, India,
Vietnam, Russia, and Romania, according to the
US Manufacturing-Outsourcing Cost Index (see
AlixPartners, 2011 US ManufacturingOutsourcing Cost Index, Costs and Complexity,
100
95
90
85
80
75
70
2005
December 2011.) The comparison favored
Mexico from 2007-2010, but as far back as 2005,
the difference with respect to India and China was
not notable. Though the observations from this
index only cover the period to 2010, we estimate
– based on exchange rate performance, wage
increases, and freight costs in these countries –
that Mexico continues to beat them in this respect.
2006
2007
2008
2009
US
Vietnam
China
Russia
Mexico
India
2010
Source: AlixPartners
Relevant infrastructure in place
The general state of infrastructure in the country
remains a challenge to address in the future.
However, the infrastructure relevant to
international trade is in place. That is, roads and
railroads, sea ports, and airports form an efficient
network that facilitates international trade valued at
USD800bn per year, exports plus imports.
Additionally, Mexico’s proximity to the US allows
it to use part of its infrastructure to satisfy needs to
export and import finished merchandise, as well as
inputs for those exports. Naturally, exporters have
taken advantage of this infrastructure and have
located themselves around it.
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Mexico Handbook
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Time to export*
Documents to export*
US
Ko rea
Ko rea
US
Ge rm an y
Ge rm any
M ex ico
M ex ico
Brazil
C hile
T urke y
Turkey
Ind ia
Brazil
C hina
R uss ia
Chile
Ind ia
R uss ia
C hina
0
10
20
(day s)
0
30
3
6
9
(days )
*The time necessary to comply with all procedures required to export goods.
Source: World Bank
*The total number of documents required per shipment to export goods. Documents
required for clearance by government ministries, customs authorities, port and
container terminal authorities, health and technical control agencies, and banks are
taken into account.
Source: World Bank
Supply chain
Competitiveness is not just about labor costs and
transportation, however. Another key factor is an
effective supply chain that has access to quality
inputs at international prices and in timely fashion,
exactly when the production process needs them –
no earlier and no later.
That is one of the advantages of the Mexican
manufacturing sector, as best exemplified by the
auto industry, in which satellite parts factories
follow the big companies. Moreover, multiple
trade agreements and low tariff support, combined
with transportation, create easy access to inputs.
Mexico: Main seaports
Annual Traffic at Seaport (tons)
9
5
15
>16,000,000
100,000-899,999
900,000-7,500,000
15,000-99,999
10
11
13
4
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Lázaro Cárdenas, Mich.
Manzanillo, Col.
Veracruz, Ver.
Altamira, Tamps.
Isla de Cedros, B.C.
Punta de Venado, Q. Roo
Coatzacoalcos, Ver.
Progreso, Ver.
Ensenada, B.C.
Guaymas, Son.
Isla San Marcos, B.C.S.
Tuxpan, Ver.
16
14
8
19
22
12
3
6
7
18
21
2
1
13.
14.
15.
16.
17.
18.
17
Topolobambo, Sin.
20
Tampico, Tamps.
Punta Santa María, B.C.S.
Mazatlan, Sin.
18. Dos Bocas, Tab.
Acapulco, Gro.
19. Las Coloradas, Yuc.
Dos Bocas, Tab.
20. Salina Cruz, Oax.
23
21. Cd. Del Cármen, Camp.
22. Puerto Morelos, Q. Roo
23. Puerto Chiapas, Chis.
Source: INEGI
17
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Mexico Handbook
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Mexico: Railways
Coahuila-Durango
Chiapas-Mayab
Isthmus of Tehuantepec
Tijuana-Tecate
Federal Government
Northeast
Pacific-North
Ojinaga-Topolobambo
Southeast
Oaxaca-South
Source: Communications and Transportation Ministry
Mexico: Main roads
Source: Communications and Transportation Ministry
18
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Mexico Handbook
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Chapter 3: Outward
orientation
 The North American Free Trade Agreement in 1994 marked a
change in Mexico’s orientation
 Potential demand from the US and Canada facilitated the
conversion of Mexico into an export platform
 This made it attractive for foreign direct investment to produce in
Mexico and export to the US, particularly in the auto industry
Export activity
Creation of the North American Free Trade
Agreement (NAFTA) in 1994 turned Mexico into
an export-oriented economy and an export
platform. This new role made the manufacturing
sector, in particular the automotive industry, the
driving force for the economy, while commodities
such as oil receded to a more secondary position
than in the past. In particular, foreign direct
investment (FDI) has been attracted to Mexico to
produce and export, mainly but not solely to the
US and Canada.
Mexico: Oil and non-oil exports
Oil ex ports
(16%)
16%
3%
1%
Non-oil
ex ports
80%
Oil
Agriculture
(84%)
Mining
Manufacturing
Source: INEGI 2011
Mexico’s exports totaled USD350bn in 2011,
making it the fifth-largest exporter among
emerging markets, behind only China (including
Hong Kong), South Korea, Russia, and Singapore.
It also is the 16th-largest exporter worldwide.
Mexico’s exports are mainly concentrated on
manufacturing goods, accounting for about 80.9%
of total export revenues, or 30.4% of GDP. Oil
exports, by contrast, account for about 16% of
total exports, or 4.9% of GDP.
However, this has not always been the case. As an
explicit development policy, the Mexican
authorities decided to accelerate trade liberalization
in the 1990s, and to benefit from the proximity of
the US and potential demand there. Mexico’s trade
patterns have modified significantly since 30 years
ago, when exports were dominated by oil products,
which accounted for 61.5% of total exports in the
first half of the 1980s. With the passage of time,
exports ceased to be dependent on oil, and the
19
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Mexico Handbook
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country began to specialize in manufacturing
goods, causing non-oil exports to reach an 80.9%
share in exports today. Moreover, we project that
non-oil exports will likely account for 90% of total
exports in five years, despite high oil prices, which
will support oil exports.
Mexico: Oil exports as percentage of total exports
80
(% o f total ex ports)
70
60
50
40
30
20
10
0
198 0
1 985
1990
19 95
2000
200 5
2 010
eighth-largest producer and the fourth-biggest
exporter of cars, tied with Spain. However, the
country also manufactures products other than
automobiles that have high demand worldwide.
For example, according to the Global Trade Atlas,
Mexico was the world’s largest exporter of
refrigerators in 2010. In addition, it was the
second-largest supplier of electronic products to
the US market for computer equipment and parts
and for telecommunications that same year. Also,
in 2009, Mexico was the world’s largest exporter
of flat-screen TV sets and the third-largest
exporter of cell phones. In addition, it was the
world’s fifth-largest producer and second-largest
exporter of beer in 2010.
Mexico: Main exported goods
Source: Banxico
% of total exports
Nowadays, the automotive industry is the most
important export group, as it represents 28% of
total manufacturing exports, or 7% of GDP; that
is, 40% higher than oil exports.
Automobiles
Television sets
Automobile parts
Data processor machines
Telephones
Medical machines
7.7
5.4
4.8
4.7
4.6
3.1
Source: Banxico, HSBC
Mexico is widely recognized as having specialized
in the automotive industry, as it is the world’s
Mexico: Manufacturing exports by industry, 2011
% of total
manufacturi
USDm ng exports
Food, beverages & tobacco
Clothing & footwear
Wood industry
Editorial & printing
Chemicals related with clockwork and
photographical industries
Rubber & plastics
Non-metallic mineral products
Iron & steel manufacturers
Metallic mineral products
Machinery and equipment
Agriculture and livestock
Transport and communications
Automobiles
Diverse industries
Domestic appliances
Professional & scientific equipment
Electronic manufacturers
Clockwork & photography equipment
Other manufacturing industries
Total manufacturing exports
Source: Banxico
20
11,529
7,856
531
2,119
4.1
2.8
0.2
0.8
9,910
8,095
3,095
7,913
17,398
202,353
691
81,655
79,177
38,514
5,153
10,602
65,326
411
7,819
278,618
3.6
2.9
1.1
2.8
6.2
72.6
0.2
29.3
28.4
13.8
1.8
3.8
23.4
0.1
2.8
100
With respect to agricultural products, Mexico is
the world’s largest exporter of tomatoes,
avocadoes, onion, papayas, eggplants, lemons,
organic coffee, and peppers, according to the
Ministry of Economy.
Automotive exports
The most important manufacturing exports are
automobiles, accounting for 28% of the total. This
is not surprising, as it is appropriate for this
industry to outsource some of its production to
points close to consumption centers, owing to low
transportation costs, in this case to the US.
Nonetheless, exports to countries in Latin
America and Europe recently increased
substantially. In particular, we note that Mexican
exports to Europe have increased as a percentage
of the latter’s GDP, despite the region’s weak
economic performance.
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Mexico Handbook
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including China, have lost ground. The Chinese
share declined to 18% from 19% last year, a trend
that may continue.
Mexican exports by region (% of GDP of each region)
165
150
(index)
135
To gain an idea of magnitude, a 1.0ppt gain in
120
market share of US imports in the past five years
represented USD44bn more exports to the US, or
105
90
75
14% of total Mexican exports in 2011.
60
2005
2007
European Union
2009
Asean 5
2011
Latam
US
Source: INEGI, IMF
One important development has been the
relatively recent shift in the trend for exports to
the US. In 2009, sales of US vehicle units were
down about 40% from their 2005 peak, but in the
same period, Mexican exports decreased only
about 10%. In the subsequent recovery, US sales
increased about 23%, whereas Mexican car
exports rose at more than double this level,
increasing about 55%. This reflected significant
gains in Mexico’s US car market share, to above
10% from slightly less than 6% in 2005.
Mexico is projected to become
the largest major US trading
partner
Since 2009, Mexico has been the only country
among the major US trading partners to have
made notable market share gains; the others,
We estimate that the Mexican economy will gain
0.5-1.0ppt per year in market share of US imports,
based on our export projection dynamics for the
medium term. (Growth rates of variables and
sensitivity analyses are calculated using our
macroeconometric model of the Mexican
economy.) This means that if China loses between
1-2ppt in market share in the next six to eight
years owing to loss of competitiveness in wages,
currency appreciation, and rising transportation
costs, Mexico could catch up with both it and
Canada. That would make Mexico the top US
trading partner, with a market share of about 16%
of US imports by 2018.
Foreign direct investment
Mexico is the fourth-largest economy among
emerging markets in its capacity to attract FDI,
behind only China (including Hong Kong), Brazil,
and Russia. India comes after Mexico.
Market share in the US, by selected countries
Auto sales in the US versus auto exports to the US by
Mexico
20
18
15 0
(% o f US total impor ts)
16
(I ndex)
13 0
11 0
90
70
14
12
10
8
6
4
2
50
0
20 05
20 06
20 07
20 08
20 09
20 10
20 11
Mex ico
US: Auto sales in th e US
2000
2006
Mex ico: A uto mo bile ex p orts to the US
Source: Wards Automotive, AMIA, HSBC
China
2001
2007
Canada
2002
2008
20 03
20 09
Japan
2 004
2 010
Germ an y
2005
2011
Source: BEA
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Mexico Handbook
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Our analysis of the BRICs indicates that only China
is a real competitor for Mexico in terms of FDI that
is oriented to manufacturing exports; in Brazil and
Russia, FDI is focused more on producing for the
domestic market or exporting commodities. The
same holds for Mexico’s main market, the US.
Neither Brazil nor Russia is an important
competitor in the US economy, where Mexico is
the third-largest trading partner, behind only China
and Canada. India, which is behind Mexico in this
respect, is unlikely to capture FDI from Mexico,
owing to a lack of competitive advantages in areas
such as transportation costs and infrastructure, as
well as access to other markets.
FDI in other emerging economies is concentrated
on extraction of natural resources such as oil or
minerals. In the cases of China and Brazil, for
example, the former is a direct competitor and the
latter is a significant recipient of FDI used for
domestic consumption. By contrast, the FDI that
flows into Mexico is directed mostly to production
of exports, which is much less the case for China
and less still for Brazil. This is confirmed by a
comparison of the amount of dollars earned via
exports for each FDI dollar received.
15
12
dol lar of FDI)
(dol lars of exports p roduced by a
Dollar value of exports produced per USD1 of FDI
9
6
3
0
Brazil
C hina
M ex ico
Source: INEGI
It is important to note that foreign investment in
Mexico is relatively diversified, albeit somewhat
concentrated on manufacturing. About 50% of
total FDI inflows are destined for the
manufacturing sector.
22
Mexico: Foreign direct investment by sector and subsector
____ 2010 ______
As a %
USDm of total
_____ 2011 ______
As a %
USDm
of total
Agriculture
Mining
Construction
Manufacturing
Food manufacturing
Computer and
electronic products
Transportation and
equipment
Wholesale trade
Retail trade
Financial services
Rest
64
955
152
11,542
6,082
0.3
4.7
0.7
57.1
30.1
17
830
1,240
8,572
1,968
0.1
4.3
6.4
44.1
10.1
1,343
6.6
617
3.2
908
904
1,805
1,833
2,952
4.5
4.5
8.9
9.1
14.6
1,025
1,078
776
3,504
3,424
5.3
5.5
4.0
18.0
17.6
Total
20,207
19,440
Source: Ministry of Economy, HSBC
The most attractive manufacturing segments for
foreign investors in recent years have been food,
computers, electronic products, transportation,
and equipment. However, we note that Mexico
has started to look attractive in some new
industries, such as aerospace, a highly knowledgeintensive group capable of producing some of the
highest levels of added value. This industry had
almost no presence in the country five years ago
but has gained ground since 2008.
Indeed, according to a study published by
Accenture, which examined the aspect of location
among American companies, 21% of those
surveyed had moved their operations to Mexico
and 18% had started new operations there in the
last two years. Accenture, a consulting firm,
stated that “Many companies … reported
changing the locations of their manufacturing
facilities and planning additional moves in the
next 24 months to be closer to their customers –
thus enabling them to keep manufacturing costs
and lead times down while more flexibly
responding to customers demand and market
developments” (see “Efficient, dynamic and
customer-focused operations,” 2012, p. 11).
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Mexico Handbook
October 2012
Mexico: Foreign direct investment in the aerospace industry
3 00
(USDm)
2 50
US
Spain
Netherlands
Canada
Germany
UK
Rest
Total
2 00
1 50
1 00
50
0
2009
2010
2011
7,237
2,680
2,069
1,621
46
347
1,958
15,959
5,519
1,460
8,919
1,243
307
554
2,205
20,207
10,699
2,911
1,306
668
230
41
3,585
19,440
2 005
2 006
2 007
20 08
20 09
201 0
201 1
In terms of FDI inflows by country, the available
data show that the US is the main investor in
Mexico. With the exception of two years, FDI
from the US has represented more than 40% of
total FDI inflows in the past 10 years. However,
European countries also have a long history of
FDI in Mexico. Spain, for example, has
concentrated on the lodging sector and
infrastructure.
exports to countries other than the US continue to
increase, slightly lessening Mexico’s dependence
on the US.
Mexico: Export diversification
90
24
(% o f total M exican exp orts)
(USD m)
Mexico: FDI inflows by main countries
88
20
86
84
16
82
12
80
78
8
76
4
74
Mexico: FDI inflows by main countries of origin, 2011
0
72
2000
13%
3%
2004
European union
China & Japan
US
4%
2002
2006
2008
Canada
Other countries
2010
LATAM
US (right axis)
Spain
Source: Banxico
Netherlands
6%
51%
Switzerland
Japan
7%
Canada
Others
16%
Source: Economics Ministry
The case of the US is explained by its strong
economic ties with and proximity to Mexico. In
effect, 78% of Mexico’s exports go to the US.
While this concentration may slip a little as some
diversification takes place, the bias that FDI
introduces by using Mexico as an export platform
to the US makes any marked diversification a
remote possibility. However, Mexico’s
competitiveness is providing support, so that
FDI perspectives
The Mexican economy has the potential to
increase FDI inflows based on its current
competitiveness. In the future, we expect FDI to
recover to levels close to 3.0% of GDP seen in
1999-2008, before the global financial crisis.
However, FDI in Mexico is linked to economic
growth in advanced economies, which have, at
best, second-rate trajectories. This is a particular
obstacle, as the main sources of FDI in Mexico
are the US and European countries. This
circumstance may reduce the potential for greater
FDI in the Mexican economy to some extent.
Recent announcements of FDI projects by
companies such as Honda, Nissan, and Hella
23
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Mexico Handbook
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Mexico: Some investment projects that have been announced
Year
Company
Amount
Description
2012
Audi
Nissan
Not specified
USD2,000m
General Motors
Hella
USD420m
USD100m
Construction of a plant in Mexico.
The company announced construction of its third plant in Aguascalientes, with production
capacity of 175,000 automobiles p.a.
The company will expand its plants in Silao and San Luis Potosi.
Fiat-Chrysler
Not specified
Microsoft
Honda
USD690m
USD800m
Mazda-Sumimoto
USD500m
General Motors
DuPont
Eurocopter
Nissan
USD540m
USD500m
USD550m
USD1,050m
SCA
USD210m
2011
Hella will construct a new plant in the state of Guanajuato for production of tail lights. The
plant is to start operating in June 2013.
The company will build a plant in the state of Coahuila, which will generate approximately
600 new direct jobs.
This investment is geared toward supporting innovation and entrepreneurial capacity.
Construction of a new plant in the state of Jalisco to produce efficient subcompact cars for
Mexico and North America. This plant is to start operations in 2014, producing 200,000 cars
per year.
The companies will construct a plant in the state of Guanajuato to produce complete cars
and motor vehicles.
GM will invest in a plant in the state of Mexico for production of two new models.
The company will expand its plant to increase production of titanium dioxide.
Investment to produce helicopter and airplane parts.
The company announced that it will expand its plants in Cuernavaca and Aguascalientes for
new projects.
The company will construct a plant to produce toilet-tissue.
Source: Reforma, Milenio, El Universal
illustrate that exports may increase considerably.
The investments are targeted at producing exports,
mainly to the US, but also to Latin America.
We are optimistic about the FDI announcements
by important companies. Nonetheless, in our
view, the most important factor is the increase in
capabilities to produce, generate employment, and
increase exports, and the attraction of satellite
industries to industrial automotive clusters. For
example, Nissan, Honda, General Motors, Ford
Motor, Chrysler, and Volkswagen have
announced investments totaling about USD6bn,
which implies an increase of about 50% in
automotive production in the next three to five
years. In other words, Mexico will be able
increase auto exports to the same extent, together
with auto parts (engines and other parts). We
therefore expect that automotive exports will
almost double to USD145bn in 2016 from
USD80bn in 2011.
24
It is important to note that the trade projections
yielded by our econometric model indicate that
other exports – non-oil and non-auto exports –
may more than double in six to eight years,
reflecting the potential of the entire Mexican
economy as an export platform. Under this
scenario, FDI must increase in tandem to support
this export growth.
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Mexico Handbook
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Mexico: Six industries that generate 75% of total export revenue
Machines and electric equipment: TVs, phones, electric
conductors, motors & transformers, microphones, radios
Automobiles: Cars, auto parts and accessories, tractors
70
80
60
(USD bn)
(USD bn)
70
60
50
40
50
30
40
20
20 00
2 002
2004
20 06
2008
2000
201 0
2002
2004
2006
20 08
2010
Automobile sector
Mach ine s and electric equ ipment
Source: INEGI, HSBC
Mineral fuels and derivatives: Crude petroleum, petroleum oil
Mechanical appliances and equipment: Data processing
machines, motors, plumbing accessories, air conditioning
60
50
50
45
(USD bn)
(USD bn)
Source: INEGI, HSBC
40
30
40
35
30
20
25
10
20
200 0
2 002
2004
200 6
2 008
200 0
201 0
2 002
2004
200 6
2008
201 0
Mechanical a pplia nces an d e quipment
Mineral fuels and deriv ativ e s
Source: INEGI, HSBC
Source: INEGI, HSBC
Precious metals and gems: Silver, gold, jewelry
Medical and optical equipment. Medical machines, veterinary
equipment, optical and orthopedic accessories
12
14
12
10
(USD bn)
(USD bn)
10
8
6
4
8
6
2
0
4
200 0
2002
2 004
200 6
2 008
2010
2000
Pre cious meta ls an d g ems
Source: INEGI, HSBC
2002
200 4
20 06
2 008
201 0
Medica l and optical equipment
Source: INEGI, HSBC
25
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Mexico Handbook
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Mexico. Main products exported
Mexico is the world’s No. 1 exporter of flat screens
Mexico is the third-largest manufacturer of computers in the
world
17
25
15
(USD bn)
(USD bn)
20
15
13
11
9
10
7
5
20 00
2002
2004
2 006
2008
2000
201 0
2002
2004
2006
2008
2010
Data-pro cess ing m ac hines
Te le v is ion s
Source: INEGI, HSBC
Mexico ranks third worldwide for exports of mobile phones
and holds global first place for BlackBerrys
Mexico produces important components for manufacturing
production
20
9
15
8
(USD bn)
(USD bn)
Source: INEGI, HSBC
10
7
5
6
0
5
200 0
2002
2 004
20 06
200 8
2000
2010
2 002
200 4
2006
2 008
201 0
Insulated electric co nductors
Telep hone and telegraph eq uipments
Source: INEGI, HSBC
Source: INEGI, HSBC
Mexico is the No. 1 global exporter of silver
Mexico ranks first worldwide in refrigerator exports
5
8
4
(USD bn)
(USD bn)
6
4
2
2
1
0
0
2000
Source: INEGI, HSBC
26
3
2 002
200 4
2 006
S il v er
Gold
20 08
2010
2000
2002
2004
2 006
Refrigerators
Source: INEGI, HSBC
2008
2010
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Mexico Handbook
October 2012
Chapter 4: The domestic
market
 While the external sector is the main driver of the Mexican
economy, the domestic market is consolidating
 The wage mass may be the main support in the medium term,
together with expansion of consumer credit
 Wage remittances from Mexican workers in the US support basic
consumption
The domestic market is
improving
Although the export sector is the main driver of
the economy, the domestic market is
strengthening, too, through higher levels of
consumption. Retail sales have had healthy
growth rates, are above pre-financial crisis levels,
and look set to maintain their current pace in the
medium term.
The strengthening of the domestic market might
not be achieved by increases in real income, as an
ample labor supply may contain such pressures in
the medium term and long term. Instead, we
expect domestic market improvement to come
from employment generation and maintenance of
real wage levels. This would cause growth in the
wage mass, which is measured as the average real
wage per worker employed. Other factors
supporting consumption are the expansion of
consumer credit and wage remittances.
We also believe that medium- and long-term
opportunities in the external sector and the
gradual consolidation of the domestic market may
increase investment to satisfy the need for goods
and services domestically.
Low wages offer little support
for consumption
The domestic market is relatively weak because of
only modest gains in inflation-adjusted wages – or
even losses if considered in US dollar terms.
Nonetheless, Mexico is a middle-income country
with GDP per capita of USD12,776 in constant
2005 dollars, adjusted by purchasing power
parity. (This measure of purchasing power parity
eliminates the distortions of undervalued or
overvalued currencies and better reflects the GDP
of an economy.) This puts Mexico country below
Argentina and Chile but above Brazil, Venezuela,
Colombia, and Peru among the Latin American
countries. Estimated on the basis of nominal GDP,
income per capita was USD10,064 in 2011.
However, this level did not imply that the
domestic market was as strong as it was in other
middle-income countries such as Brazil.
27
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Mexico Handbook
October 2012
the past decade, interrupted only by the global
financial crisis in 2008-09.
The recovery has been driven mainly by
employment creation, which has been growing at
a healthy pace, and the wage mass index now is
above its pre-crisis level.
Mexico: Real wage mass (y-o-y)
8
6
(%, y-o-y)
Inflation-adjusted wages for Mexican workers
have risen about 1.0% on average in the past
decade, or less than half the 2.5% average rate of
growth in the economy in the same period.
Moreover, if we estimate these real wages in US
dollar terms, we observe a loss. The average
inflation-adjusted wage for workers registered in
the Mexican social security system was
USD24.60 per day in 2002; the current level is
USD18.80 per day. In other words, in a decade,
the average wage declined 23%, which is
equivalent to an average yearly loss of 2.9% of
purchasing power, estimated in US dollars.
4
2
0
-2
-4
-6
2 009
Mexico: Real wages in USD (2003=100)
2010
w a ge ma ss
r eal w a ge
2011
IM S S em ploy m ent
1 05
Source: HSBC with data from IMSS
Index
1 00
95
Consumption is improving
90
85
80
20 03
2006
20 09
20 12e
Source: HSBC estimates with data from INEGI
Though the minimum wage of about USD5 per
day is not a significant amount and only a
minority of Mexican workers receive this, it is an
important benchmark for setting other levels of
wages and for legal purposes. The minimum
wage, adjusted for inflation, has shown practically
no increase in a decade.
Therefore, while the average worker has not
experienced any deterioration in purchasing
power in domestic currency terms in the past
decade, he or she has had only marginal
improvements each year and may even have had
losses if measured by US dollars.
But the wage mass is growing
In aggregate, the most important factor for
consumption is the so-called wage mass; that is,
the average real wage per worker employed. In
Mexico, this variable has been growing steadily in
28
The relationship between the wage mass and
consumption is strong and indicates that as long
as the economy is able to provide employment,
consumption will continue to grow at a steady
pace. Also, we see credit availability as an
important support for consumption or investment,
particularly in the case of high-priced items such
as cars or homes.
Private consumption has been growing at an
average rate of 3.1%, above real GDP growth of
2.5% in the past decade. The real wage mass has
been increasing at a rate of 3.5%.
This momentum from the wage mass is reflected
in a healthy retail sales performance, although
that, too, was interrupted by the 2008-09 crisis.
The variable has recently recovered to exceed the
pre-crisis level and is displaying an upward trend.
Another factor supporting consumption is the
consumer confidence index, which has been a
good reflection of the economic cycle. It has
captured consumers’ mood both in slow times
such as 2002-03 and 2008-09, and in better times,
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Mexico Handbook
October 2012
Mexico: Wage mass and consumption
Consumer confidence index
113
140
108
Index
130
103
98
120
93
110
88
83
100
78
90
2002
20 03
200 4 2 005
200 6 2 007
20 08
2009
20 10
2003
2004
2005
2006
2007
SA Index
R e al Wage m ass
2008
2009
2010
2011
2012
2011
Trend
Priv a te co nsum ption
Source: INEGI, HSBC
Source: INEGI, HSBC
Wage remittances are a basic support
An additional channel besides exports that
connects the Mexican economy with other
countries is the significant flow of wage
remittances from Mexican workers or the
population of Mexican descent in the US. The
flow of resources is almost all spent on basic
consumption and the purchase of small appliances
such as TV sets and refrigerators.
The impact on consumption is not negligible.
Average annual revenue has been about
USD22bn, or 2.3% of GDP, in the past decade.
(The flow is comparable to revenues from the oil
trade balance, measured net of crude oil exports
less gasoline imports.) These revenues depend on
US activity and the strength of the sectors in
which Mexicans workers are more concentrated;
for example, services and construction. This bias
explains why the construction crisis in the US
affected wage remittances, causing them to fall
almost 20% in 2009 from their 2007 peak. We
now estimate that the recovery to pre-crisis levels
may be likely only by 2015, although this will
depend greatly on the speed of improvement in
the US housing sector.
Mexico: Wage remittances
3, 000
2, 500
2, 000
(USDm)
such as 2010-11. Although it has recovered from
the crisis, it is still reflecting some hesitancy,
probably due to the still relatively high
unemployment rate and pessimism surrounding
the global economy.
1, 500
1, 000
500
0
1995 1997 1999 2001 20 03
2005 2007 2 009 2011
Rem ittances
Mexico: INEGI retail sales
3 per. Mov . Av g.
Source: INEGI
130
Credit is low but helpful
125
(I ndex)
120
115
110
105
100
95
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
SA
Trend
Consumer credit has never been plentifully
available in Mexico. In the decade following the
banking crisis in 1995, this remained just above
1.0% of GDP. It started to grow more
dynamically in 2005 and has since averaged 4.6%
of GDP; that is, four times more than previously.
Now it stands at 4.2% of GDP, having peaked at
Source: INEGI
29
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Mexico Handbook
October 2012
5.7% of GDP in 2007. It is one of the few
variables not to have recovered to pre-crisis
levels. However, the recent high rates suggest that
it may reach those levels in 2013.
Mexico: Consumer credit to the private sector, % of GDP
One of the areas hardest hit by the credit slowdown
was domestic sales of the car industry. The 63,000
units sold in the worst moment of the crisis in 2009
were comparable to levels sold 10 years before. The
recovery has been slow, and we expect a return to
pre-crisis levels only in mid-2015.
4.5
Mexico: Domestic auto sales
4.0
3.5
150,000
3.0
130,000
110,000
(Uni ts)
(%)
2.5
2.0
90,000
70,000
50,000
1.5
30,000
1.0
10,000
0.5
1995
0.0
1999
Units sold
1996
1998
2000
2002
2004
2006
2008
2010
Source: AMIA
The improvement in consumption is attributable in
part to the recovery in credit extended by the
banking industry, which reduced credit availability
to some extent in response to the increase in
delinquency rates during the crisis and its aftermath.
30
1997
2001
2003
2005
2007
2009
3 per. media moving
2011
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Mexico Handbook
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 A young country with a demographic bonus
 The population is healthy and relatively well-educated
 The labor force is therefore abundant for the medium and long term
Labor: a competitive
advantage
adjust the economy’s labor costs to competitive
levels according to market conditions.
Mexico can aspire to maintain its status as an
export platform in the medium term and long term
as long as it has an abundant supply of young,
educated, and relatively healthy workers – in
other words, a competitive labor force. Otherwise,
it will run the risk of reaching a point at which a
scarcity of skilled labor could put pressure on
higher real wages and end the comparative
advantage of relatively low labor costs.
Demographics play in Mexico’s favor
Hourly compensation costs in the manufacturing industry
Philippine s
Mex ic o
120
4.5
100
3.5
80
2.5
60
1.5
40
(%)
Mexico: Population levels and annual average growth rate
(millions)
However, Mexico’s competitiveness is not based
only on low-cost labor, as other countries,
particularly most Asian economies, may have less
expensive labor. Mexico must strike a balance
between its many advantages: its proximity to the
US, an efficient supply chain, relevant
infrastructure, and an exchange rate that can
Mexico underwent an important demographic
transformation in the 20th century. The population
grew at a rapid pace, with the annual population
growth rate peaking at 3.4% in 1970; the pace of
growth then began to slow, reaching an average of
just 1.4% between 2000 and 2010.
0.5
20
0
-0.5
1910
1930
Population
1950
1970
1990
2010
Grow th rate
Source: INEGI, CONAPO
Mexico’s population of more than 112 million
predominantly young inhabitants makes it the
11th most-populous country in the world. (See the
chart above and the following chart.)
Brazil
The country has a classic population pyramid.
More than 60% of the total population is under 35
years of age, and 6.5% is older than 65.
K ore a
US
Germa ny
0
5
10
15
20
25 30
(U S dol lar s)
35
40
45
Source: US Bureau of Labor Statistics
31
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Mexico Handbook
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Most populated countries in the world
Mexico: Population pyramid
China
Ind ia
Unite d States
Ind ones ia
Brazil
Pakistan
Nigeria
Bang la desh
Russ ia
J apan
M ex ico
ages
Population pyramid 2010
0
500
1,000
1, 500
(m il ions)
Source: CIA 2011
85+
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
0.4
0.4
0.5 0.6
0.8 0.9
1.1
1.0
1.5
1.3
1.8
1.7
2.4
2.2
2.8
2.5
3.3
3.0
3.6
3.9
3.6
4.0
3.8
4.1
4.3
4.6
5.0
5.0
5.0
4.9
5.1
4.9
4.8
4.7
0.3
0.3
6
4
2
0
Men
Half of Mexico’s population is under 26 years old
2
Women
4
6
percentage of whole population
Source: INEGI
Most of the population lives in urban areas
Rest
Under 26
Source: INEGI
Mexico has a demographic bonus in which the
working-age population accounts for a higher
proportion of the total than the other groups,
particularly the oldest age group. This represents a
window of opportunity in terms of economic
growth via income increases and accelerated
capital accumulation. However, benefits of the
demographic bonus rely on investment in human
capital, which helps generate a more productive
workforce. The period in which Mexico will
benefit from this combination of a large workingage population and small old-age and infant
populations began in 2006 and will end in 2028,
according to the United Nations, in “Demographic
transition, demographic bonus and aging in
Mexico,” August 2005, National Council on
Population, Mexico.
32
According to the 2010 census, 56 of every 100
Mexicans live in metropolitan areas, Mexico City
and the surrounding communities being the most
highly populated metropolitan area in the country,
with 20.1 million people. About 23% of the
population still lives in small rural communities
with fewer than 2,500 inhabitants.
Mexican states, by population density
Inhabitants per km2
+ 5000
100 – 5,000
50 – 100
20 – 50
0 – 20
Source: INEGI
According to the World Bank, Mexico’s
population is highly concentrated in urban
agglomerations, whereas in other countries the
populations are more dispersed.
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Mexico Handbook
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However, according to INEGI, the National
Institute of Statistics and Geography, Mexico’s
negative migration balance has been declining in
the last few years, especially since 2009, when the
financial crisis in the US hit. As a result, Mexico’s
net negative migration balance decreased from
725,000 in 2006 to practically zero in 1Q12.
Population in urban agglomerations of more than 1 million
Wor ld
O EC D m em be rs
G e rm any
Ind ia
C hina
R uss ian F ed era tion
T ur key
C hile
M ex ico
Br azil
U nite d States
Kor ea, Re p.
12
22
32
(% o f to t al po p u lat ion )
42
52
Source: World Bank
Net migration diminishing
Migration balance (difference of immigrants and emigrants)
The Institute for Mexicans Abroad has reported
that more than 12 million Mexicans lived abroad
in 2011, and of these, more than 98% lived in the
US. The Mexican immigrant population in the US
is highly concentrated, with about two-thirds
settled in California and Texas.
0
(per 10,000 inhabitants)
2
Consistent with these statistics, the average level
of emigrants per 10,000 inhabitants decreased to
30 recently from 109 in 2006, while immigration
levels dropped to 30 per 10,000 inhabitants from
44 in 2006.
-10
-20
-30
-40
-50
-60
-70
2006
2007
2008
2009
2010
2011
1Q12
Source: INEGI
Mexicans living abroad
M ex ican s li vin g abro a d
12,00 0,0 00
20,00 0-6 5,000
3 ,00 0-4 ,999
2 ,00 0-2 ,999
5,000 -10 ,000
1 ,00 0-1 ,999
Source: Institute for Mexicans Abroad
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Mexico Handbook
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Employment and unemployment
moving in the right direction
The labor force was estimated at approximately
49.5m in 1Q12, and was divided between
occupied, 47.1m, and unoccupied, 2.4m. In the
occupied population, 62% were linked to the
services sector, about 24% to the industrial sector,
and 13% to agriculture.
About 30% of occupied people, equivalent to
about 14m, were involved in the informal sector,
defined as those people who were not registered
in the tax payment system.
Mexico: Formally and informally occupied workers
Informal sector
29%
Formal sector
71%
Source: INEGI
About 70% of the total workforce, which is
equivalent to 33m people, was in formal
employment. More than 16m formal workers in
the private sector were affiliated with the Mexican
Institute of Social Security (IMSS). The
remaining 17m did not have IMSS coverage.
Employment was hit by the 2008-09 economic
crisis, when some 420,000 jobs were lost. Since
the recovery in 2010, employment generation has
increased at a relatively good pace, with 1.8m
jobs created.
However, unemployment has decreased only
slowly, in spite of favorable employment figures,
and the urban unemployment rate is still well
above pre-crisis levels. In our opinion, this is
partly attributable to the decrease in the negative
migration balance, which implies an increase in
the labor force and consequently the soaking up of
some of the employment gains.
34
Mexico: Formal employment
16,000,000
15,500,000
15,000,000
14,500,000
14,000,000
13,500,000
13,000,000
12,500,000
12,000,000
2006
2007
2008
Total Insured
2009
2010
2011
2012
6 per. media movin g
Source: IMSS
If we look in more detail at the unemployment
rate in Mexico, it is worth noting that it has
consistently been relatively low, compared to the
levels in other member states of the Organization
for Economic Cooperation and Development
(OECD), which has prompted some criticism
about the quality of its estimates. However, the
national statistics institute INEGI follows the
international standards of the International Labor
Organization (ILO) when calculating
unemployment figures. The explanation therefore
lies in characteristics specific to the Mexican
labor market; in other words, the definition set by
the ILO may be failing to capture real conditions
in the Mexican labor market. The ILO stipulates
that if an employee works at least one hour per
week, he or she cannot be considered
unemployed. This definition, however, seems to
be too narrow to reflect real labor market
conditions in Mexico, as most people do not have
unemployment benefits to sustain their families
when they lose their jobs and are therefore
obliged to accept any occupation available. In
other words, they are therefore more likely to
accept any casual work than their peers in
countries with unemployment benefits. Regardless
of these issues, the unemployment rate helps
identify trends.
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Mexico Handbook
October 2012
Assessment” (PISA) examination, Mexico ranked
slightly below the average score.
Unemployment
OEC D m em be rs
Korea, Re p.
C hina
Relatively well-educated populations
M ex ico
Ge rm any
R ussian F ed era tion
C hile
Brazil
U nite d States
T urkey
2
4
6
8
10
(% o f to tal l ab o r force )
12
14
Source: World Bank, 2010; 2009 data for Brazil and China
INEGI has tried to adjust to the design of the
international methodology, by calculating and
releasing complementary rates with broader
definitions on a monthly basis. One of these rates
is the partial occupation rate (TOPD1), which
includes the percentage of the labor force that is
unemployed plus the number of employees
working fewer than 15 hours in the week
concerned. On this measure, unemployment
reaches almost 11%.
Partial occupation rate (TOPD1) and open unemployment rate
15
(% )
10
5
0
2005 2 006 2 007 20 08 20 09 20 10 201 1 201 2
T O P D1
U nem ploy m en t
Denm ar k
Fin la nd
Ir an
S w itzer lan
Po la nd
C hina
Ru ssia
UK
Au stria
It al y
Argentina
Me x ico
S outh
Si nga por e
C ol om bia
B raz il
T haila nd
Egy p t
V enez uela
0
2
4
6
8
10
12
Av e rag e y ear s of m al e sch ooling
Source: Barro-Lee
A healthy labor force
Mexico has a healthy population, which had a life
expectancy of 76.6 years in 2012, relatively close
to the US figure of 78.5 years, according to the
United Nations. Mexico’s figure is higher than
those in China, Brazil, Russia, and India.
However, modern life has posed a major health
challenge to the Mexican population: the problem
of obesity, with negative consequences for health
and economic costs. The Mexican government is
combating the problem with mass campaigns
aimed at raising awareness and providing
preventive treatment, but it will take years for the
benefits to be noticed.
Source: INEGI
Mexico has a healthy population with a life expectancy of about
77 years
Educated labor force
L i fe exp e cta n cy
Number of yea rs
85
The Mexican workforce is relatively welleducated. The average of almost nine years of
years of male schooling is comparable to levels in
other emerging and developed economies.
However, there are still some challenges with
respect to the quality of education. In the OECD’s
2010 “Program for International Student
80
75
70
65
60
India R us sia Brazil C hina M ex ico U nited
Sta tes
C hile OEC D
m em ber s
Source: World Bank
35
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Mexico Handbook
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Chapter 6: The
macroeconomic
framework
 Mexico learned the lessons of its severe economic crisis in 1995
and developed a macro framework based on institutions
 An autonomous central bank and the Fiscal Responsibility Law
are accomplishments in this respect
 The free-floating peso regime has been another key policy, as
have mechanisms for absorbing external shocks
Institutions provide the
foundations
Mexico’s stability in the recent past would have
been impossible in the absence of a strong
macroeconomic framework. Indeed, a marketoriented structure of institutions is a necessary
condition for stable development. Additionally, a
free floating exchange rate is the main condition for
an open economy such as Mexico to work properly.
Over the past two decades, Mexico has
implemented economic and financial reforms
geared toward attainment of macroeconomic
stability, reduction of external vulnerabilities, and
strengthening of the regulatory framework. As a
result, inflation has decreased to one-digit rates,
within the central bank’s target range; the fiscal
accounts are balanced, and the exchange rate
functions as a shock absorber for domestic and
external impacts.
36
In particular, an autonomous central bank can
provide a credible monetary policy; and the Fiscal
Responsibility Law (FRL) induces fiscal
discipline. The institution and corresponding
economic policies were the two pillars that, for
example, enabled Mexico to weather the 2008-09
global financial crisis relatively well and, most
important, the post-crisis period.
The existence of institutions such as the
autonomous central bank, the Fiscal
Responsibility Law, and the Exchange Rate
Commission explain the efficient operation of
economic policy.
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Mexico Handbook
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An autonomous and credible
central bank
One of the main steps Mexico took toward
attainment of macroeconomic stability was to
grant autonomy to the central bank of Mexico
(Banxico) in 1994, giving it the mandate to
preserve the currency’s purchasing power.
Government finances have been managed with a
view to achieving fiscal stability. Strict control of
expenditures has resulted in small fiscal deficits of
close to 2% of GDP, including investment in Pemex,
the government-owned oil company. This prudent
fiscal management was strengthened with the
passage of the Fiscal Responsibility Law in 2006,
which established that the fiscal balance must be
equal to +/-1% of GDP, excluding investment in
Pemex, which was set at 2% of GDP.
Mexico: Fiscal balance as a percentage of GDP
1 .0
0 .0
(%)
In 1999, Banxico set a medium-term target for the
inflation rate for the first time, aiming for
convergence to the levels of its main trading
partners by end-2003. The inflation-targeting
program was formally adopted at the beginning of
2001. In 2002, a long-term inflation target of 3%
was set, and from 2003 onward, the +/-1% target
band was introduced.
Fiscal Responsibility Law
Banxico also has adopted and implemented other
measures to strengthen communication
mechanisms that have been crucial for the
effectiveness of this program. These include
publication of quarterly inflation reports, with
corresponding press conferences; publication of
monetary policy statements; and more recently,
publication of minutes from the board’s policy
decision meetings.
As a result, the central bank has gained credibility
and has been able to reduce inflation to one-digit
rates, within its target range, in three of the past five
years, down from an average level of 35% in 1995.
Mexico: Year-end inflation rates
-1 .0
-2 .0
-3 .0
2000
2004
Fis cal balance
2006
2008
2010
2012 e
In cluding PEMEX inv estme nt
Note: From 2009, the increase in the fiscal deficit responds to a change in the
methodology. The series now includes Pemex investment .
Source: SHCP
Fiscal accounts, however, are still highly
dependent on oil revenues, which account for
more than one-third of total revenues. In this
regard, the Ministry of Finance has set up hedges
to protect its net oil revenues against sudden oil
price movements.
30
25
(%)
20
15
10
5
0
1996
1999
2 002
2005
2008
2011
Source: Banxico
37
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Mexico Handbook
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Mexico: Public debt as a percentage of GDP
Revenues (I+II)
I. Federal government
A. Tax
1. Income tax
2. Value-added tax
3. IEPS
4. Other
B. Non-tax
1. Non-tax oil
2. Non-tax non-oil
II. Public enterprises
A. Pemex
B. Other
Expenditures (III+IV)
III. Programmed expenditure
A. Financial expenditure
B. Capital expenditure
IV. Non-programmed expenditure
Fiscal balance
Primary balance
2010
2011
22.6
15.9
9.6
5.2
3.9
0
0.5
6.3
4.9
1.4
6.7
2.9
3.8
25.5
20
15
5
5.5
-2.9
-0.9
22.8
16.1
9.0
5.3
3.7
-0.5
0.5
7.1
5.9
1.2
6.6
2.7
3.9
25.3
19.9
15
4.9
5.4
-2.5
-0.6
Source: Ministry of Finance
In addition, the government has made a special
effort to define rules that increase transparency.
Back in 2009, for example, a mathematic rule was
defined for determining the oil price set in the
national budget.
Stable and moderate debt
levels
Over the past 10 years, the Mexican government
has reduced the vulnerability of public debt to
exchange rate swings by decreasing the relative
importance of external debt in government’s debt
portfolio to 10% of GDP from 36% of GDP in
1995. Price stability and pension system reform
have played important roles in generating
confidence among domestic and foreign investors.
50
40
(% of GDP)
Mexico: Public sector balance breakdown (% of GDP)
The Foreign Exchange Commission is responsible
for foreign exchange policy in Mexico. Three of
its six members are from the Ministry of Finance
and three from Banxico.
38
20
10
0
19 95 1 997 1999 20 01 2 003 2005 200 7 2 009 2011
Ex ternal
Dom es tic
Note: From 2009, the increase in the public debt responds to a change in the
methodology. The series now includes Pemex investment.
Source: SHCP
The Foreign Exchange Commission decided to
adopt a free-floating exchange-rate program at the
end of 1994 as a consequence of the balance-ofpayments crisis. Since then, the exchange rate has
been determined by market forces, with only
sporadic interventions to reduce market volatility.
Any such intervention in the FX market has been
through transparent and clear mechanisms, and its
objectives have been to stabilize significant
fluctuations in the exchange rate in episodes of
high volatility or to accumulate foreign reserves.
The authorities’ commitment to maintaining a
market-determined exchange rate has allowed the
exchange rate to move in what was regarded as
the right direction and to act as a shock absorber,
cushioning the economy against domestic or
external shocks. For example, in recent episodes
MXN-USD: Nominal exchange rate
In 2011, domestic debt accounted for 80% of
the central government’s total debt, up from 55%
in 2000.
16
14
12
MXN-USD
Free-floating exchange-rate
regime
30
10
8
6
4
2
0
1990 1993 1996 1999 2002 2 005 20 08 2011
Source: Banxico
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Mexico Handbook
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Several years after the adoption of the free-floating
exchange-rate program, the central bank embarked
on a policy of accumulating foreign reserves through
dollar purchases in the market. In 2001, it abandoned
this mechanism, but the accumulation of foreign
reserves continued. This prompted the authorities to
implement a mechanism in 2003 aimed at reducing
the pace of accumulation.
However, in 2008, when the US financial crisis
broke, Mexico’s foreign reserves were considered
insufficient. As a result, the central bank
reactivated the dollar purchase mechanism that
year, while the government obtained a USD42bn
flexible credit line (FCL) with the International
Monetary Fund, which was extended to USD72bn
at the beginning of 2011 based on the country’s
sound macroeconomic framework. This brought
Mexico’s foreign reserves up to a total of
USD142bn in 2011, equivalent to 12.5% of GDP,
plus the IMF’s FCL, equivalent to 6% of GDP.
International reserves stood at about USD160bn at
the close of August 2012, an increase of about
USD18bn year-to-date.
Improved policies for debt management and higher
levels of foreign reserves are therefore perceived as
important elements of crisis prevention.
Oil price impact on the fiscal
sector
An important aspect of the Mexican economy and
particularly of the public sector is the widely
recognized vulnerability of the economy to oil
price shocks, positive or negative.
This represents a great concern for the public sector,
because one-third of its revenues come from oil.
23
200
18
150
13
100
8
50
0
(as a % of GDP)
250
(USDbn)
International reserves on the
rise
Foreign reserves plus the IMF flexible credit line
3
2000 2002 2004 2006 2008 2010 2012e
IMF flexible credit line
USDbn
%of GDP
Public finance statistics indicate that most of
government revenues come from the domestic
sector, at 5.3% of GDP, and from the external sector
at 2.3% of GDP – both figures being the averages for
the past decade. Because domestic prices are, by
policy, not adjusted to lower oil prices, the
government receives practically the same amount as
it did before an oil price reduction. By contrast, the
external sector’s revenue is reduced in proportion to
a fall in the oil prices.
However, a revenue decline is partly compensated
by a reduction of international gasoline prices –
significant because Mexico currently imports
about 40% of total gasoline consumption. This
represents about half of Mexico’s oil exports.
Mexico: Oil exports and imports
80,000
45,000
70,000
40,000
35,000
60,000
50,000
(USDmn)
of high volatility due to the eurozone sovereign
debt crisis, the exchange rate has weakened,
helping make exports more competitive.
Oil imports
30,000
Oil exports
25,000
40,000
20,000
30,000
15,000
20,000
10,000
10,000
5,000
0
0
2000
2002
2004
2006
2008
2010
Source: INEGI
39
Mexico Handbook
October 2012
In terms of the budget, the impact of lower prices
on revenues is smoothed out by the conservative
calculation of the budgeted oil price, which is
hedged in the market to avoid the need for
adjustments in expenditures for the year
concerned. If the oil price remains depressed, the
expenditure is reduced the following year to avoid
exceeding the deficit target defined by the Fiscal
Responsibility Law.
Combating monopolistic
practices
In addition to strengthening the macroeconomic
framework, Mexico has taken several steps to
fight monopolistic practices. These include the
passage of the Federal Law on Economic
Competition in 1993 and creation of the Federal
Competition Commission (Cofeco), which
represented a significant advance. Despite this big
step, though, some deficiencies limited the
Cofeco’s ability to rein in the power of dominant
players. As a result, amendments were made to
the competition law in 2011 that promoted a more
pro-competition market structure by increasing
the Cofeco’s powers to investigate and impose
sanctions for monopolistic practices. The new
antitrust law strengthened the powers of the
Cofeco, though the agency lacks measures such
autonomy and specialized tribunals.
40
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Mexico Handbook
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Chapter 7: Fixed income
and FX markets
 Local rates market offers decent liquidity and depth
 The Mexican peso is the only currency in Latin America with a
fully deliverable spot and forward market offshore
 The peso is still among the most-liquid EM currencies
Fixed income: Government’s
debt strategy
Mexico: Central government debt distribution, domestic and
external
100
%
Over the past decade, the Mexican government
has reduced the vulnerability of public debt to FX
swings by focusing its strategy on increasing the
weighting of domestic fixed-rate debt in its
overall debt stock. This has been achieved via
price stability and pension system reform, which
have helped create confidence in local debt among
domestic and foreign investors. Other factors that
have contributed to development of the local
fixed-income market are increased credibility of
monetary policy, prudent management of fiscal
accounts, and transparency of FX policy.
Local debt market
The government is financing most of its fiscal deficit
in the local market, with a particular focus on midand long-term fixed-rate and inflation-linked bonds.
External markets serve as a complementary source
of financing for the public deficit when conditions
are favorable. This also provides a broader investor
base and increases diversification. The government
focuses on two sources of external financing:
international debt markets and international financial
organizations (IFIs).
As at July 2012, the local bond market in Mexico
was sized at about USD459bn, or about 38% of
GDP. This amount included central government
debt, the Institute for the Protection of Bank
Savings or IPAB (explained below), and debt
issuances of public enterprises, agencies, and
corporates. Government bonds account for
approximately 67% of the bond market, and the
remainder corresponds to public enterprises,
agencies, and corporates.
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Domestic
Ex ternal
41
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Mexico Handbook
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Domestic debt represents about 80% of central
government debt, up from 55% in 2000, and almost
unchanged since 2007. In terms of breakdown,
nominal fixed-rate debt increased from 15% in 2000
to 60% at the end of August 2012. Since 2011, the
government has increased floating-rate issuance, as
Banxico uses these instruments, among others, for
monetary policy purposes to withdraw excess
liquidity that results from accumulation of
international reserves. Since 1999, the government
has extended the yield curve from a maximum
maturity of one year to the current level of 30 years.
The weighted average maturity now stands at almost
8.3 years, up from 1.5 years in 2000.
Mexico: Central government debt distribution, floating rate
and fixed rate
100%
Inflation-linked
80%
60%
Floating-rate
40%
Fix ed20%
0%
1999
2001
2002
2004
2006
2008
2010
The Mexican debt market is among the most
liquid in the EM universe, and participation by
foreign investors has increased sharply in the past
three years. At the end of August 2012, foreign
investors held 32% of the central government’s
total domestic debt, more than twice the amount
they held at the end of 2009. Afores, local pension
funds, held 18% and local mutual funds 13%. The
rest was distributed among local banks, insurance
companies, and other local investors.
Foreign ownership of local debt is mainly
concentrated on fixed-rate bonds, MBonos, for
which foreign participation accounts for close to
50% of the total amount outstanding, and bills,
Cetes, about 44% of participation.
42
Foreign participation in the Mexican government
bond market jumped to 32% of the total amount
outstanding at the end of August 2012 from only
12% three years ago. More than 90% of the
increase was due to the inclusion of MBonos in
Citi’s World Global Bond Index (WGBI), and the
remainder was explained by the increase in
government bills, Cetes.
In October 2010, 19 MBonos became eligible for
inclusion in the WGBI. With a total market value
of MXN1.1trn, they represented a market
weighting of 0.65% of the WGBI at that time.
The inclusion of MBonos in the index prompted
several changes in issuance policy since 2010. As
the minimum size for individual new MBonos
was set at MXN10bn, the government has started
to sell bonds through debt syndication. This
ensures that new issuances have larger initial
amounts outstanding, leading to better secondarymarket liquidity and wide allocation among local
and foreign investors. In 2011, the Finance
Ministry sold 5-, 10-, and 20-year MBonos and
10-year Udibonos through syndication. This year,
the government has launched new 5-, 10-, and 30year MBonos benchmarks and a new 10-year
Udibonos benchmark through syndication. This
program is only complementary and has not
replaced the normal issuance policy involving
weekly auctions for Cetes or monthly auctions for
MBonos and Udibonos.
Foreign participation in the Mexican bills, Cetes,
market has increased sharply since 3Q 2010, because
MXN implied yields up to three months have been
trading below the corresponding Cetes yields.
The government’s domestic debt market has a
market-maker program, in which eight market
makers have the right to participate in the “green
shoe” one working day following the weekly
auction day. For each bond, they may buy an
amount equivalent to either 20% of the total
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Mexico Handbook
October 2012
amount placed in the primary auction for each
bond, or the total amount of eligible bids sent by
the market maker, whichever is less. Eligible bids
are defined as those for which the yield is equal to
or lower than the highest yield allocated in the
primary auction, multiplied by a given factor. The
market makers also have access to the securities
lending program with Banxico for as much as 2%
of the total amount outstanding for each bond.
Key policy rates
Fondeo rate: This is the overnight rate charged in
the interbank market. It is a representative interest
rate on one-day repo and one-day outright
operations involving certificates of deposit, bank
notes, and bankers’ acceptances traded by banks
and stock brokerage firms in the wholesale
market. The Bloomberg ticker is MXONBR.
Key market rates
28-day TIIE rate: The interbank equilibrium
interest rate is the benchmark rate that applies to
commercial bank loans, which is published by
Banxico at 12.30 p.m. local time on a daily basis.
To calculate it, Banxico surveys seven banks
every day between 11:45 a.m. and noon local time
to quote MXN350m. The Bloomberg ticker is
MXIBTIIE.
Local fixed-income instruments
Bonds
Cetes, federal treasury certificates: These are
zero-coupon bonds issued by the federal
government. First issued in 1978, they are the
oldest instrument in the local debt market. They
have been the basis for developing the local
market and enlarging the yield curve. Cetes are
issued in weekly auctions, with maturities ranging
between one month and one year.
Bondes D, federal government development
bonds: These floating-rate bonds were first issued
by the federal government in 2006. They pay a
coupon every 28 days at the overnight effective
Mexico: Bond market technicals and liquidity
Available repo facilities
Onshore banks with central bank
Yes
Onshore interbank
Yes
Offshore investors with onshore
No
Onshore non-bank investor (eg custodian) with
Yes
onshore
Eligible collateral for repos
For CB repos
Federal government bonds
For interbank repos
Commercial paper, corporate
bonds
Mark-to-market requirements
Banks
Yes
Insurance companies
Yes
Pension funds
Yes
Mutual funds
Yes
Taxation: Government bonds
Onshore investors
Withholding tax of 0.5%
Offshore investors
Exempted when there is a tax
treaty
Offshore investors’ access
Foreign ownership of government bonds
MXN1.35trn (of which
MXN863bn is MBonos,
MXN390bn Cetes)
As % of outstanding
32%
Direct purchase
Yes
Subject to cap
No
Registration requirement
Yes
Access to onshore funding
No
Access to onshore FX hedging
Yes
Access to rates hedging (interest rate swaps or IRS, repo, Yes (IRS)
futures)
Market liquidity statistics
MBonos
Daily turnover
MXN28bn
Buying volume in a single day with
minimal market impact
MXN200m
Bid/offer spreads under normal conditions
2bp
Udibonos
Daily turnover
MXN5bn
MXN100m
2bp to 4bp
Cetes
Daily turnover
MXN30bn
MXN500m
2bp
Source: HSBC
rate, compounded daily during the interest rate
period. Bondes D are issued at auctions every two
weeks and have tenors of three and five years.
MBonos, federal government development
bonds with a fixed interest rate: These nominal
fixed-rate bonds are issued by the federal
government. The first issuance was in 2000.
MBonos pay a semiannual coupon, which is
calculated on an actual/360-day basis, and are
issued with 3-, 5-, 10-, 20-, and 30-year
43
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Mexico Handbook
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maturities. A seven-year bond was previously
issued but was discontinued in 2007. Three- and
5-year MBonos are auctioned every four weeks,
and 10-, 20-, and 30-year bonds every six weeks.
Udibonos, federal government development
bonds denominated in inflation-indexed
investment units: These inflation-linked bonds
are denominated in indexed investment units
(UDIs, described below). For the purpose of
placement, interest payments, and amortization,
Udibonos are converted to domestic currency at
the value of the UDI on the corresponding
settlement date. Udibonos were developed in 1996
to protect holders from unexpected changes in the
inflation rate. The government issues 3-, 10-, and
30-year Udibonos every four weeks.
In 1995, Mexico introduced a price-leveladjusting unit of account with a real constant
value called the Unidad de Inversión (UDI). The
value of the UDI changes every day, and is based
on information from the previous 25 days, which
is calculated and published by Banxico in the
Official Gazette. UDI values can be found on
Banxico’s Web site.
STRIPS: The segregation and reconstitution of
fixed-rate bonds and inflation-linked bonds has
been possible since 2005. In 2012, the
government intends to facilitate the stripping of
Udibonos to make it easier to match
assets/liabilities in the market for life annuities.
BPAs, savings protection bonds: Floating-rate
bonds issued by the Institute for the Protection of
Bank Savings (IPAB), these also are called
IPABONOS. They are agency rather than
government bonds, which are used to refinance
the institute’s funding needs and improve the
terms and conditions of its financial obligations.
These types of bonds were first issued in 2003 and
have a three-year tenor, although they were
previously also issued with a maturity of one year.
44
BPAs pay interest on a 28-day basis, using onemonth Cetes as their reference rate. The interest
rate period starts on the BPAs’ date of issuance,
and is the same as the period for one-month Cetes
issued at primary auction at the beginning of each
period. BPAs are auctioned on a weekly basis.
BPATs, savings protection bonds with quarterly
interest payments: These five-year floating-rate
bonds are issued by the IPAB. BPATs pay interest
on a quarterly basis, using three-month Cetes as
their reference rate. The interest rate period must be
the same as for those Cetes issued at primary
auction at the beginning of each period. BPTs are
auctioned on a weekly basis.
BPA182, savings protection bonds with a
semiannual interest payment and protection
against inflation: These seven-year, floating-rate
bonds are issued by the IPAB. They pay interest
on a semiannual basis. The BPA 182 interest rate
has two components: A market rate (six-month
Cetes), and an option that protects the holder
against inflation. This eliminates any possibility
of a negative real interest rate.
The reference rate is the rate of return on Cetes
issued in a primary auction for terms of six
months. Coupon payments are determined as the
maximum of either the percentage increase in the
value of the UDI over the interest period or the
reference rate and a spread over six-month Cetes.
Derivatives
Fixed-income derivatives consist of onshore and
offshore interest rate swaps and cross-currency
swaps.
TIEE swaps, interest rate swaps: This is an overthe-counter, fixed-for-floating interest rate swap
whose floating leg is indexed to the 28-day TIIE
rate. Swaps are effective T+1, and the first TIIE rate
used is the T+0 rate. On the floating leg, the 28-day
TIIE rate paid on each coupon date is fixed on the
previous coupon date. The floating leg “fixes” every
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Mexico Handbook
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28 days. This is the most-liquid fixed-income
derivative traded in the local market. The TIIE curve
extends from three months to 20 years, but 3-, 6-,
and 9-month swaps are listed alongside 1-, 2-, 3-, 4-,
5-, 7-, 10-, 15-, and 20-year swaps: Liquidity is fair
up to the 10-year tenor. The most common trade size
is MXN100-200m 10-year equivalent with bid-offer
spreads around 3bp.
TIIE swaptions: These are European options on
TIIE swaps. The notional and maturity are agreed
between parties, and for an upfront premium, the
buyer of the swaption can choose the tenor, strike
rate, and length of the option period. The option
length extends from one month to five years, but
liquidity can be found up to two years. Tenors
range from one month to 20 years, and liquidity is
best in the 1-, 2-, 5-, and 10-year TIIE.
UDI-TIIE swaps, inflation-linked interest rate
swaps: This is an interest rate swap traded OTC,
where the fixed-rate leg of the coupon is based on
the UDI and the floating leg is based on the 28day TIIE. Coupon payment dates are on an
actual/360 day-count basis. The UDI fixed coupon
leg is payable every 182 days, based on an UDI
notional amount, but payments on the floating
TIIE leg are made every 28 days, based on an
MXN notional amount. All payments are made in
MXN, and the UDI fixed-coupon leg is converted
to MXN at the UDI rate applicable on the
payment date. At the end of the contract, principal
amounts are exchanged. The UDI notional is
converted to MXN at the corresponding UDI rate.
Tenors range from six months to 30 years.
Another variant, which is more liquid, is the UDIUSD Libor swap. This is an offshore swap that
consists of a fixed coupon denominated in UDI
that is exchanged against a floating coupon
denominated in six-month USD Libor. Coupons
are paid every six months. As with the TIIE-Libor
swap, the notional is fixed at the spot FX rate and
is exchanged twice, at the beginning and at the
maturity of the swap. Tenors range from one year
to 30 years.
TIIE-USD Libor swap, cross-currency basis
swap: This a floating versus floating swap (basis
swap) denominated in two currencies, MXN and
USD. One leg is MXN-denominated and pays 28day TIIE, and the other is denominated in USD
and pays the one-month Libor rate plus a basis
swap spread. Payments are exchanged every 28
days. Notionals are fixed at the spot FX rate and
are exchanged twice during the contract, at the
beginning and at the maturity of the swap. Tenors
range from three months up to 30 years.
HSBC provides indicative prices for Mexican
domestic government debt securities via
Bloomberg page HSMX.
Regulation
Mexico allows the free flow of capital across its
borders, meaning that there are no barriers to
entry or exit. Foreign investors are not subject to
any restrictions in the trade of government bonds.
Offshore investors may opt either for local
custody, through Indeval, which is recognized by
the US Securities and Exchange Commission
(SEC), or for Euroclear or Clearstream abroad.
Derivatives trading is regulated by Mexico’s
central bank through its general regulations.
Foreign investors are required to sign either a
general International Swaps and Derivatives
Association (ISDA) agreement or a local
derivatives contract. Depending on the type of
derivative (forwards, swaps, or options), a specific
contract or appendix may be needed in addition.
Settlement
Mexican government bonds trade both OTC and
through the Mexican Stock Exchange. Settlement is
usually T+2, the exception being for MBonos, for
which settlement is allowed up to T+8. Settlement
through local custody, Indeval, is provided by
delivery vis-à-vis payment. Settlement for TIIE
swaps is T+1, but UDI-TIIE, UDI-Libor or TIIELibor swaps are settled at T+2.
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Mexico Handbook
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Taxation
There are no entry or exit taxes. Interest payments
are subject to withholding tax, but only in the case
of federal government bonds; foreign residents
may be exempt if there is an agreement to avoid
double taxation between Mexico and their country
of residence. Local residents are subject to
withholding tax of 0.5%. Derivatives and
corporate debt are subject to withholding tax.
Interest payments to foreign residents in tax treaty
countries registered with the Finance Ministry are
subject to a 4.9% withholding tax. For those in
countries without a tax treaty, the rate is 10%.
External debt market
The focus of the Finance Ministry’s external debt
policy is to obtain financial resources at the
lowest cost. This may be achieved by issuing debt
on international financial markets or obtaining
credits from international financial organizations
(IFIs), or both. External debt is a complementary
component of the government’s strategy for
financing the public deficit. As at July 2012,
external debt totaled USD65.45bn; of this,
USD44.42bn corresponded to global bonds
known as UMS bonds, USD19.9bn to loans with
IFIs, and USD1bn to bilateral agreements. Total
external debt is equivalent to about 6% of GDP
and 20% of total central government debt.
Over the past 10 to 15 years, the government’s
management of external debt has focused on the
following strategies:
 The cancellation of all liabilities associated
with the debt restructuring processes
originated in the 1980s and 1990s, such as
Brady Bonds and credits with the World Bank
and the Inter-American Development Bank.
 Access to loans provided by IFIs. Between
2004 and 2007, the government reached goals
established for net indebtedness reduction.
46
This strategy opened the door to IFI loans
again in 2008.
 Strengthening the structure of the external
yield curve.
 Diversifying and broadening the investor base.
 Maintaining a regular presence in
international financial markets.
Currently, Mexico’s sovereign ratings are:
 Moody’s: Baa1 granted on 6 January 2005
 S&P: BBB granted on 14 December 2009
 Fitch Ratings: BBB granted on 23 November
2009.
The government’s main source of external
financing is the international markets. To
diversify the investor base and currency risk,
Mexico has issued debt in different markets – the
US, Europe, and Japan – and currencies. It has
debt denominated in US dollars, euros, Swiss
francs, British pounds, and Japanese yen.
However, the bulk of the external debt is
denominated in US dollars, for which there is also
a well-defined yield curve. Consequently,
liquidity is mostly concentrated on the US dollar
yield curve; this extends from 1 to 100 years, but
liquidity can be found only up to 30 years.
Mexico was the first country in the region to issue
a century bond, in 2010. The most liquid of the
non-USD curves is euro-denominated debt, which
extends from 1 to 10 years.
The government also carries out liability
management operations aimed at reducing the
financial cost of external debt and promoting
liquidity in the benchmark sectors of the curve. In
addition, it uses liability management operations
to improve the efficiency of external debt curves.
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Mexico Handbook
October 2012
The main government tools for external debt
management are:
 Issuance: The purpose is to establish new
benchmark bonds in the curve.
 Reopening: Provides sufficient liquidity for
benchmark bonds.
Settlement
The general convention for global bond settlement
is T+3.
Foreign exchange rate:
Mexican peso (MXN)
The following products are available:
 Buybacks: The purpose of these operations is
to improve the debt profile and cancel out
short-term bonds with very low liquidity.
 Spot FX
 Exchanges: These are operations aimed at
exchanging inefficient and non-liquid bonds
for the benchmarks in the yield curve.
 Forwards out to five years
 Warrants: These are call options that give
the holder the right but not the obligation to
exchange global bonds for local currency
bonds, or MBonos. The main objective is to
reduce external debt as a percentage of GDP.
Derivatives
There is a credit derivatives market for sovereigns
including Mexico. The most common credit
derivative is the credit default swap (CDS).
CDS: In this transaction, the two parties enter into
an agreement under which one pays the other a
fixed periodic coupon for the life of the
agreement, while the second party makes no
payments unless a credit event related to the
reference asset occurs. The CDS curve runs from
6 months to 10 years, but liquidity can be found in
the 5-year tenor of the curve.
Taxation
Under the General Law of Public Debt and the
Income Tax Law, foreign holders receiving
principal and interest payments on UMS bonds
are not subject to any Mexican withholding tax. In
addition, they are not subject to capital gains taxes
applicable in Mexico on the sale or transfer of the
UMS bonds as long as the sale is made to another
foreign holder.
 MXN futures
 Currency options out to five years
 Cross-currency swaps out to 20 years
 Money market products
Spot
Following the global financial crisis in 2008, we
estimate, daily trading volumes dropped to USD510bn from USD10-15bn. However, daily volumes
have since increased considerably, to USD10-15bn,
we estimate. (The 2010 Bank for International
Settlements, or BIS, survey estimates daily
average turnover at USD17.0bn, compared with
USD15.3bn in 2007.) Significant flows also are
transacted in the FX swaps and forwards markets.
Spot transactions normally total USD5m.
Forwards/FX swaps
The liquidity of hedging instruments has
increased steadily over the past few years as
Mexico’s trade relationship with the international
community has grown. There is a wide array of
exchange-traded and OTC MXN derivatives.
Mexico also is the only Latin American country
that operates a deliverable forward market open to
nonresident investors. Liquidity in this market is
generally good.
The most common Mexican swaps are plainvanilla interest-rate swaps that exchange a fixed
rate for a 28-day floating rate, normally based on
47
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Mexico Handbook
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Liquidity at a glance
12am
2am
4am
6am
8am
= least liquidity
10am
12pm
2pm
= moderate liquidity
4pm
6pm
8pm
= most liquidity
Notes: Times are Mexico City local time = GMT – 6 hours.
Source: HSBC
the average interbank interest rate (Tasa de Interés
Interbancaria de Equilibrio or TIIE). The TIIE is
calculated daily by Banxico using quotes
submitted by at least six credit institutions.
Volumes have decreased from pre-2008 levels.
Previously liquidity could be found up to 20
years, but now there is liquidity only in the 2-, 5-,
and 10-year tenors. Currency swaps also were
liquid up to 20 years before the crisis, but
liquidity now is concentrated in shorter tenors.
Options
MXN options trade on a deliverable basis, with
expiration at 12:30 p.m. New York time. Similar
to the spot and forward markets, the option market
also is liquid, with a normal transaction size of
USD25-50m. The most liquid maturities are two
years or less.
Normal market conditions
Normal market conditions
Average daily spot volume
Spot transaction
Bid/ask spread
Average daily forward volume
Forward transaction
Forward spread
Implied option volatility spread
USD10-15bn
USD5-10m
30-50 pips (0.0030-0.0050
MXN)
USD8bn
1M USD50m
1M 30 pips (0.0030 MXN)
12M 100 pips (0.0100 MXN)
6M 0.4 vol
Note: Spreads are subject to change according to market developments.
Source: HSBC
FX framework
Exchange rate mechanism
 Mexico’s central bank, Banxico, was granted
formal independence in 1994, and monetary
policy has been conducted under an inflationtargeting program since 2001.
48
 The Foreign Exchange Commission (FEC),
consisting of officials from the Ministry of
Finance and Banxico, is responsible for
foreign exchange policy in Mexico. Since late
1994, the FEC has maintained a free-floating
FX program but has implemented measures to
preserve market stability when deemed
necessary. This was the case in 1998 and
2008, at the height of global financial crisis,
when the FEC announced new FX
intervention tools in response to the sharp
decline in global liquidity and heightened
uncertainty. However, by April 2010, when
market liquidity had normalized, all
intervention tools were suspended.
 Until July 2008, the FEC was selling excess
US dollar revenues from the state-owned oil
company Pemex on a daily basis at
predetermined amounts that were announced
every three months. This mechanism was
designed to reduce the rate of accumulation of
FX reserves. The mechanism was suspended
to offset a reserve decline of USD8bn
associated with a sale of FX to the Finance
Ministry (Secretariat de Hacienda).
 The authorities introduced a monthly auction of
USD put options in February 2010 specifically
designed to accumulate reserves and improve
Mexico’s credit profile. However, this was
suspended in late November 2011 in the wake
of the peso’s significant depreciation against the
US dollar.
 From 30 November 2011, the FEC announced
that it would auction USD400m per day at a
USD-MXN rate that was 2% higher (ie a
10pm
12am
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Mexico Handbook
October 2012
weaker MXN) than the previous day’s central
bank rate. In other words, the auction results
in placements of USD on the market only
when the MXN has weakened by 2% or more
from the central bank rate for the previous
day.
Repatriation and other
regulations
Regulations
Currency regulations, mainly the preserve of
Banxico, are relatively liberal.
Onshore-onshore
Spot
 Local regulation allows only entities
registered in Mexico to trade MXN onshore.
 Local entities cannot charge fees for currency
transactions when profit is earned through
foreign exchange intermediation.
 Foreign residents are allowed to open MXN
accounts in local banks to make transactions.
Forwards, FX swaps, and options
 Regulation covering derivatives is more
restrictive.
 All entities require central bank authorization
to transact derivative products.
 Local entities must satisfy the 31
requirements for derivatives operations
stipulated in “Circular 4/2006.”
Offshore-onshore
Spot
 Foreign institutions are allowed to participate
in spot trading of MXN.
funds, may be conducted only by authorized
Mexican foreign-exchange houses and
Mexican banks authorized to do so under
their own regulations. This limits the ability
of foreign banks to offer or enter into MXNrelated derivatives with Mexican
counterparties in Mexico that involve a
foreign exchange transaction.
 The only exception to this is when the
counterparty is a Mexican bank, because in
such cases, the foreign bank would be
considered a client of the Mexican bank.
 Foreign entities are allowed to offer onshore
financing to Mexican residents, including
MXN loans, FX-denominated loans, and
derivatives. However, the funding must come
from offshore, as Mexican law prohibits
foreign banks from taking deposits in Mexico.
 Forwards, FX swaps, and options are
regulated by the International Swaps and
Derivatives Association (ISDA) and a local
master derivatives agreement, based on
ISDA’s master agreement).
 Foreign investors are required to sign a
general contract in accordance with ISDA
regulations – either the local master
agreement or the ISDA agreement – when
conducting derivatives transactions.
Furthermore, depending on the type of
derivative (forward, swap, or option), a
specific contract plus annexes and schedules
to such contracts need to be signed in addition
to the general agreement.
Onshore-offshore
Spot
 The Mexican Law of Ancillary Credit
Activities states that FX operations such as
the purchase, sale, and exchange of foreign
currency, including the transfer or delivery of
 Local entities are allowed to buy and sell
foreign currency offshore.
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Mexico Handbook
October 2012
 Local entities can hedge risks with foreign
institutions offshore through forwards, swaps,
or options.
 Local entities are allowed to fund offshore
through debt issuance or borrowing from
abroad.
Offshore-offshore
 There are no restrictions on foreign entities’
operation of MXN instruments offshore.
 The market is open to spot, forward, swap,
and option operations.
Repatriation
Exchange rate policy is determined by the
Exchange Rate Commission, which consists of
three representatives from Banxico and three from
the Ministry of Finance.
 Mexico allows the free flow of capital across
its borders.
 Export proceeds may be held in MXN or
foreign currency for an indefinite amount of
time.
 There are no restrictions on international
borrowing for non-resident companies.
 There are no restrictions on local borrowing
by nonresidents.
 There are no restrictions on the repatriation of
capital, although financial institutions are
required to submit reports, under Mexico’s
anti-money-laundering laws.
50
Additional information
Mexico: Holiday calendar, 2013
Date
Event
4 Feb
18 Mar
28 Mar
29 Mar
1 May
16 Sep
2 Nov
18 Nov
12 Dec
25 Dec
Constitution Day
Juarez’s birthday
Maundy Thursday
Good Friday
Labor Day
Independence Day
All Souls’ Day
Mexican revolution
Our Lady of Guadalupe
Christmas Day
Source: Comision Nacional Bancaria y de Valores
Information sources
Banco de México
Ministry of Finance
National Institute of Statistics, Geography and
Informatics
Banking and Securities Commission
Bloomberg fixing page
HSBC pricing pages, Reuters
HSBC pricing pages, Bloomberg
HSBC dealing Reuters code
www.banxico.org.mx
www.shcp.gob.mx
www.inegi.gob.mx
www.cnbv.gob.mx
MXFT Index
HSMX01, HSMX02
HSMX1, HSMX2
HSMX
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Mexico Handbook
October 2012
Chapter 8: The stock
market
 Highly concentrated stock market, in which the top five stocks
account for about 62% of total market capitalization; noncyclicals
such as telecoms and consumer staples account for 57%
 Second-largest market in Latin America, with market cap
equivalent to 41% of GDP
 Its weighting on the MSCI EM has fallen sharply in the past 10
years to 4.4% from 12%, mainly due to limited stock issuance

Mexican Stock Exchange
MSE is the second most-liquid exchange in Latin
America, although still a distant second to the
USD3,700m traded in Brazil.
LatAm’s second-largest
The Mexican Stock Exchange (MSE) has a
market capitalization of USD468bn, or 39% of
GDP, second only to Brazil’s exchange with
USD1,151bn or about 50% of GDP.
10,000
1,000
100
LatAm exchanges: Market cap values (USDbn)
1,200
LatAm exchanges: Average daily traded volume (USDm)
1151
10
1,000
1
2002
800
600
468
400
302
2004
2005
2006
2007
BM&FBOVESPA
Colombia SE
Mexican Exchange
Santiago SE
2008
2009
2010
2011
Lima SE
Source: World Federation of Exchanges
232
200
2003
91
Brazil
Mexico
Chile
Colombia
Peru
Source: World Federation of Exchanges
Also the region’s second most liquid
With an average daily traded volume (ADTV)
of about USD500m (plus USD170m traded
through exchange-traded funds, or ETFs), the
Small group of constituent companies
The MSE has 135 publicly listed companies, of
which130 are Mexican and five foreign. This total
is fewer than the 358 Brazilian companies listed
in the Bovespa, 229 Chilean stocks in the Bolsa
de Comercio de Santiago, and 208 Peruvian
companies in the Lima Stock Exchange.
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Mexico Handbook
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In Mexico, the number of domestic listed
companies fell 23.0%, from 169, at end-2002.
Although the number of listed companies also
declined, the decreases in other markets were less
marked: 13.1% in Brazil, 6.9% in Chile, and 9.6%
in Peru, for example.
Based on the data above, the average value per
domestic company listed on the MSE is
USD3,600m, which compares favorably to
USD3,200m in Brazil, USD1,320m in Chile, and
USD438m in Peru.
Highly concentrated in a few stocks
A high percentage, 57.8%, of the MSE’s
market cap index (IPC) is concentrated in only
five companies. As shown in the following chart,
Mexico is second to Colombia’s 67.7% of the
IGBC index in this measure of the top five
companies. Brazil is the least concentrated market
in the region, and the top five companies there
account for 31.1% of the Bovespa index.
LatAm exchanges: Market cap concentrated in top 5 stocks (%)
70
67.7
57.4
60
50
39.4
40
35.2
domestic-oriented sectors, which gives it a low
exposure to the external growth cycle, explains its
low beta and defensive performance versus its
global emerging market (GEM) peers.
Mexican stock market: Sector composition, July 2012
Consumer
Discretionary,
11.1
Telecoms,
25.0
Consumer
Staples, 31.9
Materials, 16.2
Industrials, 6.0
Financials, 9.8
Source: HSBC with Mexican Stock Exchange data
Benchmark indices
The Indice de Precios y Cotizaciones Index, the
IPC, is the benchmark provided by the Bolsa
Mexicana de Valores. It is composed of 35
stocks weighted by their free-float-adjusted
market cap. The sample is revised annually in
August, with changes effective each September,
and is subject to quarterly rebalancings.
31.1
30
IPC index and MSCI index: Top 10 stocks in terms of weightings
20
Weighting
(%)
Sector
in IPC
10
0
IGBC General
(Colombia)
IPC (Mexico)
Peru Lima
General
Chile SM Select Bovespa (Brazil)
Source: World Federation of Exchanges, Federación Iberoamericana de Bolsas
Sector concentration also high
Domestic defensive sectors are the most
important: Telecoms and consumer staples
jointly account for 57% of Mexico’s
benchmark IPC index.
Cyclical sectors – industrials plus materials –
account for only 22% of the index, financials for
9.8%, and consumer discretionary for 11.1%. The
Mexican stock market’s high concentration in
52
AMXL
WALMEXV
FEMSAUBD
TLEVISACPO
GMEXICOB
GFNORTEO
CEMEXCPO
ALFAA
GMODELOC
PENOLES*
Aggregate
Telecom
Consumer Staples
Consumer Staples
Consumer Discr.
Materials
Financials
Materials
Industrials
Consumer Staples.
Materials
23.39
11.92
8.66
6.97
6.88
6.18
4.43
4.40
3.25
3.13
79.20
Weighting
(%)
in MSCI
30.74
8.79
9.70
6.85
6.25
5.81
4.31
2.68
3.33
3.34
81.81
Consumer Discr. = Discretionary
Source: HSBC with Mexican Stock Exchange and MSCI data
International investors also use the MSCI Mexico
Index as a benchmark. This includes 21 stocks
weighted by their free-float market cap.
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Mexico Handbook
October 2012
Low equity issuance
New equity issuance peaked in 2005, dropped in
2008-09 due to the global financial crisis, and
recovered in 2010-11 to levels above USD1bn.
In April 2012, Alpek’s petrochemical IPO raised
USD689m with a 50% allocation in Mexico. At
the time of this writing, two equity issues were in
the pipeline, both follow-ons: Santander Mexico,
about USD4bn, with USD1bn to be sold in
Mexico, with proceeds of the secondary offering
to strengthen the parent company’s financial
structure in Spain; and Mexichem, USD1bn total,
no details on the breakdown, with proceeds of the
primary equity offering along with an already
concluded USD1.1bn debt offering, to pursue
growth alternatives.
MSCI EM index, mainly due to this low equity
issuance in Mexico. Its weighting fell to 4.4% in
mid-2012 from more than 10% in 2002, whereas
Brazil’s increased to 15% from 6%.
ETFs tracking Mexican stocks are
increasingly important
Meanwhile, exchange-traded funds (ETFs) in
Mexico are becoming increasingly relevant, as
most pension funds prefer to invest in broader
instruments, rather than specific names. The two
most important ETFs tracking Mexican indices
are the NAFTRAC and the EWW.
The NAFTRAC (value: USD5.8bn; ADTV:
USD280m), which is locally traded, tracks the
IPC index (35 securities).
NAFTRAC 1m ADTV vs Afores’ AUM invested in local equities
Equity issuance in Mexico
MXNbn
1
1
2
4
3
4
2
0
5
3
1
220
40
150
631
718
762
579
0
1,162
698
344
4
2
3
7
4
3
0
2
2
2
2
315
382
59
1,356
235
526
0
464
70
315
2,000*
5
3
5
11
7
7
2
2
7
5
2
536
423
209
1,987
953
1,288
579
464
1,232
1,013
2,344*
*Estimated
170
MXNbn
125
150
105
130
85
110
65
90
45
70
Naftrac 1M ADTV
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Afores' AUM in Equities
____IPOs ____ _ Follow-ons __ ____Total _____
Number USDm Number USDm Number USDm
25
50
30
5
2008
2009
2010
Afores' AUM in Equities
2011
2012
Naftrac 1M ADTV
The EWW is the oldest ETF tracking the MSE
and is composed of 42 securities. Its market value
is USD1.2bn, with an ADTV of USD154m.
Over the past three years, the number of IPOs in
Mexico has averaged only three annually, with
an average value of about USD245m each. This
is similar to the averages in Chile, 2.6, and
Colombia, 2.3, higher than that in Peru, 1, but far
lower than that in Brazil, 9. Considering the size
of the Mexican economy and the MSE’s PE
(15.6x), which is higher than the LatAm average,
primary equity issuance is low. This is because
family-owned companies seem reluctant to share
management control.
 ICMTRAC: Broader, total return, replicating
the IPC Composite (BBG IPCCOMP),
formed by the MSE’s 60 largest stocks.
Over the past 10 years, Mexico has steadily lost
ground to Brazil in terms of its weighting in the
 IMCTRAC: Mid-cap, replicating IMC30
(BBG IMC30), 30 mid-cap stocks.
Other ETFs track four MSE indices:
 ILCTRAK: Large-cap, replicating INMEX
(BBG INMEX), 20 largest companies by
market cap, capped at 10% weighting.
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Mexico Handbook
October 2012
 IHBTRAC: Homebuilders, tracking
HABITA index (BBG HABITA), six stocks.
Foreign investment in Mexican
equities
Since the North American Free Trade Agreement
took effect in 1994, foreign investment rose
steadily as a proportion of the total Mexican
stock market, from 26% to a peak of 46% in
2003. This level has since stabilized at around
40% (an average of 39.7% since 2004) and now
is at 37%. In the past decade, foreign investment
flows into Mexican equities have been volatile.
On our calculations, the net inflow from 2001 todate is USD3.5bn.
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Mexico Handbook
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Chapter 9: The pension
and mutual funds
 With cUSD250bn in assets under management (AUM), or 21.5%
of GDP, pension and mutual funds are Mexico’s most important
institutional investors
 The Mexican pension system has played a key role in the
development of a yield curve in the Mexican fixed-income market
 Both pension and mutual funds have less than 20% of total AUM
invested in equities

Pension funds
Relatively new private individual
capitalization system
In 1997, the Mexican pension system was
transformed from a pay-as-you-go system to a
private program of individual capitalization,
changed from defined benefit plans to defined
contribution plans. The reform was implemented
as a means of dealing with demographic
challenges and trying to ensure the financial
sustainability of pensions. It was based on the
Chilean model introduced in 1980.
In Mexico, each worker owns an individual
account in which contributions are mandatory for
the employer, the government, and the employee.
Workers and employers each contribute 6.5% of
monthly wages. The average bimonthly flow of
contributions amounted to about USD2.3bn over
the past 12 months.
Afores’ AUM value equivalent to
12.2% of Mexican GDP and growing
At end-July 2012, total assets under management
(AUM) by the Afores pension funds
(Administradoras de Fondos para el Retiro)
amounted to MXN1,824bn (cUSD138bn), or
12.2% of GDP. This means that Mexico has the
second-largest pension system in Latin America,
after Chile. It is, moreover, the largest system by
number of affiliates, 47.4m, followed by
Colombia, with 10.2m.
Mexican pension funds: Afores’ AUM as a % of Mexican GDP
14.0%
12.0%
12.0%
10.1% 10.2%
9.1%
10.0%
8.0%
6.0%
4.5%
5.1% 5.3%
6.0%
6.7% 7.0%
7.7%
3.6%
4.0%
1.2%
2.0%
1.8%
2.5%
0.2%
0.0%
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Jul12
Source: HSBC with Consar data
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Mexico Handbook
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The last 12-month flow into Afores was
cUSD13.9bn, or 10% of current AUM. The
Afores’ critical mass should continue to increase
on the back of steady and predictable inflows. The
average rate of y-o-y growth in AUM was 15.7%
over the past 12 months.
About Siefores and Afores
The Mexican pension system consists of fully
funded, compulsory-contribution, private pension
funds known as Siefores. The private pension
managers of these funds are known as Afores, of
which there are 13. The top five in terms of AUM
account for 70.3% of the system’s assets. The
National Commission for the Pension System
(Consar) regulates and supervises Mexico’s
pension system.
Mexican pension funds: Top 5 Afores in terms of market shares
Profuturo
GNP, 11.9%
Others,
29.7%
Af ore XXI,
12.8%
Siefores’ main features
Age range (years)
Value at risk (%)
Equity limit (%)
SB1
SB2
SB3
SB4
SB5
>=60
0.7
5
46-59
1.1
25
37-45
1.4
30
27-36
2.1
40
<=26
2.1
40
The youngest contributors, <=26 years old, are
assigned to Siefore Básica 5 (SB5); its strategy is
the most aggressive, with the highest exposure to
equities, a limit of 40%, and the greatest value at
risk, VAR historical 1 day = 2.1%. Conversely,
Siefore 1 (SB1), for the oldest contributors, >=60
years old, is the most conservative. Equity
exposure is limited to 5% and the VAR is 0.7%.
Afores have played a key role in the development
of the Mexican financial markets, helping in
particular to develop a yield curve in the fixedincome market. The existence of a large pool of
investors with a long-term horizon has enabled
private and public issuers to place debt with
longer maturities, of up to 20 and 30 years, for
example.
Siefores’ investments by asset class (% of total AUM)
SB1 SB2 SB3 SB4 SB5
SURA,
13.8%
Bancomer,
14.4%
Banamex,
17.5%
Main features of the multifund system
In March 2008, the system was reformed from a
two-fund asset allocation model to one that
offered five funds, or Siefores Básicas (SB), with
different risk/return profiles. Each pension fund
manager is authorized to offer five investment
alternatives – SB1, SB2, SB3, SB4 and SB5 –
according to the contributor’s age.
56
Total investment
Fixed income
Government securities
Cetes (zero-coupon bonds)
MBonos (fixed-rate bonds)
Bondes (floating-rate bonds)
Udibonos (inflation-linked)
Others
Non-government securities
Equities
Local
Foreign
100.0
96.3
67.8
0.6
13.9
10.3
39.7
3.3
28.5
3.7
1.5
2.2
100.0
83.1
60.8
5.5
20.4
7.7
23.4
3.7
22.3
16.9
6.6
10.3
100.0
79.8
56.8
4.0
20.9
8.6
19.6
3.6
22.9
20.2
7.9
12.3
100.0
73.7
52.6
2.1
20.3
8.4
17.6
4.2
21.1
26.3
10.3
16.0
100.0
74.4
57.4
2.3
27.0
6.9
16.1
5.1
17.0
25.6
9.8
15.8
Source: HSBC with Consar data as at July 2012
Asset allocation
At end-July 2012, fixed-income assets
represented about 77% of total AUM, of which
72% was invested in sovereign debt and 28% in
corporate securities.
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Mexican pension funds: Aggregate asset allocation
LatAm pension funds: Equity allocation as a % of total AUM
35
31.0
29.4
30
Equity
25
International Other 3%
12%
20
14.4
15
Domestic
8%
International
3%
10.5
7.8
10
5
0
Mexico
Corporate
17%
Sovereign
58%
Chile
Colombia
Panama
Peru
Source: HSBC with International Association of Pension Funds Regulators (AIOS) data.
Mexico as at July 2012. The remaining countries, as at March 2011.
Fixed Incom e
in the limits on Siefores’ equity investments,
which brought them up to their current levels (see
the table on the previous page, titled “Siefore’s
main features”).
In July 2012, equity investments accounted for
about 20% of total AUM, one of the highest levels
ever, as shown in the following chart. The
investments of the remaining 3% of total AUM
are mainly structured notes.
Equity investments as a % of Afores’ AUM
20.0%
22%
As at end-July 2012, we calculate the total
aggregate limit on the system’s equity exposure at
MXN538bn (USD41.4bn); the MXN359bn
(USD28bn) invested in equities at that time
therefore represented capacity utilization of about
67%. This was slightly above the two-year
average capacity utilization of 64%.
20%
18%
Equity investment as a % of maximum equity exposure
16%
14%
80%
12%
10%
70%
8%
60%
6%
66.7%
50%
4%
Jun-12
Apr-12
F eb-12
O ct-11
D ec-11
Jun-11
A ug-11
Apr-11
F eb-11
O ct-10
D ec-10
Jun-10
A ug-10
Apr-10
30%
F eb-10
40%
0%
D ec-09
2%
20%
10%
Jun-12
Apr-12
Feb-12
Oct-11
Dec-11
Jun-11
Aug-11
Apr-11
Feb-11
Oct-10
Dec-10
Jun-10
Aug-10
Apr-10
Feb-10
0%
Dec-09
Source: HSBC with AIOS data
Equity investments
Afores’ equity allocations are low by regional
standards for pension funds, as shown in the
following chart. The Consar has therefore
gradually liberalized the Afores’ investment
program in an effort to increase equity exposure.
In February 2010, Afores were allowed to invest
directly in individual stocks, rather than, as
previously, only in index trackers. In June 2010
and July 2011, the Consar announced an increase
We therefore estimate that a further MXN179bn
(USD13.8bn) of assets could have been invested in
equities at end-July 2012, equivalent to 33.3% of the
estimated maximum amount allowed. Based on
average daily trading of MXN5.0bn over the past 12
months (excluding exchange-traded funds, or ETFs),
it would take approximately 37 trading days to
allocate this amount. The MXN179bn also is
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Mexico Handbook
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equivalent to 8.5% of the current free-float value of
the IPC index.
Breakdown between domestic and international equities
100%
The y-o-y increases in AUM have been influenced
by both the performance of asset prices and GDP
growth, as shown in the following chart. Average
y-o-y growth was 41% in 2006 and 30% in 2007.
90%
AUM increases y-o-y versus annual GDP growth
80%
60.9%
70%
AUM
60%
50%
30%
20%
39.1%
10%
YoY%
40%
0%
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Local
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Jul-12
International
GDP
8
6
4
2
0
-2
-4
-6
-8
5.2
50
40
30
20
10
0
-10
-20
5.5
3.9
3.3
1.2
-6.0
06
07
08
09
10
11
12
AUM's YoY growth
The breakdown between domestic and
international equity investments is 39% domestic
and 60.93% international. Since December 2009,
Afores have gradually shifted their mix from 69%
in domestic equities and 31% in international
equities, as shown in the chart immediately above.
Mutual funds
GDP
AUM = Assets under management
Source: HSBC with CNBV data
Growth in AUM fell in 2008 and 2009, during the
global financial crisis and Mexico’s recession, but
recovered in 2010 and 2011. As at July 2012,
AUM had risen at an average y-o-y rate of 9.1%
in the past 12 months.
High growth in AUM
But equity exposure is below 20%
With about USD111bn, or 9.5% of GDP, in AUM
as at July 2012, the mutual funds industry was the
second-largest institutional investor in Mexico.
Less than 20% of the AUM of mutual funds has
been invested in equities at almost all times in the
past six years. The only temporary exception was in
2007, as shown in the following chart; equity
investments currently stand at 16.8% of total AUM.
Mutual funds industry: AUM, MXNbn and as a % of GDP
11%
10%
9.6%
9.6%
22
9%
7.9%
8%
1,254
7.6%
7.1%
7%
6%
5%
6.5%
5.6%
692
1,429
1,322
20
18
945
16
849
14
787
507
2005
Percentage of mutual funds’ AUM invested in equities
%
9.2%
12
2006
2007
2008
2009
2010
2011
2012
Jul-12
10
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Source: HSBC with CNBV (Comisión Nacional Bancaria y de Valores) data
Mutual funds’ total AUM had a CAGR of 17%
from 2005 to July 2012. The number of managed
accounts totals about 2m, equivalent to less than
2% of the total population.
58
The mutual funds industry has become more
conservative since the global financial crisis,
investing more than 80% in fixed income, of
which 56% is in short-term instruments.
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Top mutual funds in terms of market share
Banamex ,
Others, 27.1%
25.3%
Inbursa, 6.1%
Ix e + Banorte,
Mutual funds industry highly
concentrated in a few fund managers
As at July 2012, the industry had 556 mutual
funds and 32 fund managers. However, three
fund managers hold about 60% of the industry’s
total AUM.
Bancomer,
6.5%
Santander,
22.6%
12.4%
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 Mexico has improved its political environment by increasing
the number of political institutions, parties, and independent
election authorities
 Elections have been democratic, and Mexican voters have been
rational, rewarding or removing incumbent politicians for their
performance
 There is room for improvement to increase the credibility of and
confidence in the system, according to political analysts

Politics: More institutional and
democratic
We provide the basics on Mexican politics,
identifying the main actors and institutions to
help readers understand the context in which
the economy operates. We also note some
considerations political analysts have
highlighted about shortcomings in the country’s
democratic practices.
Mexican politics has been transformed into a
more institutional and democratic system in the
past 22 years. The country now has at three
important political parties, compared to a
practically mono-party system in the past. The
center-left Institutional Revolutionary Party (PRI)
dominated for almost 70 years until 2000, when
the center-right National Action Party (PAN) won
the presidential election.
The three major parties, the PRI, the PAN, and the
left-wing Party of the Democratic Revolution
(PRD) compete fiercely at the three levels of
government – municipal, state, and national – and
60
vie for legislative positions as representatives and
senators in Congress. However, the political
forces are not equally represented throughout the
country. In the south, the PRD and PRI have more
importance than the PAN. In many northern
states, the PRD is a small party, but it is the most
important political force in Mexico City.
An autonomous election authority was formed in
1990, involving citizen participation to ensure that
elections are fair and that voters’ decisions are
fully respected.
In the past 15 years, balloting has become very
rational, in the sense that voters, knowing that
their votes are secret and respected, can reward or
penalize politicians or political parties according
to whether they have delivered on their election
promises. According to political analysts, voters
acted rationally in the most recent presidential
election in July 2012, either casting ballots against
governors and politicians and voting for a
different political party, or rewarding those who
did well in the previous administration – as was
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Although the greater part of the population has
confident in Mexican institutions such as the
Electoral Institute and the Electoral Supreme
Court, surveys suggest that a significant
proportion of people remains ambivalent (see
Consulta Mitofsky, 28 June 2012). Moreover,
candidates have sometimes been reluctant to
accept election results. For example, in both 2006
and 2012, the PRD’s presidential candidate,
Andres Manuel Lopez Obrador, repeatedly
expressed such doubts.
Some steps to increase the credibility of and
confidence in the system among direct
participants and their supporters have already
been made, such as political reforms recently
approved by Congress and signed by President
Felipe Calderon. Two of the new measures are
particularly noteworthy. The first allows citizens
to run for political posts without having to belong
to a political party and gives citizens the right to
organize referenda for creation or modification of
national laws. The second enables the president to
present to Congress initiatives for proposed laws
that should have a preferential status, enabling
them to be discussed and voted on within the 30
following days. This may speed things up,
especially when measures are considered urgent
or strategic for the country.
forces until 30 November 2012. The president-elect
is Enrique Peña Nieto of the PRI, who will take
office on 1 December 2012 for a term through 2018.
The president is elected by direct, popular, and
universal suffrage for a six-year term, and is
prohibited from serving a second term.
Congress
The Mexican Congress consists of the upper
house, the Senate; and the lower house, the
Chamber of Representatives.
Senate
The upper house has 128 seats. Elected senators
serve a six-year term and may not hold office for
two consecutive terms. Three senators are elected in
each of the 32 states, resulting in 96 seats. Two of
the three Senate seats from each state are allocated to
the party with the largest share of the vote. The third
is allocated to the first runner-up. The remaining 32
seats are allocated by the method of proportional
representation, whereby seats are allotted based on
the percentage of votes obtained by a political party
in a geographic region.
Congress: Composition of the Senate
100
90
70
29.7
60
50
40. 6
40
30
47.7
20
The following sections of this report offer a
general description of the government, the
political parties, the electoral system, and the
composition of Congress, based on the results of
the last election on 1 July 2012.
Government structure and
election system
President
Felipe Calderon Hinojosa of the PAN is the head of
state and supreme commander of the Mexican armed
21.9
28. 1
80
(%)
the case in the states of Mexico, Jalisco, Morelos,
Tabasco, and many others.
30. 5
10
0
2009
PRI-P VEM
PAN
201 2
PRD-PT-MC
PANA L
Source: Chamber of Senators
Chamber of Representatives
The lower house has 500 members who each
serve a three-year term and may not hold office
for two consecutive terms. Three hundred
members are elected by popular vote, and the
remaining 200 seats are allocated based on
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proportional representation through a system of
party lists in five multimember districts of 40
seats each. No political party may have more than
300 members in the lower house. This means that
a political party may have an absolute majority of
seats, 251, but that the law prevents it from having
two-thirds of the total seats, which is the level of
approval required for constitutional reforms. (Any
constitutional change requires approval by twothirds of the Congress and two-thirds of state
congresses.)
Congress: Composition of Lower House
Gubernatorial elections
Source: Chamber of Representatives
100
90
1 6.6
27.2
80
(%)
70
2 8.4
60
50
22.8
40
30
5 2.8
48.0
2009
201 2
20
10
0
PRI-PVE M
PAN
PRD-PT-MC
Others
Gubernatorial elections are staggered throughout the
six-year presidential period. Usually, no more than
six governorships are contested in any given year.
Mexico: States, governed by political party
1 Baja California Sur - PAN
2 Baja California - PAN
3 Sonora - PAN
4 Chihuahua - PRI
5 Sinaloa - PAN
6 Durango - PRI
2
3
4
7
1
8
5
6
11
7 Coahuila - PRI
8 Nuevo León - PRI
9 Zacatecas - PRI
10 San Luis Potosí - PRI
11 Tamaulipas - PRI
12 Nayarit - PRI
13 Aguascalientes - PRI
14 Jalisco - PRI
15 Guanajuato - PAN
16 Querétaro - PRI
17 Hidalgo - PRI
18 Colima - PRI
19 Michoacán - PRI
9
20 México - PRI
21 Morelos – PRD
22 Tlaxcala - PRI
23 Puebla - PAN-PRD
24 Veracruz - PRI
25 Guerrero - PRD
26 Oaxaca - PAN-PRD
27 Chiapas – PRI
28 Tabasco - PRD
29 Campeche - PRI
30 Yucatán - PRI
31 Quintana Roo - PRI
DF Distrito Federal - PRD
Source: Local election institutes
62
10
13
12
14
DF
15
30
16 17
22
19
20
23
18
31
29
24
28
25
26
21
27
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Federal Electoral Institute
The Federal Electoral Institute (IFE) is an
autonomous, public organization that operates
independently. It is responsible for organizing the
election of the president and members of the
lower and upper houses of Congress.
Electoral Supreme Court
The Electoral Supreme Court (TEPJF) is a
tribunal that specializes in elections and political
rights. It resolves disputes about federal elections.
The TEPJF is dependent on the Federal Judicial
Authority, which is independent of the president
and Congress. Its resolutions are unappealable.
until 1989 that it began to threaten the PRI’s
hegemony by winning gubernatorial elections in
some states. In July 2000, the PAN’s presidential
candidate, Vicente Fox Quesada, won the
presidential election, which ended the PRI’s 71year rule. Mr. Fox’s presidential term represented
a transition in the political system from an allpowerful presidency to an increasingly important
legislature.
Political parties
On 2 July 2006, the PAN reaffirmed its strength
when it became the party with the majority of
members of Congress. However, it lost its
dominance to the PRI first in 2009 and again in
2012, when it obtained 114 seats in the lower
house, becoming the third political force.
Mexico has a multiparty system, with three
dominant parties and four small ones.
Party of the Democratic Revolution
(PRD)
Institutional Revolutionary Party (PRI)
The left-wing PRD was formed in late 1989 by
supporters of the 1998 presidential candidate,
Cuauhtémoc Cárdenas. The PRD’s support is
strongest in the central and southern states and,
more important, in Mexico City. However, the
initial refusal by Manuel Lopez Obrador, the
party’s presidential candidate in 2006, to accept
defeat in that election divided the party between
his followers and a more-moderate faction, a
situation that weakened the PRD. Nonetheless,
Mr. Lopez continued to have strong support in the
2012 presidential election, when he won about
30% of votes, about 7ppt less than the winner, the
PRI’s candidate, Enrique Peña Nieto.
The center-left PRI maintained control of politics
in Mexico for 71 years, holding the presidency
from 1929-2000. In the 2 July 2000 presidential
election, the PAN overwhelmingly defeated the
PRI presidential candidate, who finished in
second place. The PRI has since struggled to
reinvent itself and has tried to adopt a fresher
position to attract young voters and regain
political appeal. Among others, the party became
a key factor in fiscal and oil industry reforms that
were proposed by the government. This formula
has worked, and the party has regained ground,
obtaining the first minority in the Chamber of
Deputies in the 2009 mid-term elections, and
demonstrating its capacity to win state-level
elections. This year, the PRI won 207
representatives, short of a majority.
National Action Party (PAN)
The PAN, the incumbent political force, is a
center-right party that has held power for the past
two presidential terms. The PAN was founded in
1939 as the main opposition party, but it was not
Ecologist Green Party of Mexico
(PVEM)
The PVEM is considered the most important of
the smaller political parties in Mexico. This party
allied itself with the PAN in the 2000 presidential
election, but the alliance was dissolved, as the
PVEM did not receive any cabinet positions in the
Fox administration. The party has since allied
itself more frequently with the PRI and did so in
the 2012 elections.
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Social Movement (SM)
This party was previously known as Convergence
for Democracy. It was founded in 1997 and
obtained its license as a political party in 1999.
The party has allied itself more frequently with
the PRD and did so again in the 2012 elections.
Labor Party (PT)
This party was formed in 1990 and has been allied
with the PRD for election purposes, as was the
case in the 2012 elections.
President-elect for 2012-2018
term
Enrique Peña Nieto
Mr. Peña Nieto has been a member of the PRI
since 1988 and holds a bachelor’s degree in law.
He is a former governor of the state of Mexico,
where he mainly built his political career. He was
elected local deputy for the state’s congress in
2003, was in charge of the state’s economic
development ministry, and also served as its
deputy minister of the interior.
New Alliance (PANAL)
This small party was created in 2005 by the
education workers’ labor union. It has alternately
been allied with the PAN and the PRI, according
to the political considerations of its leader. In the
2012 presidential election, the party was initially
allied to the PRI, but later distanced itself.
64
In his gubernatorial campaign, Mr Peña Nieto
made 608 promises, which he pledged he would
achieve if he was elected. In the last annual report
of his administration, he declared that he had
accomplished them all.
Mr. Peña Nieto is regarded as a market-friendly
politician who has said he will continue
with structural reforms in his administration from
2012-2018. His term of office begins on
1 December 2012.
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Chapter 11: The
challenges
 Despite important economic advances and the reinforcement of
institutions, many challenges persist
 Poverty reduction and improvements in income distribution are
key means of strengthening the domestic market
 In particular, the recovery of security is of the utmost importance to
social and economic progress, as well as to stimulate further FDI

Issues ahead
Mexico faces challenges in terms of consolidating
democracy and its practices, advancing education,
reducing poverty, improving income distribution,
and recovering security.
Consolidating democracy
The Economist Intelligence Unit’s Democracy
Index ranks Mexico 50th among 196 countries,
Democracy Index, by country
Russia
Turkey
Mexico
Authoritarian regime
Brazil
India
China
Chile
South
US
German
Norway
Hybrid regime
Flawed democracy
Full democracy
0
2
4
6
8
10
(Democracy in dex)
*The Economist Intelligence Unit’s Democracy Index is based on five categories:
electoral process and pluralism, civil liberties, the functioning of government, political
participation, and political culture.
Source: The Economist
classifying it as a “flawed democracy” with a
score of 6.9. The index is divided as follows: full
democracies – scores of 8 to 10; flawed
democracies – scores of 6 to 7.9; hybrid regimes –
scores of 4 to 5.9; and authoritarian regimes –
scores of 0 to 3.9.
Of particular importance is creation of a culture of
respect for election decisions made by institutions
such as the Electoral Institute and the Electoral
Supreme Court. This problem was thrown into
relief by the refusal of the PRD’s presidential
candidate, Andres Manuel Lopez Obrador, and his
supporters to accept the election results in 2006
and 2012.
Political analysts have highlighted other flaws in
Mexico’s democracy (see, among others, Juan
Pablo Becerra-Acosta, Milenio, 6 August 2012).
First is insufficient effective control over election
spending or penalization of political parties when
their spending exceeds levels specified by law.
Second, the practice of offering gifts to poor
voters in exchange for their votes is widespread,
even though it might not have a decisive effect on
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Improving quality of education
Another pending task is to improve the coverage
and quality of education. The country has made
significant progress on coverage in the past few
decades. According to the Organization for
Economic Cooperation and Development, the
percentage of Mexicans who have completed
upper secondary education, grades 7-9, doubled to
42% from 21% among 25-34-year-olds between
2010 and 2011. A similar development can be
seen in grades 10-12.
However, progress on the quality of education has
been slower, and it remains relatively weak, as
reflected in international tests. In the OECD’s
2009 Program for International Student
Assessment (PISA) tests of 15-year-olds, Mexico
ranked below the average for OECD member
countries. This may, in part, be associated with
the power of the teachers’ union, which has
opposed examining teachers.
This weakness is not necessarily related to low
levels of spending on education, but rather to the
efficiency with which such spending is allocated.
According to the OECD, Mexico spends slightly
more than the OECD member average on
education, measured as a percentage of GDP. In
2008, Mexico spent 6% of GDP on this item,
compared to the OECD average of 5.9%, and
allocated more than 20% of its total public
66
Reading
Mathematics
Brazil
Me xico
Ch ile
Rus sian
Federat ion
Tu rke y
OECD
average
Germ any
600
550
500
450
400
350
300
Korea
Some political analysts have recommended
reforming election law on these and other issues,
such as extension of campaigns and loosening of
restrictions on candidates to enable them to
campaign more freely. Some participants in the
most recent elections have stated their intention to
propose changes in law to make the election
process fairer and cleaner.
Results of the 2009 OECD PISA tests, by country (scores)
Shan ghaiCh ina
results. Third, media practices in which some
candidates are given more exposure than others
can affect fairness of the election process.
Science
PISA = Program for International Student Assessment
Source: Organization for Economic Cooperation and Development
expenditure to education. Nevertheless, most of
this spending is absorbed by teacher
remuneration, rather than spending per student or
for facilities.
High levels of poverty
Another challenge for the country is to reduce
high levels of poverty, now affecting more than
40% of the population. Programs have been set up
to provide support for this population, such as
“Opportunities,” a socially assisted government
program launched in the 1990s under which poor
people are offered cash in exchange for school
attendance, health monitoring, and acceptance of
nutritional support. About one-quarter of the
population has signed up for this program. Other
challenges include creating better conditions to
provide work and infrastructure, allowing these
people to make personal improvements.
The National Council for the Evaluation of Social
Development Policy (Coneval for its initials in
Spanish) is in charge of measuring poverty levels
in Mexico. According to the organization, 46.2%
of the total population was living in poverty in
2010, up from 44.5% in 2008. About 10.4% of the
population lives in extreme poverty and 35.8% in
moderate poverty. The increase in poverty levels
between 2008 and 2010 may be attributable to the
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government social assistance programs aimed at
alleviating poverty, such as Opportunities. But for
all the government’s efforts, poverty levels in
Mexico remain high.
(% of total population)
Mexico: Indicators of social deprivation
70
60
50
40
Improving income distribution
30
20
Despite Mexico’s macroeconomic stability and
the progress it has achieved, the country continues
to display high income inequality. This raises the
issue of improving income distribution, as the
imbalance distorts consumption and creates social
discontent. Although not an easy task, fighting
poverty, broadening educational coverage, and
creating more employment could help in this
direction.
10
0
2008
2010
Educational Backwardness
Lack of Health Services
Lack of access to social security
Lack of quality housing
Lack of access to public services
Lack of access to affordable food
Source: Coneval
effects of the global financial crisis in 2008-09, as
real household income decreased considerably, in
particular in urban areas.
However, according to Coneval, most indicators
related to social deprivation improved in the same
period, with the exception of access to affordable
food. There were decreases in the numbers of
people lacking access to health services, social
security and basic services, and quality housing
and living spaces.
From a long-term perspective, trends over the past
two decades indicate some improvement in
poverty levels. This may be associated with
Mexico: Poverty levels
80
Alimentary Pov erty
Capab ility Pov e rty
Asset Pov erty
70
60
According to the World Bank, Mexico is still a
highly unequal country, with a Gini coefficient of
48 in 2009, behind countries as China, Russia, and
Turkey, but ahead of Brazil and Chile. The Gini
coefficient is commonly used as a measure of
inequality of income or wealth. A Gini coefficient
of one (100 on the percentile scale) expresses
maximal inequality, while 0 represents the
absence of inequality.
Gini Index by country, 2009
Country
India
Canada
Turkey
Russia
US
China
Mexico
Chile
Brazil
South Africa
Gini Index
33
33
40
40
41
42
48
52
55
63
Source: World Bank
50
(%)
Regarding income inequality in Mexico, at the
beginning of the 1990s, the Gini coefficient stood
at 51.9, but it has since been on a downward
trend.
40
30
20
10
1992
1996
2000
2004
2 006
2 010
Source: Coneval
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Mexico: Development of the Gini index
(Index)
52
51
50
49
Homicides per 100,000 inhabitants
48
47
46
45
44
1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: World Bank
According to The Economist, in Free exchange
(12 August 2012), a fall in fertility rates,
combined with income progression – the pattern
seen in Mexico – may provide a partial
explanation for the country’s highly unequal
income distribution. According to this theory, the
benefits of having fewer children reach rich
people earliest, the middle classes later, and the
poor last of all. The people with the highest
incomes therefore reinforce this positive factor by
having fewer children, thereby further
deteriorating income distribution. If this reasoning
is correct, it may imply that income distribution
could gradually improve in Mexico, as fertility
rates have begun to fall even in the poorest
groups, and the country is working to prevent
early pregnancy among teenagers.
Recovering security
Insufficient personal security is a relatively recent
phenomenon produced by changes in drug routes
and operations of criminal gangs in Mexico. This
has brought with it collateral crime, such as
kidnapping and extortion. Security has been
compromised mostly as a result of drug-related
crimes. The crime wave has been intense since
2006 and reached a peak in mid-2010. Although
signs of slowing have emerged, the security issue
has become one of the country’s main challenges.
In 2000, Mexico had 11 homicides per 100,000
68
inhabitants, but the rate jumped to 22.7 by 2010,
and the preliminary figure for 2011 is 24.0.
China
Canada
Chile*
India*
US
Russia
Costa Rica
Brazil*
Mexico
South Africa
Venezuela
Colombia
Peru
2000
2010
2.0
1.8
3.5
4.2
4.9
19.8
6.4
22.5
10.7
48.6
32.9
66.7
5.6
1.0
1.6
3.2
3.4
4.2
10.2
11.3
21
22.7
31.8
45.1
33.4
10.3
*India 2009, Brazil 2005, Chile 2005.
Source: United Nations, UNODC, UN.INEGI
When the US shut down a drug route through the
Caribbean in the mid-1980s, this activity shifted
to Mexico, strengthening Mexican cartels and
diminishing the power of Colombian drug lords
(see Bonner C. Robert, The New Cocaine
Cowboys, Foreign Affairs, August 2010). This
move was a game-changer, and Mexican
authorities were not prepared to intervene, owing
to a combination of corruption and insufficient
resources and experience.
The crime wave was not faced full on and
decisively until President Felipe Calderon decided
to take action in 2006, the first year of his
administration. The government’s explicit
objective since then has been to fight the threat to
national security by recovering control of regions
where criminal organizations impose their own
law through violence.
The violence increased sharply from 2006 and
peaked in 2010, and since then, homicides have
gradually fallen. In effect, deaths related to
organized crime averaged 1,100 year-to-date versus
1,500 two years ago, or a reduction of 27%. At the
same time, a substantial number of drug lords have
been captured or killed, and many have been
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Mexico Handbook
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violence in 2010. In 2009 and 2010, the most violent
years, portfolio investment averaged USD26.4bn,
about six times more than the average in the
previous 10 years of USD4.6bn. Although this
increase was associated with excess global liquidity,
it also reflected confidence generated by Mexico’s
sound macroeconomic framework.
Mexico: Drug-related homicides
1,600
1,400
1,200
1,000
800
600
400
Mexico: Foreign investment and drug-related deaths
200
2009
2010
2011
2012
12-Month MA
Source: Milenio
deported to the US. Authorities have reported that
22 of 37 drug lords are no longer active.
This reduction in crime levels is a result of intense
lobbying of Congress to obtain funding for better
policing, more efficient intelligence, technology,
and an improved legal framework. President-elect
Enrique Peña Nieto’s campaign promises included
an undertaking to refine the strategy for reducing
violence in the country. His main proposals
include establishment of a force of carabineers to
substitute for the army and marines in the fight
against crime. In addition, human rights issues
have been debated and laws have been approved
to provide a healthy framework for application of
the law.
So far, foreign investors have been generally neutral
on the crime issue, as foreign investment continued
to perform well in spite of the strong surge of
70
14,000
60
12,000
50
40
10,000
8,000
30
20
6,000
4,000
10
0
2,000
0
(number of deaths)
Drug-related homicides
(USDbn)
2008
2006 2007 2008 2009 2010 2011
Foreign investment (LHS)
Drug related deaths (RHS)
Source: Banxico, Milenio
Foreign direct investment (FDI) in Mexico
decreased in 2009 due to the global downturn, but
staged a notable recovery in 2010. In 2011,
investment inflows remained firm, supporting our
premise that the violence has not affected
investment decisions appreciably. In the current
year, capital inflows have moved to levels
exceeding those in 2011. Nonetheless, security
concerns are a risk factor that might hinder
investment in the country if progress falters in the
near future.
Numb er of police offi cer s
Mexico: Numbers of police officers
35,000
30,000
25,000
20,000
15,000
10,000
2006
2007
2008
2009
2010p
Source: Presidency of Mexico
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Chapter 12: The structural
reforms
 Long-pending structural reforms in key areas of the Mexican
economy are vital to achieve higher growth rates
 These reforms are on the political agenda of President-elect
Enrique Peña Nieto in his 2012-18 administration
 Mr. Peña Nieto faces challenges in negotiating passage of
the reforms in a divided Congress and making them palatable to
the public

Long-delayed reforms
Modernization of the Mexican economy first got
under way in the first half of the 1990s, when
several important reforms were enacted and the
North American Free Trade Agreement (NAFTA)
was established in 1994. However, continuation
of these efforts was thwarted by the effect of the
“Tequila” currency crisis in 1994-95, political
costs of the economic adjustment, and a Congress
that has been divided since 1997.
Since then, progress on structural reforms has
been slow, and in some cases, only watered-down
versions have been passed; for example,
energy and fiscal reforms. According to political
analysts, the administrations of Ernesto Zedillo
(1994-2000), Vicente Fox (2000-06), and Felipe
Calderon (2006-12) seemed to have the right ideas
about reforms. However, these presidents lacked
the negotiating skills needed to convince the
opposition parties, which also blocked proposals
according to their calculations of political gains or
70
losses. The center-left Institutional Revolutionary
Party (PRI) blamed the center-right National
Action Party (PAN) for blocking energy reform
from 1997-2000, and the PAN blamed the PRI for
blocking the same reform from 2009-12. The
PRI’s presidential candidate, Enrique Peña Nieto,
who won the election, answered this charge in the
first debate by stating that the party had not
blocked any reforms, and that the main cause of
the failure to advance them had been the inability
of PAN’s negotiators, among them Josefina
Vazquez Mota, the PAN presidential candidate.
PAN politicians rejected the charge and insisted
that the PRI had hindered the reforms.
Reforms are on the political
agenda for 2012-18
The platform adopted by President-elect Enrique
Peña Nieto and the PRI in the last presidential
campaign explicitly included structural reforms
with the highest priority. However, events in the
campaign, such as a student protest against media
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bias, corruption, and lack of transparency made
Mr. Peña Nieto reconsider his priorities and
propose sets of reforms beyond those he had
already embraced.
The first round of proposed reforms will address
three issues that were at forefront in the
presidential election campaign. First, corruption
would be dealt with via creation of a National
Anti-Corruption Commission, which would be an
autonomous body. Second, a drive would be
launched to increase transparency at all levels of
government – municipal, state, and federal – as
well as in the judiciary and legislature. Third, an
autonomous body composed of citizens would be
set up to monitor that all levels of government
follow a transparent relationship with the media to
prevent any hidden promotion of individual
politicians’ using public money.
Content of the reforms
During the latest election campaign, Mr. Peña
Nieto outlined proposals for the structural reforms
in his electoral platform in the following way:
Labor reform: He proposed updating the legal
framework governing labor relations, promoting
programs that support young entrepreneurs in an
effort to incorporate them into the labor market,
and favoring integration of informal workers into
the formal sector. In addition, he proposed
establishing national unemployment insurance,
promoting a sustained increase in productivity,
favoring the incorporation of women into the
labor market, and supporting workers via benefits
such as nurseries.
These proposals would represent an advance, as
they seek to generate gender equality, while
promoting more flexible conditions and higher
levels of productivity. However, other issues that
were not addressed included labor union
affiliation policies, costs related to dismissing
staff, and union privileges – in particular in the
public unions.
The labor market platform indicates that reform in
this sector is likely to be less than comprehensive.
However, it would represent an advance from the
current state of the law.
Fiscal sector reform: Mr. Peña Nieto also plans
to widen the base tax, reduce tax loopholes,
combat tax evasion, and strengthen public
finances at the local level. He also will seek to
promote more efficient spending.
In the current administration and the one that
preceded it, some fiscal modifications were
approved, but some of the most urgently needed
changes were not made. The latter included
revising the structure of the value-added tax
(VAT), eliminating the zero tax rates on
medicines and food, as well as the exemptions of
medical services, education and public transport,
among others. The fiscal reform proposals may
provide the resources needed for other projects
without jeopardizing fiscal stability.
Economic competition: Mr. Peña Nieto has
proposed strengthening and granting autonomy to
the Federal Competition Commission (Cofeco)
and the Federal Communications Commission
(Cofetel). This would help combat monopolistic
practices and further the impartiality of the
regulatory entities’ decisions.
The proposals could complement amendments to the
antitrust law approved in 2011, which strengthened
the powers of the Federal Competition Commission.
The proposal to grant autonomy to Cofeco and
Cofetel would be a significant step toward
strengthening their powers. In particular, it could
inhibit monopolistic practices in some key industries
such as media and telecommunications, which
would help reduce inflation for consumers in the
medium term.
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Energy sector: Mr. Peña Nieto has said that he
will promote energy reform under which Pemex
would be able to increase its association with the
private sector, although public ownership of
hydrocarbons would be maintained. In addition,
he endorsed the need to explore and develop
renewable energy via promotion of technological
research and support for development of human
capital. He also proposed an evaluation of the
pricing policy.
Pemex’s association with the private sector would
represent significant progress, as previous energy
reforms have lacked this aspect, which would
promote Pemex’s efficiency in exploration,
extraction, and refining, and support greater
investment. However, in terms of energy prices,
the proposal is vague, as it does not specify
whether monthly slippage will prevail or whether
gasoline and gas subsidies will be removed or
increased. This reform would improve the sector’s
dynamics and could constitute a big push for the
entire economy.
Reform of the education system: Mr. Peña Nieto
has promised to make a high school education
compulsory. He also has said that he would
promote teaching of information technology and
English as part basic education. He will seek to
focus on development of sporting activities,
making them compulsory, as he said this would
have a positive impact on children’s health and
school performance. In terms of teacher
performance, he proposed to review and refine the
framework of evaluation and compensation.
These proposals could make students more
competitive at the global level, and would mark a
move toward improvement in educational quality.
However, the proposal for teacher evaluations did
not specify direct consequences for those who
achieve good or bad reports. This issue is
particularly challenging, as negotiations with the
powerful teachers’ unions have typically been
difficult. That said, the leader of the most
important teachers’ union has publicly expressed
her willingness to work with the president-elect.
Economic policy reform: We were struck by Mr.
Peña Nieto’s plan to evaluate the possibility of
establishing a dual mandate for the central bank.
This, in our opinion, would be a backward step, as
the central bank’s single mandate of controlling
inflation, in place since 1994, has successfully
reduced inflation from double-digit rates to close
to 3% in recent years. It is widely acknowledged
that inflation control promotes long-term
economic growth, and that inflation is a tax that
hits the low-income population hardest. However,
it remains to be seen whether the new
administration will be willing to take a stand on
an issue that might not make much difference to
economic activity or inflation.
Mexico: President-elect Enrique Peña Nieto’s proposals
Fiscal
Widen tax base, reduce loopholes
Combat tax evasion and strengthen public finances at
the local level
Promote more-efficient spending
Competition Strengthen and grant autonomy to the Federal
Competition Commission (Cofeco) and the Federal
Communications Commission (Cofetel)
Combat monopolistic practices and guarantee the
impartiality of the regulatory entities’ decisions
Energy
Promote energy reform under which Pemex should
be able to increase its association with the private
sector
Explore and develop renewable energy by promoting
technological research
Evaluate the pricing policy
Education
Promote teaching of information technology and
English as part of basic education
Focus on development of sporting activities and
make them compulsory
Make a high school education compulsory
Labor
Update the legal framework governing labor relations
Promote programs to support young entrepreneurs in
an effort to incorporate them into the labor market
Introduce national unemployment insurance, promote
a sustained increase in productivity
Favor incorporation of women into the labor market
Monetary
Evaluate the possibility of establishing a dual
policy
mandate for the central bank
Source: Newspaper reports and Evalua y decide (www.evaluaydecide2012.mx)
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Will Mr. Peña Nieto be able to
deliver?
Three factors that could affect the outcomes of
President-elect Enrique Peña Nieto’s’s proposals:
 A good team of political negotiators in
Congress, according to political analysts.
 The National Action Party (PAN), the thirdlargest force in Congress, has shown political
willingness to negotiate structural reforms
that are close to its ideological stance.
 There is consensus in the media and
public opinion about the need to carry out
such reforms.
However, here are four obstacles:
 The left-wing opposition may be difficult to
negotiate with, even its more-moderate
faction.
 Though the PAN appears to have the will to
pass reforms, negotiations nonetheless could
be tough, so the PRI will have to show strong
negotiating skills.
 The PAN may ask for tougher marketoriented reforms in exchange for its support
for fiscal reform, and this could disrupt the
unity of the PRI – if, for example, it sought a
labor reform that might hurt benefits of labor
unions affiliated with the PRI.
 Though reforms may win congressional
passage, public opinion plays a role, as
leftist opponents may stage marches and
protests by the left. The PRI may therefore
seek public support so that it can manage any
discontent arising from any left-wing
rejection of its reforms.
Risks and challenges
One risk is that reforms could prove less
comprehensive than necessary, as was the
case with the energy and fiscal reforms in
previous administrations.
The same could also occur with other reforms, such
as for the energy sector, in which one of the most
desirable changes would be an opening for private
investment in certain energy-related activities.
Impact on financial markets
FX, fixed-income, and equity markets
Structural reforms would have an important effect of
lowering the country risk premium, which could
support better performances in financial markets.
On the currency front, we could expect to see
appreciation of the peso, which ultimately mirrors
the state of the country. Simply put, structural
improvement in the outlook should improve the
peso’s position versus other currencies.
For fixed-income markets, the gradual
introduction of structural reforms or even just the
generation of positive expectations while they are
being prepared could prompt a reduction in
Mexico’s credit default swap levels, as well as
lowering spreads between local currency bonds
and the corresponding benchmark in the US.
For equity markets, lower credit risk could result in
re-ratings of stocks listed on the Mexican Stock
Exchange (MSE). In other words, investors could be
willing to pay a richer valuation for Mexican stocks.
Furthermore, introduction of structural reforms in
several sectors of the Mexican economy could
galvanize private investment, both domestic and
foreign. This could result in GDP growth, favoring
sales and earnings of Mexican companies.
We now examine a selection of sectors to provide
more-specific ideas about potentially positive
effects on equity markets.
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Energy
 The opening of certain energy-related activities
to private investment should have a positive
effect on chemical and petrochemical
companies such as Alpek, Mexichem, and
KUO. Some backward integration opportunities
could arise, resulting in lower input costs.
 Other industrial sectors could benefit indirectly
from higher energy-related investments, such as
auto parts (Alfa’s Nemak), steel (ICH and
Simec), cement (Cemex), and manufacturing
(Carso’s Condumex).
 The development of supply chains in
exploration, extraction, refining, and
distribution of oil and oil-related products
could open a window of opportunity for oil
services companies to be listed on the MSE.
 An eventual listing of Pemex on the MSE
would strengthen the profile of the exchange,
increasing its market cap value and raising the
visibility of Grupo Bolsa’s shares.
Fiscal programs
 Higher tax collections should free up
resources for additional public expenditures
in key sectors.
 This could boost investment in infrastructure,
including highways, ports, airports, schools,
and hospitals, benefiting companies such as
ICA and OHL Mexico.
Labor
 Labor costs could decrease on the back of
higher labor-force mobility, resulting in higher
profit margins overall for Mexican companies,
including those listed on the MSE.
 The wage differential relative to other
emerging markets such as China could
narrow. This could have a positive impact on
manufacturing companies, including auto
parts makers (Alfa, KUO, Carso).
 Higher labor productivity should favor laborintensive companies in the services sector,
such as retail and financial services.
 Greater transparency surrounding the
operation of labor unions could make stateowned companies more efficient, potentially
freeing up resources for public investment in
top-priority sectors such as infrastructure.
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Chapter 13: The financial
industry
 The Mexican financial system’s regulatory framework proved
resilient during the global financial crisis in 2008-09
 Credit penetration is still low
 The banking system is well-capitalized

Agile, with room for
improvement
The regulatory framework underpinning the
Mexican financial system has been strengthened
since the “Tequila” currency crisis in 1995. As a
result, the financial system proved resilient during
the global financial crisis in 2008-09. However, the
banking industry remains highly concentrated, with
seven financial groups holding about three-fourths
of the banking system’s total assets. In addition,
credit penetration is still relatively low. Foreign
banks work with a domestic deposit base under a
Mexico: Financial system intermediaries (share of total
assets)
Brokerage
Others
House
4%
4%
Insurance
6%
Development
banks
9%
Investment
Companies
12%
Pension f unds
14%
Source: Banxico, October 2011
Commercial
B anks
51%
subsidiary system, and most of their operations are
directed at the national economy. However, they
also link the country to the rest of the world – an
important feature in an open economy.
Financial system composition
The Mexican financial system is small and
relatively concentrated. In June 2011, commercial
banks accounted for more than half of its assets.
Pension funds formed the second-largest group of
financial intermediaries, with 14% of the total
assets in the system, followed by mutual fund
companies, with 11.5%. The public sector
participates in the system through six
development banks, development trusts, and two
large public mortgage entities, the Institute of the
National Housing Fund for the Workers
(Infonavit) and the Housing Fund of the Social
Security Institute of Public Sector Workers
(Fovisste). These have a joint share of 9.2% of all
assets in the system.
Regulation of the financial
system
The Mexican financial system’s regulatory
framework has been strengthened since the
“Tequila crisis” in 1995. This helped it withstand
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The banking system consists of 35 banks but is
dominated by seven large banks that hold about
80% of total assets. Five of the seven largest
Source: CNBV
Credit penetration is relatively low. Banking credit
stood at about 15% of GDP in 2011, while total
domestic credit to the private sector, including
credit from additional financial intermediaries, was
equivalent to about 25% of GDP.
Credit penetration in Mexico is much lower than
that in other Latin American countries such as
Brazil and Chile.
Banking credit to the private sector was hard hit
during the global financial crisis but has achieved
a sustained recovery since mid-2010. Total credit
has exceeded pre-crisis levels since mid-2011.
Consumer credit is the exception in that it has not
Domestic credit to the private sector (% of GDP)
250
200
150
100
50
0
Source: World Bank
76
United States
Concentrated banking system
that supports the economy
Santander
14 %
OECD mem bers
 Council for the Stability of the Financial
System: Created by the government in 2010
following the 2008-09 financial crisis to
analyze and identify risks that could hamper
functioning of the financial system.
Banorte-Ixe
10%
China
 National Commission for the Protection of
Users of Financial Services (Condusef):
Promotes financial education, and deals with
and resolves complaints by users of financial
products and services.
BBVA Bancome
20%
HSBC
9%
Korea, Rep.
 National Insurance and Bonding Commission
(CNSF): It is in charge of regulating
institutions related to insurance and bonding.
Inbursa
4%
Chile
 National Banking and Insurance Commission
(CNBV): The regulatory and supervisory
authority of financial institutions. Its mission
is to safeguard stability of the Mexican
financial system and foster its efficiency.
Sco tiab ank
3%
Brazil
 Institute for the Protection of Bank Savings
(IPAB): Protects the savings of small and
mid-level bank depositors, and resolves
situations of banks with solvency problems at
the lowest possible cost.
Banamex
20 %
India
 Central Bank of Mexico (Banxico): Promotes
development of the financial system.
Rest
20%
Russ ia
 Ministry of Finance (SHCP): Responsible for
planning, coordinating, evaluating, and
protecting the financial system.
Mexico banking system: Market shares
Me xic o
The financial system is regulated by the following
institutions:
banks are foreign-owned subsidiaries established
in Mexico.
(%GDP)
the global financial crisis in 2008-09, despite
severe effects on economic growth.
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Mexico: Banking credit to the private sector
2 35
2 15
(Index)
1 95
1 75
1 55
1 35
1 15
95
2006
Total
Source: Banxico
2 007
200 8
Co nsum er
2009
20 10
Housing
2011
20 12
Busine ss
Financial credit system
With the exception of Sofoles, the non-bank
financial institutions for housing that are beset by
solvency problems arising from the financial
crisis, Mexico’s financial credit system appears to
be well-capitalized.
As at June 2012, the risk-weighted capital asset
ratio in the Mexican financial system stood at
nearly16%, well above the minimum index of 8%
stipulated by capitalization regulations. In
addition, more than 85% of total capital is of high
quality. Implementation of Basel III, a global
regulatory standard on bank capital adequacy,
stress testing, and market liquidity risk, should
not, therefore, pose problems for individual banks.
Mexico: Banks capitalization index
18
17
(i ndex)
yet returned to previous levels, but even so it has
made a significant recovery, providing support to
consumption growth.
16
15
2 01 0
20 11
2 0 12
Source: Banxico
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Chapter 14: The banking
system
 Profitability is recovering with improvement in loan quality, a
pickup in credit growth, and lower loan-loss provisions
 The banking system in Mexico has high capitalization levels, with
a systemwide risk-weighted capital asset ratio of 16%
 Credit penetration is still low, yet it provides support for the
country’s economic growth

Mexican banking system
structure
funds, insurance companies, credit unions,
factoring companies, and mutual funds.
Mexico has one of Latin America’s mostdeveloped banking systems, consisting of a central
bank and six types of banking institutions: public
development banks, public credit institutions,
private commercial banks, private investment
banks, savings and loan associations, and mortgage
banks. Other parts of the financial system include
securities market institutions, development trust
The central bank, the Bank of Mexico (Banco de
México), regulates the money supply and foreign
exchange markets, sets reserve requirements for
Mexican banks, and enforces credit controls. The
National Banking and Insurance Commission
(CNBV for its Mexican abbreviation) regulates
and supervises financial institutions.
Top Mexican commercial banks, total loan share (%), July 2012
Others
16%
The banking industry consists of 42 banks, which
together have more than 12,000 branches. The three
largest banks in Mexico account for 54% of the
Mexico: Top banks’ branch networks and ATMs, July 2012
BBVA Bancomer
21%
Interacciones
2%
Deutsche Bank
3%
9,000
8,000
7,827
7,000
6,425
6,136
6,240
6,000
Scotiabank
3%
Inbursa
4%
4,778
5,000
4,000
3,000
Banamex
19%
HSBC
8%
2,000
1,813
1,706
1,097
1,128
1,067
1,000
706
272
1,561 1,772
701
647
0
Banorte
10%
Source: CNBV
78
Santander
14%
BBVA Banamex Santander
Bancomer
Branches
ATMs = Automated teller machines
Source: CNBV
Banorte
HSBC
Mexico
Inbursa
ATM s
Scotiabank
Inverlat
Azteca
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Mexico Handbook
October 2012
Mexico: Top commercial banks, assets, July 2012
A ssets
Top C o m m ercial B anks
%
L oan s
%
Fu n di ng
%
Eq ui ty
%
(MXN m)
42 bank s
1
Total s ys te m
BBV A Bancomer
5,993,906
1,249,167
20.8
2,583,210
644,052
24.9
3,049,174
684,603
22.5
621,554
115,970
18.7
2
Banamex
1,118,027
18.7
415,575
16.1
540,061
17.7
129,877
20.9
3
Santander
840,575
14.0
338,905
13.1
378,426
12.4
96,538
15.5
4
Banorte
604,935
10.1
335,012
13.0
353,867
11.6
54,639
8.8
5
HSBC
490,383
8.2
195,462
7.6
321,242
10.5
40,285
6.5
6
Inbursa
229,716
3.8
169,698
6.6
149,088
4.9
51,317
8.3
7
Sc otiabank
200,293
3.3
112,779
4.4
141,199
4.6
28,335
4.6
8
Deutsc he Bank
178,664
3.0
728
0.0
6,580
0.2
2,465
0.4
9
Interacc iones
96,712
1.6
47,265
1.8
47,698
1.6
5,374
0.9
10
Banc o del Bajío
95,186
1.6
71,214
2.8
73,096
2.4
10,168
1.6
11
Bank of A merica
92,925
1.6
635
0.0
34,668
1.1
4,955
0.8
12
A firme
92,692
1.5
14,267
0.6
17,704
0.6
2,723
0.4
13
Ix e
88,466
1.5
29,720
1.2
38,831
1.3
4,968
0.8
14
Banc o A z teca
79,504
1.3
50,170
1.9
59,036
1.9
7,483
1.2
15
Banregio
62,999
1.1
30,172
1.2
27,476
0.9
5,136
0.8
Source: CNBV
banking system’s total assets. The system is
dominated by seven large banks, with 80% of assets
and 86% of loans. Five of these seven are foreignowned subsidiaries of major international banks. The
remaining 35 banks represent a group focused on
corporate and consumer lending, as well as niche
banking. Larger banks compete to lend to blue-chip
companies that could fund themselves abroad, as
well as in the credit card and mortgage markets.
Sound, profitable, and wellcapitalized system
The banking system in Mexico has high
capitalization levels, with a systemwide riskweighted capital asset ratio of 16% as of August
2012. Its Tier I capital of 14% exceeded the level
required by new international regulations. The
new guidelines established by Basel III, a global
regulatory standard, demand greater capital
requirements and quality for financial institutions.
In Mexico, current bank capital levels mean that
this regulation can come into force easily without
placing pressure on the country’s banking system.
Profitability declined sharply in the 2008-09
global financial crisis but recovered recently with
an improvement in loan quality, a pickup in credit
growth, and rapid declines in loan-loss provisions
and write-offs. Liquid assets accounted for more
than 40% of total assets in the banking system,
and the loan-to-deposit ratio seems to have been
adequate at 92% as of August 2012. In addition,
banks keep about one-third of their total assets
invested in government securities.
Mexico: Banking system’s ROA and ROE are recovering
2.5
30
25
2.0
Mexican banks: Healthy capital ratios well above required levels
18
17.09
16.15
15.16
16
20
1.5
1.0
15
12
10
10
0.5
5
0.0
0
Jul-12
Jul-11
Jul-10
Jul-09
Jul-08
Jul-07
Jul-06
Jul-05
Jul-04
Jul-03
Source: CNBV
14.63
14.06
13.95
HSBC
Banorte
8
6
4
2
0
Inbursa
ROA %
15.05
14
ROE %
Scotiabank
Banamex
BBVA
Bancomer
Santander
Source: CNBV
79
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Mexico Handbook
October 2012
Mexico: Credit penetration is still low, 2011 (% of GDP)
250
Mexico: Credit trends, private sector
211.6
202.2 204.0
200
169.2
150
30%
20%
86.3
100
40.3 43.5
24.3 24.6 30.9
14.6 22.3
50
50%
40%
130.0
114.4
60%
10%
57.0
0%
-10%
-20%
0
-30%
Spain
C or por ates
Jun-12
Colombia
UK
Oct-11
Bolivia
USA
Feb-11
Ecuador
Japan
Jun-10
México
China
Oct-09
Perú
France
Feb-09
Uruguay
Chile
Jun-08
Oct-07
Feb-07
Jun-06
Oct-05
Feb-05
Jun-04
Oct-03
Feb-03
Jun-02
Spain
UK
USA
Japan
China
France
Chile
Brasil
Colombia
Bolivia
Ecuador
México
Perú
Uruguay
Argentina
Total credit to the priv ate sector
Argentina
C onsum er
Brasil
Source: CNBV
Source: World Bank
Banking system benefiting
from economic recovery
Mexico was hard hit by the global financial crisis,
but the financial system proved to be resilient. The
economy and the financial system recovered in 2010
on the back of sound policy responses and
fundamentals and a rebound in external and
domestic demand. Growth has remained robust this
year, with a strong expansion in consumer activity.
Mexico: Loan growth (left axis), economic activity (right axis)
25%
8%
Credit growth continues to be driven by consumer
loans, which represent about 22% of total system
loans. Consumer credit began to rise again in
September 2010 when it showed positive nominal
growth rates. Private sector credit growth in the
consumer segment remained strong, at 22.7% in July
2012 y-o-y versus 23.1% in June, and see an
accelerating in credit cards continued, +15.9% y-o-y.
Mexico: Loan growth y-o-y, by bank
70%
40%
6%
20%
4%
15%
0%
-8%
Banor te
Source: CNBV
-10%
Eco nomic activity
Source: INEGI and CNBV
Mexico credit trends
In April 2010, total loans granted by commercial
banks to the private sector started to recover,
registering positive nominal annual growth rates.
Total system credit growth decelerated to 14.5%
y-o-y in July 2012 from 15.4% in June, and credit
to the private sector increased 15.0% y-o-y in July
versus 16.1% in June.
Mexico: Banking system loan breakdown, July 2012
Housing
17%
Other Consumer
credit
11%
Corporates
62%
Credit card
10%
Source: CNBV
80
2Q12
Scotiabank
1Q12
Santander
Inbur sa
4Q11
Banamex
HSBC Mexico
3Q11
BBVA Bancomer
-6%
2Q11
-4%
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
Jun-12
F eb-12
Oct -11
Jun-11
Feb-11
Oct-10
Jun-10
Feb-10
Oct-09
Jun-09
Feb-09
Oct-08
Jun-08
T otal loan gro wth
3Q08
0%
2Q08
5%
- 20%
1Q08
-2%
4Q07
10%
-5%
10%
2%
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Mexico Handbook
October 2012
performance has pushed the average growth rate
for the past two years above 10%.
Consumer: Nonperforming loans ratio by segment
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Jul-12
Jan-12
Jul-11
Jan-11
Interbank
deposits
8%
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Total consumer
Personal credit
Othe r personal credits
Mexico: Core funding breakdown, July 2012
Credit cards
Auto
Real Estate
Source: CNBV
Time
deposits
35%
Demand
deposits
57%
Jul-06
Jan-06
Jul-05
Following the 2009 recession, credit to companies
underwent an important process of reactivation
and expansion, and ultimately this became the
credit category that contributed the most to total
credit. From the second half of 2010, the
expansion of credit to companies has stood out,
growing at a more rapid pace than credit to
consumers. Corporate loan growth to the private
sector in July grew at a rate of 13.3%, down from
14.9% y-o-y in June.
Source: CNBV
Mexico: Funding sources, y-on-y growth
30%
Overall, the lending rate has been increasing and
now stands at 12.8% in Mexico. This has been
driven by rising consumer lending rates. For
corporates, however, rates have remained steady
at 7.5-8% for more than a year. Strong loan
growth, especially in consumer, and higher
lending rates have supported growth in the interest
margin in the banking system; Mexican banks’ net
interest income in July 2012 increased 17.3%
y-o-y and their ROE was 13.82%.
Spread between consumer lending rates and TIIE 28 days (bp)
15%
2,800
Consumer
2,700
2,600
0%
2,500
2,400
2,300
-15%
Jul-12
Mar-12
Nov-11
Jul-11
Mar-11
Nov-10
Jul-10
Mar-10
Nov-09
Jul-09
Mar-09
Nov-08
Jul-08
Mar-08
Nov-07
Jul-07
Mar-07
Nov-06
Jul-06
Demand deposits
1,900
1,800
J ul- 12
J an -1 2
J ul- 11
J an -11
J ul- 10
J an -1 0
J ul- 09
Jan - 09
Source: CNBV
2,000
J u l-08
Total core funding
Ti d
i
2,200
2,100
Consumer
Funding and rates
Traditional or core deposits include savings,
demand deposits, and term deposits. Demand
deposits account for 57% of total banking system
core deposits, followed by time deposits, with
37%, as shown in the “Core funding breakdown”
pie chart above. The trends in these funding
sources have improved significantly from their
lows during the recession. A better GDP
Source: CNBV, Banxico
81
abc
Mexico Handbook
October 2012
Top Mexican banks: NPL ratios
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
B AN AM EX
BA NOR TE
SCOTIA B AN K
B AN CO IN B UR SA
IXE
B AN REGIO
Jul-12
BB VA B AN COM ER
H SB C M EXIC O
Mar-12
Nov-11
Jul-11
Mar-11
Nov-10
Jul-10
Mar-10
Nov-09
Jul-09
Mar-09
Nov-08
Jul-08
T otal Syst em NP L
Source: CNBV
Lending interest rates (%)
Funding rates
10.0%
35
30
8.5%
25
20
7.0%
15
5.5%
10
5
4.0%
-
Apr-12
Oc t-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct -08
Apr-08
Oct-07
Apr-07
Oct -06
Apr-06
Oct-05
Apr-05
Oc t-04
Apr-04
2.5%
1.0%
2Q12
1Q12
4Q11
3Q11
CETES 28 days
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
TIIE 28 days
Consumer
Source: CNBV
Asset quality
Mexican banking system: NPL and coverage ratios
4.5
300
4.0
250
3.5
3.0
200
2.5
150
2.0
1.5
100
1.0
50
0.5
0.0
0
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Total banking system NPL %
82
Corporates
FONDEO rate
Source: CNBV
Source: CNBV
Total credit
Coverage total system % RHS
The banking system’s nonperforming loan (NPL)
ratio was 2.52% and the NPL coverage ratio was a
healthy 187% in July 2012. Asset quality and
formation have been improving in recent years,
mainly owing to a decline in consumer
delinquencies, especially in the credit card segment.
In July 2012, the NPL ratio in the corporate
segment stood at 2.16% of all loans, and the
consumer NPL ratio was 4.42%. In 1H12,
consumer NPL started to deteriorate, mainly due
to an increase in personal credit NPL ratios.
Although personal credit is approaching the peak
abc
Mexico Handbook
October 2012
NPL ratio of 2009, credit card delinquency – a
major problem in the 2008-09 crisis – now is
much closer to the seven-year low.
Mexican banking system: NPL formation and ratio improving
4.0%
10.0%
8.0%
3.0%
6.0%
2.0%
4.0%
1.0%
2.0%
0.0%
0.0%
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
NPL ratio
NPL formation
Source: CNBV
83
84
Lending growth (% y-o-y)
BBVA Bancomer
Banamex
Banorte
HSBC Mexico
Inbursa
Scotiabank
NIM (%)
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
5.6
20.4
21.1
4.9
-5.7
5.5
7.0
20.0
23.9
7.9
-1.2
3.5
7.4
20.4
23.0
4.5
-0.2
4.1
10.3
18.8
23.3
5.8
5.2
2.9
11.7
18.0
24.4
6.9
11.4
1.2
11.5
16.1
22.8
7.2
14.8
-0.2
Source: CNBV
Total system
BBVA Bancomer
Banamex
Banorte
HSBC Mexico
Inbursa
Scotiabank
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3.73
4.01
3.18
3.36
3.16
1.30
4.89
3.83
3.83
3.62
3.45
3.22
3.07
5.23
3.86
3.69
4.03
3.30
3.25
5.29
4.92
4.08
4.33
3.70
4.03
2.69
1.80
4.37
4.08
4.14
4.17
3.85
3.00
0.12
5.11
4.07
4.11
4.09
3.85
3.05
2.64
5.80
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
21.15
9.49
14.54
0.61
9.55
9.99
21.25
9.11
14.53
1.80
10.79
10.03
19.16
8.78
14.41
3.16
7.03
10.54
20.94
8.00
14.87
1.90
7.84
10.31
20.77
9.25
15.49
3.34
7.71
11.08
20.28
9.28
15.92
4.03
6.08
13.07
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
123.69
297.22
154.03
227.51
448.82
115.68
123.20
284.86
154.61
222.21
410.01
117.07
122.49
275.77
141.24
246.22
417.42
117.18
119.05
263.56
138.89
267.61
407.06
115.43
122.00
268.78
134.46
252.73
383.91
109.35
121.74
247.39
131.01
257.98
496.01
110.38
Mexico Handbook
October 2012
Mexican banks
Margins and growth
Source: CNBV.
Returns
ROE (%)
ROA (%)
BBVA Bancomer
Banamex
Banorte
HSBC Mexico
Inbursa
Scotiabank
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
2.04
1.24
1.14
0.06
1.97
1.53
2.07
1.17
1.17
0.16
2.25
1.53
1.88
1.08
1.19
0.26
1.52
1.61
2.04
0.94
1.24
0.15
1.74
1.57
2.00
1.10
1.30
0.26
1.72
1.65
1.93
1.10
1.36
0.32
1.37
1.91
BBVA Bancomer
Banamex
Banorte
HSBC Mexico
Inbursa
Scotiabank
Source: CNBV
Source: CNBV
NPL and coverage
Coverage (%)
NPL ratios (%)
Source: CNBV
Mar-12
Apr-12
May-12
Jun-12
Jul-12
2.44
3.26
1.43
1.77
2.50
3.02
2.56
2.45
3.30
1.51
1.72
2.61
3.33
2.54
2.52
3.40
1.55
1.53
2.51
3.38
2.58
2.55
3.49
1.61
1.56
2.19
3.49
2.59
2.50
3.45
1.60
1.51
2.15
3.57
2.59
2.52
3.50
1.75
1.56
2.14
2.79
2.54
BBVA Bancomer
Banamex
Banorte
HSBC Mexico
Inbursa
Scotiabank
Source: CNBV
abc
Total system NPL
BBVA Bancomer
Banamex
Banorte
HSBC Mexico
Inbursa
Scotiabank
Feb-12
abc
Mexico Handbook
October 2012
Chapter 15: The
infrastructure sector
 Privately run infrastructure on the rise owing to improved
regulation and limited ability to boost public spending
 A new law on public-private partnerships (PPPs) could reduce
project financing costs for concessions
 We expect new regulation to boost bidding on privately
run projects

Mexican infrastructure
We believe that boosting infrastructure is crucial
to meet Mexico’s increasing needs as a major
trade hub. The country’s limited ability to
increase public spending implies higher
participation by private investors, while improved
access to long-term funding underpins capitalintensive projects. However, challenges in the
form of deregulation persist as a headwind if
Mexico is to attract private investors, particularly
in energy. Clarification of rules for concessions
also could improve the risk/reward balance, which
is a key factor for project feasibility. It will be
vital, in our opinion, to improve execution
capabilities and speed up the bidding processes to
allow investments to kick in. This sector could be
one of the major beneficiaries of structural
reforms that address the government’s spending
capabilities and deregulation.
Quality versus quantity
Competitiveness Report; this was up eight
positions from a year earlier. Although Mexico
has the 13th-largest economy, its infrastructure is
substandard, according to the statistics from the
World Bank report.
The government has engaged in some initiatives to
boost infrastructure spending: The National
Infrastructure Plan (NIP); creation of the National
Infrastructure Fund (Fonadin); a law on publicprivate partnerships (PPPs); and changes in t
investment programs for Mexican pension funds
(Afores) to increase availability of equity financing
for new projects.
Infrastructure spending projected to rise
100bps to 5.5% of GDP in 2013-18
According to Mexico’s Civil Engineering
Chamber (CMIC for its initials in Spanish),
Mexico has invested an average of 4.5% of
GDP in infrastructure over the past six years,
up 62.2% from 2000.
As we mentioned in Chapter 1 of this report, “The
country,” Mexico ranked 58th in competitiveness
in 2011, according to the World Bank’s Global
85
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Mexico Handbook
October 2012
CMIC expects infrastructure spending as percentage
of Mexico’s GDP to increase by a cumulative100bps
to 5.5% of Mexico’s GDP from 2013-18. That
would put this spending at its highest level in the
country’s history. In the past decade, Mexico has
made important infrastructure investments,
prioritizing ground transportation, followed by
healthcare and water segments via concessions.
Mexico’s existing infrastructure: Primary roads a priority
2008 2009 2010 2011
Modernized roads (km)
Paved highways (% of total)
Railroad network (000 km)
New airport developments
Total airport terminal PAX (m)
Available rooms in tourist centers (000)
New port developments
Potable water national coverage (%)
Wastewater collection and treatment (%)
450
36.3
26.7
1
56.2
333
0
90.3
40.2
696
37.1
26.7
0
48.8
340
0
90.7
42.1
1,110
37.2
26.7
0
50.4
351
0
91.3
44.8
1,296
38.1
26.7
0
52.4
355
0
91.7
49.5
Source: Federal government, 2008-2011
Main challenges: Deregulation
and increased recoverable
and unrecoverable funds
For projects for which potential return are in
doubt, development banks can step in and provide
recoverable or unrecoverable funds to make them
economically feasible. Partial guarantees are
another means of attracting private investment in
infrastructure. In Mexico, the Fonadin is in charge
of providing such funds, but the future of such
programs is in doubt. With every change in
Mexico’s government administration, the Fonadin
budget has been cut. Another challenge to
boosting infrastructure investment in Mexico is
86
Financial stability
Since 2000, sound macroeconomic stability has led
to a major development in local long-term debt
markets. As a result, the tenor of the yield curve in
Mexico has been increasing, while assets under
management (AUM) by Afores pension funds grew
to 12.2% of GDP as at July 2012, up from 1% in
2000. This stable environment has made it possible
to fund projects using long-term capital and moresophisticated mechanisms. Lower inflation led to
lower rates and yield curve formation.
Mexico: Yield curve (end of year %)
9
8
7
6
5
4
3
2009
Source: Banxico as of May 2012
2010
2011
2012*
30-years
Source: CMIC, INEGI
20-years
1318e
7-years
2010
10-years
2008
5-years
2006
3-years
2004
2-years
2002
1-year
2000
6-month
3.4%
3-month
4.5%
the need for deregulation. Now, private investors
cannot invest in sectors that the government
deems to be strategic, the most important of which
is energy. Moreover, the government depends on
Petróleos Mexicanos (Pemex), the state-owned
petroleum company, as a major source of
revenues; in 2011, the company funded about
35% of government receipts (see Chapter 22 on
the energy sector in this report). Although
Pemex’s capex has grown steadily since 2000, it
lacks the ability to allocate any more capex to
exploration and production (E&P), and oil
production is well below its peak of 3.4mdb in
2004. The problem for Mexico is that private
investors are not permitted to step in and close the
gap. One of the goals of the next administration,
which takes office in December 2012, is to allow
for more private investment in the energy sector.
1-month
5.5%
1-day
Potential increase of infrastructure investment to 5.5% of GDP
abc
Mexico Handbook
October 2012
Current infrastructure financing in Mexico
Recent project finance experience in Mexico
Development of the National Infrastructure Plan
for 2007-2012 required total investment of
USD234bn. According to the Mexican treasury
(SHCP), 50% of the total investments were
already under way as of end-2011. About 18% of
this investment consisted of private funding
through the capital markets (3ppt), bank loans
(10ppt) and sponsors (5ppt). The remaining 82%
came from public funds, 76ppt from the federal
expenditures budget, 4ppt from Fonadin, and 2ppt
from Banobras, the State Development Bank.
The country’s past experience of project finance
was not successful. A good example of this is the
first highway concession program in the 1990s,
when the government authorized using these
assets for a given period of time in exchange for
their construction and maintenance. The 1995
“Tequila” currency crisis led to a deep decline in
toll collections, which prevented companies from
being able to settle their liabilities, and concession
extensions were insufficient to allow companies
to make returns on their investments. As a result,
the government had to carry out a bank rescue and
recover the concessions. The main flaws in this
privatization were the poor quality of feasibility
studies, the concessions were awarded on the
basis of the highest potential profit, the short
terms of the concession periods, and increasing
cost overruns in the construction phase.
Pension fund system adds depth and liquidity
to markets: 12.2% of GDP or 21% of domestic
savings
From 2008, the National Commission for the
Pension System (Consar) approved participation
by Mexican Siefores pension funds in securities
financing infrastructure projects.
Public and private investments in infrastructure: Still not enough
(MXNm)
2011
2009
2007
0
20,000
40,000
60,000
Priv ate
80,000
100,000 120,000
Public
Source: World Economic Forum, FOA
As of 2011, of the total investment outstanding,
pension funds financed USD12bn, or 21%,
through corporate bonds and structured securities.
Among those issuances of structured securities
that benefited from the growing presence of local
pension funds, we highlight investment trusts
known in Mexico as CKDs, a sub-asset class of
securities that fund infrastructure in Mexico.
Local pension funds have bought 90% of the
cUSD3bn in total issuances of CKDs.
To reduce risk perceptions related to lending and
investing, and to increase predictability of the
investment environment, the government
developed a legal and institutional framework that
included the Bankruptcy Law (a Mexican version
of Chapter 11 of the US Bankruptcy Code), a
system for asset collateralization and
securitization, and rules for disclosure. New
regulations were issued, stipulating that specialpurpose entities for issuance of asset-backed
securities should be set up in the form of limitedpurpose trusts, and the new PPP Act was recently
passed.
Financial programs for public-private
association:
 Concessions, dating back to the 1990s: Private
companies pay the government for the right to
use, conserve, and maintain an asset for periods
of time that vary according to the sector. These
apply to airports, telecommunications, toll
roads, water treatment plants, healthcare
facilities, and railroads.
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 Pidiregas, 1995, infrastructure projects with
deferred expense recognition: These are
contingency liabilities for the federal
government that are not registered on the
balance sheet, as a liability until a project is
completed and delivered. This is used for
financed public works (OPF), primarily for
long-term energy infrastructure projects, such
as the El Cajon and La Yesca hydroelectric
power plants.
 Public-private partnerships (PPPs): These
long-term service contracts allocate risk
between private and public participants. The
government pays the concessionaire though a
tariff for providing specified services.
Examples of PPPs include the QueretaroIrapuato highway, Bajío Hospital, and Water
Aqueduct II. Penitentiaries were recently
added via long-term service contracts.
 Long-term financing structures of states and
municipalities. This is a long-term pesodenominated loan for up to 17 years that has
bank support and covers the total cost of a
project during the construction and
amortization period. This is supported by the
federal government through Banobras, which
provides a contingency line of credit and a
maintained line of credit covering debt
service of 6-9 months.
88
Regulatory framework
Mexico: Some changes to the legal framework
Year
Fund
2005
Finfra
2008
2008
2011
Description
Federal government trust that
provides financial assistance for
investment projects in the highway,
railroad, water, sewage, and waste
segments. It is authorized for
recoverable and unrecoverable
assistance.
Fonadin
National Infrastructure Fund that
provides recoverable and
unrecoverable assistance to improve
profitability of projects. However, its
assets have declined substantially
since 2006.
Pemex
Reforms related to Pemex’s budget,
administration, and procurement.
New form of contracts to provide
incentives through productive
sustainable activities.
Public-private Established rights and obligations of a
partnerships contracting public entity and
(PPP) law
developers that provide this type of
services; grants permits and
concessions for use of public domain
assets. The regulatory framework was
critical, as private investors needed
low financing costs and predictable
ROI over the life of a contract.
Source: HSBC, Pemex, Fonadin, SHCP
Mexico infrastructure: Key players
Mexico Handbook
October 2012
Infrastructure operators
Tollroads
OHL Mexico*
Pinfra*
IDEAL*
Empresas ICA*
FCC
Isolux Corsán
Globalvia
Coconal
Airports
Grupo Aeroportuario del Centro-Norte (OMA)*
Grupo Aeroportuario del Pacifico (GAP)*
Grupo Aeroportuario del Sureste (ASUR)*
OHL Mexico*
Railroads
Ferromex (Grupo Mexico*)
Kansas City Souther Mexico
Ferrosur (Grupo Mexico*)
Logistic Terminals
IDEAL*
Pinfra*
Empresas ICA*
APM
Water
Empresas ICA*
IDEAL*
FCC*
Prisons
Empresas ICA*
Homex*
Construction & Engineering
Empresas ICA
Carso Infraestructura y Construccion (CICSA)
Grupo Mexico
Dragados
Odebrecth
Andrade Gutierrez
La Peninsular
Tradeco
Avzí- Cointer
Mitsubishi
Abengoa
Samsung Engineering
Technip
FCC
*Publicly traded companies in Mexico.
Source: HSBC
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Engineering, Procurement
& Construction
Operation,
Maintenance & Conservation
Supervision
Concessionaire
Financial
partners
Capital
Constructor
Financial sponsors
Operating
partners
Banks
Non recoverable investment
Collection rights
Principal &interests
Special Purpose Vehicle: SPV
Credit
Trust
Return
90
Mexico: Financing structures for concessions and PPP projects
FONADIN
Financial sponsors
Source: HSBC
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Mexican infrastructure to be boosted by 2030e: Logistics and tourism get the main focus
Mexico Handbook
October 2012
Deep water
Coast corridor
Cross corridors

International logistic corridor
Industrial developments

Tourism developments
Mayan
Coast
Hydro agricultural developments
Brin las Huastecas

Brin Grijalva Usumacinta
New Airports
Source: CMIC
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Mexico: Major infrastructure works for transportation, tourism, water, and energy, 2006-2012
Presidente Juárez
(in service)
Coahuila WWTP
San Luis Río Colorado
Agua Prieta II
(under construction)
Ensenada
Puerto Peñasco
Punta Colonet
Mexico Handbook
October 2012
Monte Los Olivos
Nuevo Casas
Grandes
Norte II. Chihuahua
(in tender)
El Molinito Aqueduct
(in service)
Monterrey
Huatabampo
Guaymas
Matamoros-Brownsville International
Bridge and Rail Bypass
Cd. Cuauhtémoc
Picachos
(in service)
Norte La Trinidad
(in service)
Loreto
Ramos Arizpe
Culiacán
Mazatlán
Costa
del Pacifico
Cabo San Lucas
El Cajón (in service)
Realito
(construction)
Aqueduct
Saltillo
Durango
El Orito
Salamanca Phase I (under construction)
Tabasco comprehensive
Water Resources Plan
Veracruz
Campeche
Riviera Maya
Coatzacoalcos
Morelia
Manzanillo
Valley of Mexico Water Sustainability Plan
(includes Oriente I Transmission Tunner,
under construction and the Atotonilco
WWTP under construction)
Lázaro
Cárdenas
Izúcar de
Matamoros
Othón
P .Blanco
Oaxaca
Palenque
Chiapa de Corzo
Salina Cruz
Huatulco
Comprehensive Cleanup
of Acapulco Bay (in service) La Venta II (in service)
Zumpango del Río
La Venta III (under construction)
Oaxaca I, II, III y IV (under construction)
Tapachula
(in service)
Coal-fired Power Plant
Airports in service
Rail Bypass
Combined Cycle Power Plant
Airports that have been
or are being expanded
Tabasco Comprehensive
Water Resources Plan
Wind Power Plant
Airports in planning phase
Comprehensive Cleanup
Storage & Regasification
Terminal
Port modernization
Wastewater Treatment
Plant (WWTP) in Service
Manzanillo-Guadalajara
Gas Pipeline
Multimodal project
Comprehensively Planned
Development
(in development phase)
Suburban Train
System 1 (In service)
System 2 and 3
(Planning phase)
Storage Reservoir
Hydroelectric Plant
Water Pipeline
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92
Mérida
Aqueduct II (in service)
Zapotillo
Puerto Vallarta
Cleanup of Guadalajara
Comprehensive Manzanillo
Project (under construction)
El Pacifico coal-fired
Power Plant (in service)
Cancún
Tamazunchale (in service)
Jalpa, Zacatecas
La Yesca (under construction)
Source: Federal government
Playa del
Carmen
Altamira
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October 2012
Chapter 16: Airport
operators
 Domestic fleet expansion and better prospects for Mexican
consumers underpin solid growth in passenger traffic (PAX)
 Limited capacity of the Mexico City Airport and PAX growth are
paving the way for hub creation
 Mexico has had positive experiences in offering airport
concessions to the private sector, dating back to 1998

Mexican airport operators
Mexico’s experience with airport concessions has
been positive, enabling upgrades of infrastructure
and bringing valuable know-how from reputable
global players. The market is divided among three
privately run networks of airports that jointly
handle 49% of passenger traffic (PAX), and a
network of government-run airports.
The Mexico City Airport accounts for about half
of all PAX. In 2009, PAX fell 14% in to the
aftermath of the global financial crisis and the
outbreak of swine flu, but this has recovered
steadily since 2010. Domestic carriers have
announced major fleet expansions, but this has not
been enough to outweigh the loss of one of
Mexico’s largest carriers, Mexicana, which
suspended operations in August 2010. With the
planned fleet expansions, we forecast that
increased flight frequencies and additional routes
will reduce airfares and fuel PAX growth. With
PAX growth of 14% YTD at Mexico City Airport,
the creation of new hub airports is a possibility.
Mexican airports: The structure
The federal government controls and operates the
airport network through Aeropuertos y Servicios
Auxiliares (ASA), which manages 42 of the
country’s 76 airports; of these, 64 are classified as
international, and the rest provide domestic services.
The three main private airport concessionaires
operate half of the international airports; two of
them, Grupo Aeroportuario del Sureste (ASUR) and
Grupo Aeroportuario del Pacífico (GAP), have been
operating concessions since the late 1990s, and they
were joined by Grupo Aeroportuario del Centro
Norte (OMA) in 2000.
In Mexico, all cities with more than 500,000
residents have an airport. This is one of the reasons
why the country has a total of 1,385 airfields.
The top 10 major airports account for more than
85% of PAX and aircraft operations, handling
more than 76m passengers per year.
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Mexico, exceeding the Mexico City Airport’s
international passenger traffic by 5%.
Mexico City Airport ranks No. 50 worldwide by PAX traffic
12
13
16
21
27
27
28
31
34
Santiago, Chile
Bogota, Colombia
Mex ico City, México
Los Ángeles, USA
Total Mexican PAX has increased at an average
annual rate of 4.8% since 2002. Nonetheless, total
passenger numbers are still below the pre-global
financial crisis levels of 2008.
63
70
Atlanta, USA
0
20
40
60
79
80
Mexico: Domestic airlines’ market shares
94
100
Source: Airports Council International, World Wide Airport Traffic Statistics
50%
2009
20%
10%
0%
Aeromex ico
Cancun Airport handles 9.3m international
passengers per year. This is the largest number in
Top 10 Mexican airports ranked by passengers (millons)
1
2
3
4
5
6
7
8
9
10
Mexico City
Cancun
Guadalajara
Monterrey
Tijuana
Los Cabos
Puerta Vallarta
Toluca
Merica
Hermosillo
2011
30%
The Mexico City Airport handles the most
domestic passengers in the country: 17.5m in
2011. This is more than GAP’S total of 13.1m,
OMA’S 10m, and ASUR’S 7.5m.
Airport
2010
40%
Viv aAerobus
Mex icana
Source: DGAC
Major restrictions on expansion and lack of
2010
2011
Operator
24
12
7
5
4
3
3
2
1
1
26
13
7
6
4
3
3
2
1
1
AICM
ASUR
GAP
OMA
GAP
GAP
GAP
OHL
ASUR
OMA
Source: DGAC, HSBC
capacity: Opportunity for creating alternative
hubs
The Mexico City Airport is the main hub for
Aeroméxico and was the major hub for Mexicana.
Since Mexicana discontinued operations in 2010,
Interjet and Volaris shifted the majority of their
operations for Toluca’s flights to Mexico City. As
a result, this took a toll on Toluca, the nearest
Mexican airports: Major domestic and international routes
__________________________ Domestic routes ___________________________
2010 2011
From
To % of PAX
% accum
1
2
3
6
4
5
7
8
13
12
19
11
10
23
18
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Mexico City
Monterrey
Mexico City
Mexico City
Tijuana
Tijuana
Tuxtla Gutierrez
Villahermosa
Mexico City
Veracruz
Mexico City
Monterrey
Monterrey
Mexico City
Tampico
Source: DGAC as of December 2011
94
Cancun
Mexico City
Guadalajara
Merida
Mexico City
Guadalajara
Mexico City
Mexico City
Hermosillo
Mexico City
Chihuahua
Cancun
Guadalajara
Culiacan
Mexico City
8.1%
7.5%
6.6%
3.1%
3.7%
3.4%
2.4%
2.1%
1.8%
1.8%
1.3%
1.8%
1.9%
1.2%
1.4%
8.1%
15.6%
22.2%
32.3%
25.9%
29.3%
34.8%
36.9%
46.1%
44.4%
54.6%
42.6%
40.8%
59.6%
53.3%
_________________________International routes__________________________
2010
2011
From
To
% of PAX % accum
2
1
4
7
9
3
6
11
8
5
10
14
16
18
12
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Mexico City
Los Angeles
Mexico City
Miami
Cancun
Houston
New York
Miami
Dallas
New York
Mexico City
Paris
Toronto
Mexico City
Cabos
Los Angeles
Guadalajara
Houston
Mexico City
Atlanta
Cancun
Mexico City
Cancun
Cancun
Cancun
Madrid
Mexico City
Cancun
Chicago
Los Angeles
2.7%
3.0%
2.6%
2.3%
2.2%
2.7%
2.4%
1.9%
2.2%
2.5%
2.1%
1.6%
1.4%
1.3%
1.7%
5.8%
3.0%
11.0%
18.2%
22.5%
8.4%
15.9%
26.4%
20.4%
13.5%
24.6%
31.4%
34.4%
37.0%
28.1%
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alternative airport. In 2008, this airport reached its
highest level with 4m PAX/year, which,
compared with its LTM PAX/year, is 75% lower
than pre-crisis levels, despite aggressive
commercial strategies to attract and retain
domestic carriers. (For more information, see our
10 April 2012 report, Mexican Airport Operators:
The sweet sound of leveraged growth.)
As at end-2011, the latest date for which information
is available, 15 routes accounted for about 50% of
the country’s domestic passenger traffic.
Mexico City Airport: LTM passenger traffic reached as much
as 90% of its maximum capacity (millions)
30
29
28
27
26
25
24
23
22
21
29
26
24
25
26
26
24
24
2005 2006 2007 2008 2009 2010 2011 LTM
12
Source: AICM
International routes are more diversified. The top
15 accounted for only about 30% of international
PAX. Routes to and from the US accounted for
71% of international passengers, followed by
Europe at 9%, Canada at 8%, South and Central
America at 5% each, and Asia at 1%. The Mexico
City Airport is the only one in Latin American
that offers nonstop flights to Tokyo and Shanghai.
The Mexico City Airport cannot expand, as it is
situated in a densely populated area. The addition of
Terminal 2 allowed the airport’s authorities to
expand terminal capacity. However, use of the
airport’s two runways is at maximum capacity, and
there is no capability for simultaneous takeoffs and
landings. According to ASA, the Mexico City
Airport could reach PAX overcapacity by 2016,
with 32m passengers annually. This is one of the
reasons for the possibility of building a new
airport, providing in its first phase expected capacity
of 50m passengers.
New airline hubs are therefore important to
Mexico. Toluca offers an alternative for Mexico
City’s metropolitan area, as it is located only
40km from the Santa Fe financial district;
however, total PAX at this has fallen by half since
2008, after low-cost carriers moved their
operations to Mexico City in the wake of
Mexicana’s collapse. The domestic carrier Volaris
has a major presence at the Guadalajara airport in
western Mexico. In northern Mexico, another hub
could be created at the Monterrey airport, where
utilization rates of installed capacity are still low.
Domestic carriers unlikely to cause PAX
disruption
Airlines no longer wage fare wars in Mexico.
Many carriers have left the market, eliminating
oversupply, and the financial results of the
remaining players have rebounded. This lessens
material risks to PAX growth for the foreseeable
future. Airlines’ reports of sound load factors (the
percentage of available seats occupied), despite
strong growth in capacity by the remaining
carriers, bode well for PAX growth. The major
domestic carriers have announced major fleet
expansions, but according to the airlines’ reports
to regulators and public announcements, the
supply of seats for 2012 and 2013 could be down
15% and 9%, respectively, from 2009 levels
because of the time required for deliveries of
ordered planes.
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We that Mexicana and Aviacsa, which suspended
operations in August 2010 and July 2009,
respectively, will not return to the market. In
2009, these two companies accounted for 13,214
and 3,174 passenger seats, or 39% and 9% of total
capacity, respectively.
Three publicly traded airport companies
ASUR
Since 1998, Grupo Aeroportuario del Sureste (ASUR)
has owned a 50-year renewable concession to operate,
maintain, and develop nine airports in southeastern
Mexico. The concession includes the operation of
Cancun International Airport, Mexico’s No. 1 tourist
destination, and the second-busiest airport in Mexico in
terms of passenger traffic. In 2011, the group’s airports
handled 17.5m PAX. ASUR trades on the NYSE and on
the Mexican Stock Exchange, where it is part of the
MEXBOL Index. Also, in July 2012, the Aerostar Airport
Holdings consortium (a partnership between ASUR and
Highstar Capital IV, LP/50-50% share) and the Puerto
Rico Ports Authority, the sponsor, announced that the
consortium would operate, manage, maintain, and
rehabilitate Puerto Rico’s Luis Muñoz Marín International
Airport (SJU) through a 40-year lease agreement. The
airport handled 4m passengers in 2011.
GAP
Grupo Aeroportuario del Pacífico (GAP) has a 50year renewable concession to operate 12 airports in
northwestern Mexico. GAP operates airports in two large
metropolitan cities, Guadalajara and Tijuana; four tourist
destinations, Puerto Vallarta, Los Cabos, La Paz, and
Manzanillo; and six midsize cities, Hermosillo, Bajío
region, Morelia, Mexicalí, Aguascalientes, and Los
Mochis. Six of GAP’s airports are among the 10 busiest
airports in Mexico in terms of passenger traffic,
Guadalajara being the third largest and Tijuana the fifth
largest. In 2011, GAP handled 20.2m passengers. Since
2010, the company has been involved in legal action
against Grupo Mexico after it made a hostile takeover
bid for 30% of GAP’s shares outstanding.
Grupo Aeroportuario del Centro Norte (OMA) has a
50-year renewable concession from the Mexican
government to operate 13 airports. This concession
began in 2000. The airports are located in the central
and northern regions of Mexico. OMA’s airports fall into
the following categories: those serving large
metropolitan cities (Monterrey); three tourist destinations
on the Pacific Coast: Acapulco, Mazatlán, and
Zihuatanejo; seven midsize cities in northern Mexico:
Chihuahua, Culiacán, Durango, San Luis Potosí,
Tampico, Torreón, and Zacatecas; and two cities on the
border with the US, Ciudad Juárez and Reynosa. The
company also operates a hotel and commercial area
inside Terminal 2 of the Mexico City Airport. In full-year
2011, OMA handled 11.8m passengers. Empresas ICA,
a construction and engineering company, holds about
40% of the company’s shares.
Mexican airlines: Available passenger seats at year-end
2009a
Aeroméxico
Interjet
Volaris
VivaAerobus
Aviacsa
Aeromar
Magnicharters
Mexicana
Total
2010a
2011a
2012e
2013e 2014e
9,468 9,873 11,488 11,822 12,212 12,871
2,250 3,300 4,950 5,772 6,816 7,395
2,970 3,774 5,166 5,688 5,986 6,048
1,036 1,628 2,516 3,108 3,552 3,552
3,174
0
0
0
0
0
712
664
764
764
764 764
823 1,414 1,414 1,414 1,414 1,414
13,214
0
0
0
0
0
33,647 20,653 26,298 28,568 30,744 32,044
Source: HSBC estimates
We also believe that fleet expansions by domestic
carriers could boost PAX growth, enabling this to
outpace domestic GDP.
This would be good news for Mexican airport
operators, because higher GDP would be positive
for PAX growth prospects. Now that domestic
airlines are increasing their fleets, thereby
stabilizing industry supply, we expect a stronger
relationship between GDP and PAX, with the
latter exceeding 1.2x GDP growth for 2012.
OMA
Sound pricing and manageable committed
capex
Airport operators have two major sources of
revenues, one related to mostly regulated
aeronautical revenues and the other to nonaeronautical businesses.
The maximum tariffs for aeronautical revenues are
set by Mexican authorities in tandem with each
airport operator. These tariffs can be renegotiated
every five years under the “Master Development
Plan,” which, among other things, sets a framework
for maximum pricing and capex investments.
Real estate-oriented investments are another way
of diversifying and leveraging the business.
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Source: HSBC
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Chapter 17: The real
estate industry
 Real estate fundamentals remain sound
 Growth underpinned by solid institutions
 Market consolidation for homebuilders should continue due to
structural changes

Strong fundamentals, despite
lackluster recent performance
An absence of price bubbles, combined with
sound annual gains in home values, is good news
for homeowners and mortgage originators in
Mexico. The annual average rise of 6.2% in home
sale prices has been 180bps above inflation in
each of the past six years. Residential housing
demand is supported a strong banking system and
institutions, as well as sound demographics: The
number of new homes that Sociedad Hipotecaria
Mexico’s population, 2010 census: 63% are ages 25-40, the
group most likely to buy a house
Federal (SHF) projects will be needed by 2040
represents half of Mexico’s current housing stock.
However, mediocre GDP growth has limited
mortgage eligibility, and recent changes in
regulations related to low-income housing have
hurt project eligibility.
Sound demographics
According to Sociedad Hipotecaria Federal, a
government-related entity that provides mortgage
insurance, funding, and guarantees for financial
institutions that originate mortgage and construction
Mexico’s population in 2040e: To 128m from 112m in 2010;
the major boost in housing demand should fade by then
85+ yr
85+ yr
70-74
70-74
55-59
55-59
40-44
40-44
25-29
25-29
10-14
10-14
M en
Source: Conapo
Men
Women
Women
Source: Conapo
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loans, the number of homes that needs to be built
over the next three decades is equivalent to half of
the current housing stock of 29m. Demographics is
one of the major drivers of demand.
Mexico: Housing starts, still below pre-financial crisis levels
700,000
629,993
600,000
493,627
444, 190
500,000
412,313
400,000
Results from Mexico’s 2010 census show that the
birth rate is higher than had been expected, and
that fewer Mexicans are crossing the US border
than before. The SHF estimates annual household
formation for 2012 at more than 600,000.
300,000
164, 330
200,000
100,000
0
2008
2009
2010
2011
2012*
Housing starts
According to SHF estimates, population growth
will not stabilize until 2040, when it forecasts that
the population density per square km will have
increased to 76 from 57 inhabitants.
The dependency ratio – the proportion of children
and elderly people relative to the labor force –
should reach a trough in 2030. According to the
SHF, this also implies a boost in housing demand.
The National Institute of Statistics and Geography
(INEGI) reported that the average household
members fell from 5.0 in 2000 to 3.9 in 2010, and
that single-person homes should be one of the
largest demand drivers in the future.
* As at June 2012.
Source: Convai, Infonavit, RUV
minimum wages. The minimum wage in Mexico
stands at cMXN5,536 (cUSD142) per month, and
as a result, potential homebuyers with such pay
would need a subsidy to buy a house; otherwise,
they would be unable to afford one.
Mexico: Total income per household based on deciles
(left axis USD, right axis %)
3,000
2,613
1,000
622 798
333 409 502
103 194 265
According to the National Survey of Household
Income and Expenditures (ENIGH), about 1.3m
households fell into the two highest-income
deciles in 2010. The monthly income in this group
was approximately USD2,000, enough to cover a
housing unit valued at USD100,000. However,
89% of all households earned less than 3
98
20.00
10.00
-
Housing deficit in Mexico
The number of wage earners is 2.3 per household,
a figure that has increased steadily at an annual
average rate of 6.3% since 2004.
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I
The SHF estimated Mexico’s housing deficit, a
measure of potential demand, in 2011 was 9m,
equivalent to 31% of the total housing stock of 29m.
It expects total residential demand to have a CAGR
of 4.6% by 2030, equivalent to 14.2m homes.
40.00
30.00
2,000
II
III
IV
V
Income per capita
VI
VII
VIII
IX
X
As % receipt
Source: INEGI
According to Mexico’s National Population Council
(Conapo), unoccupied dwellings have accounted for
about 14% of housing stock since 2005. These
properties largely belong to high-wage-level
borrowers and are in locations with insufficient
infrastructure services. This is one of the reasons
behind regulators’ plans to change zoning, density,
infrastructure, and donation rules for any given piece
of land in a residential project in Mexico.
Currently, residential demand is highest in eight
states: Mexico State, Veracruz, Mexico City,
Chiapas, Baja California, Chihuahua, Oaxaca,
and Jalisco.
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Mexico: Housing demand for 2012
Mortgages: Declining interest rates, improving terms
In transition
16%
13.0
18
12.5
18
17
12.0
17
16
11.5
Urban
11.0
52%
10.5
16
15
10.0
15
Rural
32%
D-09 M-10 O-10 M-11 A-11
Rate (% -LHS)
Source: SHF
Improved affordability and
mortgage supply from banks
The terms of fixed-rate mortgages offered by
commercial banks in Mexico range from seven to
30 years, according to the Mexican Bank
Association (AMB).
Mortgage interest rates at commercial banks
closed 2011 at 11.5%, and the average term was
17.8 years. Mortgage and unemployment
insurance is available to borrowers. The SHF
estimates that the balance of mortgages
outstanding should account for 11% of Mexico’s
GDP by 2040, up from current levels of 9%.
J-12
J-12
Term (y ears -RHS)
Source: CNBV
Mexico: Mortgage market shares
Fovissste
9%
Others
1%
Banjercito
1%
Financial
institutions
16%
Infonavit
73%
Source: Conavi
No bubbles in Mexico, but equity
formation remains sound
As at June 2012, commercial banks’ mortgage
portfolio in Mexico stood at USD32bn and
accounted for 18% of the Mexican banking
industry’s total loan portfolio.
According to an index developed by the SHF, the
value of homes in Mexico implies that house
prices have grown at average yearly rates of 6.2%
over the past six years, outpacing Mexico’s
inflation rate of 4.4%.
Affordability has improved since 2000: Mortgage
payments have fallen to MXN10 from MXN22
for every MXN1,000 lent; minimum down
payments range from 10% to 20%.
Growth in home values of 180bps above yearly
inflation is good news: Mortgage lenders benefit
from improved collateral, and homeowners
benefit from equity gains.
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No bubbles in Mexico in contrast to the experience in the US
(Home Price Index, 2008=100)
Solid institutions underpin
sound fundamentals
150
Setting aside what looks like a resilient economy,
institutions and sound housing policies are also
supporting growth prospects in Mexico.
130
110
Instituto del Fondo Nacional de la Vivienda
90
para los Trabajadores (Infonavit)
70
M-05 J-06 N-06 S-07 J-08 M-09 M-10 J-11 N-11
Case-Shiller
SHF
Source: S&P/Case-Shiller index, Sociedad Hipotecaria Federal (SHF)
In contrast to the S&P/Case-Shiller home price index
in the US, we see no generalized evidence of price
bubble formation in Mexico. Moreover, the types of
projects required by the regulatory and market
environment imply a continuation of that trend.
Positive long-term trend in average prices per
square meter, despite a weaker peso
From 1994-2010, home values in Mexico
increased 10.5% per square meter per year in local
currency terms. Adjusted for exchange rate shifts,
average yearly appreciation was lower but still
positive at 4.6%. However, using more-recent
figures tells a different story: From 2005-10,
home values rose at an average rate of 6.6%, and
values at the lower end of the market grew 5.9%.
After adjusting for a weaker peso, the result was
slightly positive at 1.9%.
Housing: Average unit price per m2 (USD)
 It is not reliant on external financing to meet
its mortgage origination goals, though the
potential to improve growth prospects using
the market is there.
Sociedad Hipotecaria Federal (SHF)
The organization’s primary role is to support the
Mexican housing industry by developing financial
solutions aimed at improving mortgage
origination, funding construction loans, and more
recently, developing a holistic approach to
housing policy that encourages sustainability in
Mexico. The SHF focuses on the low- and
middle-income market segments, and particularly
Housing: Average unit size (square meters)
300
250
200
150
100
Source: Softec
AEL
Residential plus market
Middle market
Second home markets
Affordable-Entry Level
Residential
Source: Softec
Low Middle-Income
Residential plus
Middle Income
Second home
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
1994
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
50
AEL (low-end)
Residential market
100
 It has internal capacity to fund more than
500,000 mortgages.
350
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
This institution accounts for roughly 60% of
yearly mortgage originations. It targets potential
homebuyers who are employed in the private
sector, have social security rights, and make
contributions to the fund. We view Infonavit as a
pillar of the Mexican housing industry because:
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those segments unattended by the market or other
entities such as Infonavit or Fovissste. The SHF’s
regulatory role was critical when nonbank
financial institutions faced a liquidity crunch
during the global financial crisis. At that time, the
SHF provided guarantees, funding, and liquidity,
but did not bail out companies.
Cash-out alternatives have failed to
pick up, hurting growth prospects
Most residential mortgage-backed securities
(RMBS) issuance in Mexico comes from
Infonavit and, to a much lesser extent, Fovissste.
RMBS issuance in Mexico: Appears unlikely to improve
40,000
Fondo de la Vivienda del Instituto de
35,000
Seguridad y Servicios Sociales de los
30,000
Trabajadores del Estado (Fovissste)
25,000
This entity has the capacity to originate 100,000
mortgages per year, and it exclusively targets
potential homebuyers who work for the federal
government in Mexico.
20,000
15,000
10,000
5,000
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*
Comision Nacional de la Vivienda (Conavi)
This entity does not originate loans but plays two
major roles: allocation of federal subsidies in
home purchases to eligible home buyers, and
coordination of policies in the housing industry.
Perhaps the main area in which Conavi has made
a difference is in creating a set of incentives and
standards for policies aimed at achieving
sustainability in Mexico. It also has been a major
player in attempts to align states and
municipalities with Mexico’s national
sustainability efforts in housing.
Breakdown of Infonavit’s loan originations per type,
budgeted for 2012
Issuance (in MXNm) of RMBS in Mexico
*As at June 2012.
Source: Conavi
Participation by nonbank financial institutions has
disappeared, as, indeed, have the vast majority of
these entities (see our 14 June 2012 report,
Mexican Homebuilders: Hunting for value though
a scorecard.)
Commercial banks also have reduced their
presence in the RMBS market.
Breakdown of Infonavit’s long-term loan origination (’000s)
Home
800
improvement
600
10%
11x min >
4x min <
wage
12%
to 11 x 4
min wage
28%
Source: Infonavit
400
wage
200
50%
0
2012
2014
< 4x min wage
> 11x min w age
2016
2018
2020
4 to 11x min w age
Home improv ement
Source: Infonavit
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As commercial banks did not experience any
reduction in mortgage origination during the
financial crisis or its aftermath, we should not see
any sharp growth unless GDP and consumer
confidence rise sharply.
Housing supply
The Mexican housing market is highly
fragmented, as nonhousing developers have a
market share of more than 15%. However, the
financial crisis in 2009 and introduction of new
regulations have led to a consolidation process so
that the 10 most important developers now
account for more than 50% of the market for new
homes by volume.
Mexico: Numbers of housing developers
1,762
2,000
1,417
1,364
1,500
1,049
1,156
1,159
1,304
934
1,000
500
0
2004
Source: HSBC
102
2005
2006
2007
2008
2009
2010
2011
Six homebuilders are publicly traded on the
Mexican Stock Exchange and jointly form the
Habita Index.
Mexican public companies, 2011
Ticker:
ARA GEOB HOMEX
Total units titled
15,142 57,865
Total housing revenue
(MXNm)
6,655 20,844
Lower and affordable
level (%)
49%
64%
Middle and higher level
(%)
50%
36%
Mortgage originators
(% of units)
Infornavit
68%
78%
Fovissste
23%
13%
Sofols and banks
9%
9%
Cash, cofinancing
Source: Company data
SARE URBI
52,486
2,030 34,515
20,525
1,272 13,177
84%
39%
90%
16%
61%
10%
50%
21%
29%
39%
NA
NA
NA
NA
21%
40%
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Chapter 18: The retail
industry
 This is one of the largest strategic industries in the Mexican
economy
 Mexico remains an attractive destination for retailers, given its
growing middle class and improving economic indicators
 Retailers are planning important investment projects, which
should support sustained industry expansion

An expanding consumer base
Mexico’s retail industry remains attractive owing
to growth in the country’s middle class. This
supports our estimate that retail sales will expand
12% by 2014. Domestic demand has provided a
strong impetus, reaching its highest level since
2008, driven by purchasing power that reached
record levels this year, after recovering from the
effects of the 2008-09 global financial crisis.
Given the presence of dominant players, the food
retailing market in Mexico is relatively saturated,
so industry growth has shifted toward speciality
retailing, with US and European retailers entering
through joint ventures and franchises.
Retailing in Mexico is supported by structural
growth, favorable macroeconomic conditions –
including higher wages, falling unemployment,
the increased inclusion of women in the
workforce, and positive consumer sentiment – and
easier availability of consumer credit.
Mexico: Consumer credit
Mexico: Retail sales
128
600,000
126
550,000
124
500,000
(MXNm)
(index)
122
120
118
116
450,000
400,000
350,000
114
300,000
112
2006
110
20 06
2007
2008
SA
20 09
2010
2 011
Trend
2012
2007
2008
2009
Consumer credit
2010
2011
2012
3 per. media moving
Source: INEGI
Source: INEGI
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Improved access to credit has been an important
driver of consumption. In Mexico, consumer
credit grew 24% y-o-y in 2011.
Retailers in the informal economy, ie those that do
not pay taxes or have social security for their
employees, are the biggest competitor for
companies in the industry. According to INEGI,
29% of the total economically active population
operates in the informal segment, and, according
to the retailers’ association ANTAD, the informal
economy represents about 12% of Mexico’s GDP.
Industry overview
The retail industry in Mexico has undergone a
major transformation over the past 20 years,
beginning with the market entry of Wal-Mart
Stores in association with Aurrera (Grupo Cifra)
in 1992, to form Walmart de Mexico (Walmex).
This redefined the local retail industry, leading to
major changes and creating a modern, dynamic,
group. Local retailers have since been forced to
modernize their businesses, adopting the latest
technology and distribution methods. As a result,
the Mexican industry has become more
competitive, offering consumers better quality at
significantly lower prices, with wider distribution
nationwide. In this modern and extremely
competitive arena, local Mexican retailers such as
Soriana and Chedraui are competing effectively
with Walmex and other players in every segment
of the retail market.
The shift to modernization has changed Mexico’s
retail landscape over the past 30 years, and even
more drastically since the 2008 recession.
Between 2009 and 2011, mom-and-pop shops lost
5pptsof their market share, which fell to 32%.
And from 2009 to 2011, 825 new discounters and
more than 3,000 convenience stores opened in
Mexico. According to a survey conducted by
McKinsey & Co, published in August 2012, 15%
of Mexico’s consumers cited lower prices and
greater convenience as the reasons why they
104
changed where they bought their groceries. This
hurts traditional and informal grocers, favoring
more-modern retailers, including supermarkets,
hypermarkets, and price clubs.
The ownership structures of the companies in
Mexico’s retail industry are varied, with a strong
70% representation from family ownership.
Among publicly listed players, Wal-Mart Stores
of the US owns 69% of Walmart de Mexico.
Industry players and new entrants seek to capture
market share by targeting the country’s fastgrowing consumer base.
Retail segments
The retail industry is divided into food, soft-line, and
e-commerce segments. The consumer segment is
divided into food, beverages, and home and personal
care (HPC). The food and beverage segments are
described in other parts of this report.
Core industry driver: Consumer Confidence Index
110
100
90
80
70
J-07
J-08
J-09
SA
J-10
J-11
J-12
Trend
Source: Datastream
Food retailers
Although food retailing is a modern industry, we
believe that about 50% of the retail trade in Mexico
occurs through informal retailers, ensuring a big
growth opportunity for many more years.
Walmart de Mexico has expanded rapidly over the
past 10 years, almost quadrupling the number of
units it operates, from 579 in 2002 to 2,087 in 2011.
Soriana, Chedraui, Comerci, and H-E-B round out
the list of the top five food retailers in Mexico.
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The industry operates varied store formats:
hypermarkets, supermarkets, discounters,
convenience stores, cash and carry, and
department stores.
Retailers’ market shares in Mexico, by company
Other, 14%
Walmex , 47%
Ched rau i,
5%
Ca sa
Ley , 6%
Soriana,
Department stores
Department stores were the first modern retailers to
emerge in Mexico in the 1930s. Liverpool and
Palacio de Hierro were among the first entrants, as
well as a few others that have since disappeared. In
Mexico, each department store company operated
only a single big store for almost 30 years, but the
emergence of the affluent baby boom generation
paved the way for a major expansion of the format.
Liverpool, for example, now operates 93 stores and
has 1.3m sq m of selling area in 53 cities across
Mexico. Other important department store chains in
Mexico are Palacio de Hierro, Sears, Sanborns, and
Saks Fifth Avenue.
18%
Comerc i, 9%
Source: ANTAD, Infobasics SA de CV 2010
Hypermarkets are large stores of more than 8,000
sq m each that focus on volume and compete on
price. They usually sell groceries and general
merchandise, offering as many as 50,000 stockkeeping units (SKUs), a common measure of each
product or item for sale in the retail industry.
Supermarkets are midsize stores of about 2,000
sq m each that also focus on groceries but have a
limited selection of nonfood items, as well. These
stores compete primarily on price and have about
13,000 SKUs in grocery.
Convenience stores offer a variety of food and
nonfood items and are located near their target
customer populations. As the name suggests,
these stores provide convenience of location in
return for higher prices.
Discount stores are no-frills operations with low
prices that target lower-income customers.
Department stores have many different categories
functioning as different business units under one
roof. They have the largest number of SKUs.
e-commerce
E-commerce is growing faster in Latin America
than anywhere else in the world, not only due to
low penetration rates but also to improving
macroeconomic conditions in the region and the
increasing availability of broadband services.
Internet penetration in the region is comparatively
low, at 40%; Brazil is at 39% and Mexico is at
37% – well below the 78% in the US and 61% in
Europe. The industry should continue to see faster
growth as the supporting distribution network
improves. According to Euromonitor, Internet
retailing posted higher growth, 20%, than any
other retail channel in Mexico in 2011.
Key themes and sector drivers
Staples retailers
Consumer confidence
This is measured through regular surveys of
consumers, who report their assessments of the
state of the economy and their own personal
financial situations. The survey acts as an
indicator of the direction of the economy and of
consumers’ propensity to spend on products.
When consumer confidence grows, consumers
trade up, as has been the case in recent years.
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Selling-space growth
Same-store sales growth
Staples retailers experienced almost 10% growth
in 2011, which should allow them to increase
economies of scale and thereby expand their
margins. As penetration rates improve, retailers in
Latin America are moving to small-store formats.
However, we expect them to continue to build
large-format stores, as this is the most effective
way to penetrate the market.
As retailers bring new products to stores, they
tend to generate more sales from the spaces they
already operate. This growth measure reflects the
appeal of the store, which can be enhanced by
using better branding, diversifying merchandise,
pricing, and loyalty offerings.
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Chapter 19: The beverage
industry
 Mexico is a significant contributor to volume and profit growth for
global beverage companies, both in beer and soft drinks
 Consolidation has been a key theme in the beverage industry, as
economies of scale are crucial to sustainable long-term growth
 The industry is profitable and expanding, driven by strong brand
equity and favorable demographics

A leading beverage market
Mexico is one of the most profitable markets in
the world for both beer and soft drinks. The beer
segment is a duopoly between Heineken–FEMSA
and Grupo Modelo–A-B InBev, and the soft drink
industry is dominated by Coca-Cola Co. and its
bottlers. Given these dominant market-share
positions, Mexican beverage companies tend to
have strong pricing power and operate within
mostly rational pricing environments.
Mexico also benefits from strong GDP growth, a
population skewed toward younger age groups,
and an emerging middle class. All these factors
contribute to volume and revenue growth,
making Mexico an attractive market for global
beverage companies.
Key themes
Over the past few years, the beverage industry has
experienced its fair share of challenges: The weak
consumer environment that resulted from the
economic downturn; increasing costs of ingredients,
Top five beer markets ranked by margin pool, 2011
Country
Brewer
1. US
A-B InBev
MillerCoors
Crown Imports
A-B InBev
Kirin/Schincariol
Heineken/FEMSA
Carlsberg
SABMiller/Efes
A-B InBev
AB InBev
Molson Coors
Sleeman/Sapporo
Grupo Modelo/A-B InBev
Heineken/FEMSA
2. Brazil
3. Russia
4. Canada
5. Mexico
Source: A-B InBev, Plato
Volume share
48%
29%
6%
70%
12%
9%
39%
18%
16%
41%
41%
7%
59%
41%
Global soft drink data, 2011
Population
(000)
US
Mexico
Argentina
Germany
Canada
UK
Brazil
Italy
France
Russia
China
India
308,746
112,469
41,343
82,283
33,760
62,348
201,103
58,091
64,768
139,390
1,330,141
1,173,108
8-oz per Coca-Cola
capita
share*
728
680
529
460
389
361
343
213
195
177
44
15
42
73
57
35
39
51
60
55
65
24
54
56
Pepsi
share*
29
12
23
8
36
16
6
7
4
18
3
40
Source: Beverage Digest; *Share in measured channels only
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packaging and energy; and a competitive price
environment. We believe that beverage companies
need to revive categories that are struggling while
focusing on those that potentially offer higher
growth, be proactive with new-product
introductions, rationalize costs, and expand
globally. On a positive note, the beverage industry
is defensive, typically more resilient than other
industries during challenging economic and
market conditions, because it can offer affordable
products to consumers.
Beverage companies in Latin America have
benefited from relatively strong consumption trends,
despite global economic and consumer uncertainty.
Several companies in this region have increased their
cash positions, so potential uses of cash are
becoming an increasingly important question. We
expect more share repurchases and dividend
increases, as well as increased capex and investment
spend, as companies seek to take advantage of
organic and expansionary growth opportunities.
Consolidating beer market
The Mexican beer industry is a duopoly between
Grupo Modelo–A-B InBev and Heineken–FEMSA.
This high concentration of market share makes it
similar to most other beer markets in the Americas,
but different from Europe, where competition is
more intense due to the regulatory environment.
The beer market in Mexico is highly regional. Grupo
Modelo is strong in the center of the country, and
Heineken (formerly FEMSA) is more prevalent in
the north. There is small premium beer segment in
Mexico, which Heineken is looking to build out,
although we believe this will take time to develop.
Most of the volume is in the mainstream segment
and full-calorie beers, though the light segment is
gaining popularity.
Mexican beer duopoly: Market shares
100%
80 % 44%
43%
44%
44%
56%
57 %
57%
56%
56%
59%
58 %
2000
2002
2004
2006
200 8
20 10
60 %
40 %
Consolidation also has occurred among brewers
and soft drink bottlers throughout Latin America,
and especially in Mexico. We believe that this
should continue, and that it could be a potential
use of cash for companies such as Arca
Continental, Coca-Cola FEMSA, and FEMSA.
Arca and Coca-Cola FEMSA are interested in
further consolidating Coca-Cola Co.’s bottling
system in Latin America, and Coca-Cola FEMSA
is interested in entering Southeast Asia,
particularly the Philippines. FEMSA continues to
focus on expansion of its Oxxo convenience
stores, aiming to open at least 1,000 per year,
which would allow it to reach its goal of
approximately 14,000 stores by 2015. The most
recent news about consolidation in Latin America
is that A-B InBev has agreed to acquire the 50%
stake in Grupo Modelo that it does not already
own, a move that further emphasizes the growth
potential in Latin America.
108
42 %
41%
43 %
20 %
0%
Grupo M ode lo/ A-B InBev
FEM SA /Heineken
Source: Company reports, HSBC
As the large global brewers are looking to expand
into growth markets, Mexico has been an obvious
target. In 2010, Heineken acquired FEMSA’s beer
business in exchange for a 20% equity interest in
Heineken. The transaction value was USD7.4bn,
implying a 10.9x trailing EBITDA multiple. Upon
taking over the business, Heineken focused on
strengthening its position in its core markets, while
beginning to promote the Heineken brand from a
very small base.
Following the FEMSA acquisition, Grupo Modelo
was left in a more difficult position as a regional
brewer competing directly against one of the three
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leading global brewers: A-B InBev, SABMiller, and
Heineken). However, in mid-2012, it accepted a
takeover bid from A-B InBev, which already held a
50% noncontrolling stake in the company. A-B
InBev agreed to pay USD20bn to acquire Modelo,
which, on our calculations, represented a 17x 2012e
EBITDA multiple.
Coca-Cola FEMSA: % volume by beverage category in
Mexico and Central America
Water
5%
Still
6%
Attractive soft drink market
The soft drink industry in Mexico is dominated by
Coca-Cola Co., with smaller shares for PepsiCo
and discount ‘b’ brands. The Mexico division is a
standard-bearer within Coca-Cola for its very high
and still-growing per capita beverage consumption.
Coca-Cola FEMSA is the largest bottler in Mexico,
handling approximately 53% of Coca-Cola Co.’s
total country volumes, and Arca Continental has
about 30%. The rest is divided among seven
different family-owned bottlers. Each Coke bottler
operates solely within its own territories and
competes against other Coke bottlers.
Per capita consumption of Coca-Cola products (8oz servings)
728
309
379 403
460
210 230
M exico
C hile
US
Panam a
Argentina
Australia
Brazil
C olom bia
UK
W orldwide
Japan
127 129
Philippines
92
179
343
Source: Company reports
Per capita consumption of Coca-Cola products is
heavily skewed toward sparkling beverages, mainly
the trademark Coca-Cola products. However, we
see greater growth potential in the still beverage
category, as do Coca-Cola Co. and its bottlers. This
is best evidenced by the joint acquisition of the
Jugos del Valle juice company by Coca-Cola Co.
and Coca-Cola FEMSA in 2007. The Del Valle
brand became the 15th billion-dollar brand in
Coca-Cola Co.’s portfolio in 2011.
Bulk Water
14%
Sparkling
75%
Source: Company reports
Consolidation has also been a central theme in
soft drinks over the last decade. Coca-Cola
FEMSA recently acquired three smaller Mexican
bottlers, taking its percentage of Coca-Cola’s
volume in Mexico up to 53% from about 40%.
Arca, which itself was formed through the merger
of three family bottlers in 2001, merged with
Grupo Continental in 2011 to become the fourthlargest Coca-Cola bottler in the world (Coca-Cola
FEMSA is the largest). PepsiCo also recently
consolidated, forming a joint venture in 2011 with
GEUPEC and Empresas Polar, to add more scale
to its distribution.
Looking forward, we believe there are still
opportunities for the soft drink bottlers to expand
through acquisitions. Both Coca-Cola FEMSA
and Arca will continue to look to acquire
additional bottling territories, both in Mexico and
throughout Latin America. The companies have
been clear about their M&A intentions, although
in many cases they are dependent on finding a
family that is willing to sell its bottling business.
Outside Latin America, Coca-Cola FEMSA is
discussing the potential acquisition of Coca-Cola
Co.’s bottling operations in the Philippines. In
addition, we believe that both Coca-Cola FEMSA
and Arca would be interested in expanding into
the US when Coca-Cola Co. decides to
refranchise its US bottling operations.
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Chapter 20: Telecoms and
media
 Mexico’s tele-media industry is evolving rapidly
 Mexico has more tele-media penetration upside than LatAm peers
 But regulatory pressure has intensified and should remain a factor

A dynamic, fast-growing arena
Adoption of telecommunication and media
services in Mexico has grown rapidly in recent
years, driven by technological innovation,
stronger competition, and regulatory intervention
that have led to the lowering of prices.
Mexico: Information, communications, and technology (ICT)
household penetration, – 2010
100%
80%
60%
40%
20%
According to Mexico’s national statistics institute,
INEGI, 93% of households had a TV set as of
2010, 65% had mobile services, 43% had fixedline telephony, 36% had pay-TV, 29% had a
computer, 21% had Internet access, and 10% had
a fixed broadband connection. Collectively, such
services are often termed “information,
communications, and technology,” or ICT (see the
following chart).
On a relative basis, Mexico is a middle-ranking
country based on a comparison of its
telecommunications development and that of other
nations on a global and even regional Latin
American basis. According to the 2011 ICT
Development Index produced by the International
Telecommunication Union (ITU), Mexico ranks
75th of 152 countries at the global level. The index
combines 11 indicators to monitor and compare
developments in information and communication
technology across different countries.
110
0%
TV
Mobile
FX-Line
Pay-TV
Comp
Internet
FX-BB
Source: COFETEL, INEGI
Telecoms
Fixed-line penetration has stalled
The total number of fixed lines in Mexico grew
rapidly until 2005, and then, in line with global
trends, remained flat at close to 20m. As a result,
fixed-line penetration as a percentage of the total
population declined, reaching 17.6% in 2011,
down from a peak of19.1% in 2008.
However, compared to major LatAm countries,
Mexico’s fixed-line penetration is relatively low.
The market is highly concentrated, as incumbent
Telmex, América Móvil’s fixed-line subsidiary,
has a market share of about 75% of services,
telephony and broadband, for example. Its closest
competitor is Axtel, with a line share of
approximately 5%. Other participants include
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Mexico Handbook
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Alestra and Maxcom, and cable companies such
as Megacable, Cablevision, and Cablemas.
Mexico: Fixed-line growth has flattened (total lines in ’000s)
25,000
25%
20,000
20%
15,000
15%
10,000
10%
5,000
5%
0
0%
2000
2002
2004
2006
Fixed Lines
2008
2010
Penetration (%)
Source: COFETEL
Mobile has grown rapidly
The decline in fixed-line penetration is
attributable in part to the penetration of mobile,
which had an 18.9% CAGR from 2000 to 2011.
Total mobile subscribers reached 94.6m in 2011,
representing penetration of 84.2%.
Despite rapid growth in mobile penetration,
Mexico is still underpenetrated, compared to peers
in Latin America, where a rate exceeding 100% is
not uncommon, as many individuals have more
than one subscription each. One major reason for
this is the high market share of the leader Telcel,
which has about 70% of the market: Lower-priced
on-net calls reduce the incentive for customers to
maintain multiple prepaid accounts, which is a
common practice in other markets in the region.
Mexico: Mobile subscribers grow (total subs in ’000s)
100,000
100%
80,000
80%
60,000
60%
40,000
40%
20,000
20%
0
0%
2000
2002
2004
2006
Mobile Lines
2008
2010
Penetration (%)
Source: COFETEL
share. Telefónica de México is the second-largest
mobile operator, accounting for about 20% of the
market in terms of subscriptions. In third place –
and growing rapidly, boosted by its alliance with
Televisa – is Iusacell, with a 5.7% share. The
fourth-place operator is Nextel de México, with
3.9% of total subscribers.
Broadband
Broadband penetration increased significantly in
Mexico in recent years. According to the telecom
regulator Cofetel, fixed and mobile broadband
penetration reached 17.9% in 2011, compared with
1.8% in 2005, for a CAGR of 46% in the period.
Mexico is roughly in line with LatAm peers, with
fixed-line broadband penetration of 10% in 2010.
However, this was still significantly behind
developed markets such as the US, which had
fixed-line broadband penetration of 28%.
As noted above, competition in Mexican mobile is
also highly concentrated. Telcel, América Móvil’s
mobile subsidiary, commands a 69% market
Mexican fixed-line penetration still low compared to peers…
50%
…but penetration remains relatively low
160%
140%
40%
120%
100%
30%
80%
20%
60%
40%
10%
20%
0%
0%
US
VEN
ARG
BRA
CHI
Source: International Telecommunications Unit (ITU) - 2010
MEX
COL
PERU
ARG
CHI
BRA
PERU
US
COL
VEN
MEX
Source: International Telecommunications Unit (ITU) - 2010
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Mexico: Fixed-line broadband penetration in line with regional
peers
Strong broadband penetration growth (% pop)
20
30%
17.87
25%
16
20%
12.73
12
15%
10%
8
5%
4
0%
US
CHI
MEX
ARG
BRA
COL
VEN
1.84
PERU
0.11
0
2000
Source: International Telecommunications Unit (ITU), 2010
Media
In Mexico, television began with free over-the-air
broadcast about six decades ago, limited to a few
analog TV channels. Subsequently, pay-TV
arrived, first in cable broadcast format and then
satellite, both of which significantly increased the
number of channels available. Initially, cable
companies offered just video services. However,
with the introduction of hybrid-fiber-coaxial
(HFC) two-way digital cable systems, cable
operators were able to expand their service set to
include data services (Internet) and subsequently
Internet protocol (IP) telephony. Recently, payTV started to cede some ground to on-demand
unicast video via cable and telco IP networks.
2005
2010
2011
* Includes both fixed and mobile broadband. As of 2011, fixed and mobile broadband
accesses totalled 20.1m of which 58.7% correspond to fixed broadband and 41.6% to
mobile broadband.
Source: Cofetel.
allocating a growing proportion of their budgets to
pay-TV and on-demand/over-the-top (OTT) video
platforms. The following charts show the steady
increase in the Internet’s share of advertising
spend in Mexico, up from 0.5% in 2004 to 6.0%
in 2010. Also on the rise, albeit more moderately,
pay-TV increased its share of advertising
revenues from 5.0% in 2004 to 5.9% in 2010.
During this time, the broadcast advertising
revenue share fell to 57.8% from 61.0%.
Similarly, printed media, magazines, and
newspapers also had declining share trends.
Mexico: Pay-TV has grown strongly over the past five years
Broadcast
The Mexican TV content market is essentially a
duopoly. The larger of the two companies, with an
audience share of about 70%, is Televisa, a
diversified media conglomerate and the world’s
largest producer of Spanish-language
programming. Its rival, TV Azteca, with an
audience share of about 30%, is a solid but
smaller and less diverse over-the-air broadcaster.
A handful of government and independent TV
stations barely figure in overall market share.
Despite the rapid growth in satellite and cable TV
subscribers in recent years, over-the-air broadcast
TV is still the main video distribution medium in
Mexico. However, advertisers are gradually
112
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2006
2007
2008
2009
Cable
DTH
2010
2011
Q2
2012
MMDS
Source: Cofetel
Pay-TV
The primary mode of competition in pay-TV in
Mexico is between cable and satellite. Cable
operators rarely compete against each other –
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average of 59%, according to data published by the
Latin America Multichannel Advertising Council
(LAMAC), a pay-TV industry trade group.
Mexico’s pay-TV penetration is still low versus LatAm
100%
80%
Market participants
60%
40%
20%
0%
ARG
COL
CHI
VEN Central MEX
America
BRA
Avg
Source: Latin American Advertising Council (LAMAC), 2012e
typically only one is present in any given area,
with little “overbuild” – but satellite providers that
have full nationwide coverage do compete against
each other. The satellite broadcaster Dish Mexico
arrived at the end of 2008 and began offering lowcost packages (typically about MXN140 per
month for 30 channels at the time); this offer was
rapidly matched by the rival satellite company
Sky Mexico, greatly increasing the adoption of
pay-TV in the country. Over the past five years,
pay-TV subscriptions had a 13.7% CAGR.
Despite this rapid growth, Mexico’s pay-TV
penetration is still below the average for large Latin
American countries, at 41% (2012e) versus an
Mexico: Broadcast still dominates advertising spend…
Multichannel TV in Mexico is available via
several network technologies: cable, microwave
wireless (MMDS), satellite, and IPTV. In Mexico,
the two main platforms offering pay-TV services
are cable and satellite broadcast.
The Mexican cable industry is highly fragmented,
with more than 200 operators across the country.
These operators hold about 1,100 concessions
granted by the Mexican government.
The largest cable operators in Mexico in terms of
the number of subscribers as at Q2 2012 were
Megacable, with 2,010,211; Cablemas, 1,095,587;
Cablevision, 754,153; TVI, 383,091; Telecable
(Grupo Hevi), and Cablecom – note: subscriber
data for the latter two firms are unavailable.
Televisa is the parent company of Cablemas
(100%) and Cablevision (51%), and also owns
controlling interests in TVI (50%), making it the
largest cable operator in Mexico in terms of the
number of subscribers, 2,232,831.
…but Internet and pay-TV are gaining share
2010
2004
0.5%
9.0%
2.0%
8.3%
6.0%
1.0%
2.0%
0.7%
8.5%
8.0%
4.0%
3.4%
57.8%
8.0%
61.0%
5.0%
8.9%
5.9%
Broadcast
Pay-TV
Radio
Broadcast
Pay-TV
Radio
Magazines
New spapers
Cinema
Magazines
New spapers
Cinema
Internet
OOH
Other
Internet
OOH
Other
Source: Cofetel, Association of Media Agencies
Source: Cofetel, Association of Media Agencies
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A potential entrant into the pay-TV segment is
Telmex. The company has sought changes to its
license in an effort to offer pay-TV since it signed
the Mexican communication ministry’s
“Convergence Agreement” in October 2006; this
agreement in turn permitted cable operators to
offer telephony and broadband. However,
Telmex’s aspirations to enter pay-TV have met
with frustration so far, and its latest legal appeal
was rejected in July 2012.
Only two companies provide satellite pay-TV
services in the Mexican market, namely Sky
México, with 4,550,695 subscribers and owned by
Televisa and DirecTV, and a relatively new
entrant, Dish México, with 1,735,623 subscribers
and owned by MVS Comunicaciones and
EchoStar.
Regulation tightens
According to a January 2012 study published by
the Organization for Economic Cooperation and
Development, “Review of Telecommunication
Policy and Regulation in Mexico,” the Mexican
telecommunications sector is characterized by
high prices and low penetration of services. This
was due in large part, the study argues, to a lack
of effective competition and resulting high levels
of market concentration. Each market segment –
fixed-line, mobile telephony, over-the-air TV – is
dominated by a single company with a much
higher market share than its closest competitor;
for example, Telmex has about a 75% share of
fixed-line services, Telcel has about 70% of
mobile, and Televisa has a share of about 70% in
broadcast TV.
to instituting major reform is Mexico’s complex
multilayered political and legal system.
Despite the challenges they face, Mexican
authorities have crafted a wide-reaching agenda to
counter anticompetitive practices in telecom and
media. Key areas include:
 Imposing interconnection rate cuts
 “Set-aside spectrum” for mobile challengers
 Encouraging the entry of mobile virtual
network operators (MVNOs)
 Levying punitive fines
 Imposing dominant operator obligations
 Requiring infrastructure sharing
 Consolidating local service areas
 Assigning additional free-to-air TV licenses
One area in which the government has achieved a
considerable degree of success is interconnection
rates. In Mexico, mobile termination rates
(MTRs) historically were commercially agreed
between operators, although if they could not
agree to a rate, Cofetel had the right to intervene.
From 2011 to 2012, the regulator effectively
reduced mobile termination rates by about 65%.
Mexico: Mobile termination rates have declined (MXN/minute)
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
Over the past couple of years, Mexican regulators
– principally the telecoms and media sector
regulator Cofetel and the antitrust authority
Cofeco – have invoked new legal powers and
have shown a new willingness to take on the
dominant companies, América Móvil in telecoms
and Televisa in media. However, a key challenge
114
2005
2006
Source: Cofetel, HSBC
2007
2008
2009
2010
2011
2012
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Chapter 21: The
industrials
 Mexican industrials have been transformed in the past decade
and emerged stronger from the 2008-09 global economic crisis,
having become leaner, more focused, and less cyclical
 Mexico’s auto industry has surpassed oil as the largest and most
important export platform; FDI continues to flow into this industry
 Mexican petrochemical companies are world-class entities with
leading positions in their markets and geographies; in the
domestic markets, their only competition is from imports

Industrial sector in Mexico
 Construction, 6.3% of GDP
30.1% of Mexican GDP at 2Q12
 Mining, 4.7% of GDP
Industrial production is divided into four segments:
 Electricity, gas, and water, 1.5% of GDP
 Manufacturing, 17.6% of GDP
Mexico: GDP breakdown by economic sector as at 2Q12
Manufacturing dominates the industrial sector, at 58.5%
Agriculture Other*
1.6%
3.3%
Electricity
5.0%
Mining
15.6%
Industrial
30.1%
Services
65.0%
* Other denotes imputed banking services and product taxes. Source: INEGI
Construction
20.9%
Manufacturing
58.5%
Source: INEGI
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Mexico: Export platform for manufacturing
goods
The country became an export-oriented economy
after the North America Free Trade Agreement
took effect in 1994. Mexico’s main exports are
manufacturing goods, which account for about
80% of total export revenues, or 30.4% of GDP.
Oil exports, by contrast, account for about 16% of
total exports, or 4.9% of GDP.
Basic petrochemicals with production exclusively mandated to
Pemex and its subsidiaries
Ethane
Propane
Butane
Pentane
Hexane
Heptane
Raw material for carbon black
Naphthas
Methane when derived from hydrocarbons
Source: Pemex
Mexico has nine publicly listed industrial
companies. The largest and most important
companies, with the greatest visibility from an
investment viewpoint, are industrial
conglomerates that have business activities in
petrochemicals, auto parts, processed food, retail
(department stores), infrastructure, and
telecommunications: Alfa, Alpek, Grupo Kuo,
Grupo Carso, and Mexichem. These companies
have transformed themselves in the past decade
and emerged stronger from the 2008-09 global
economic crisis, becoming leaner, more focused,
less cyclical, and less leveraged.
companies participating in these markets face no
competition for these resins other than imports.
Petrochemicals
Products
Market position
In Mexico, oil-related activities are exclusively
mandated to Petróleos Mexicanos (Pemex) under
the Mexican constitution. Its operations are
divided into four subsidiaries: exploration and
production, refining, petrochemicals and gas, and
basic petrochemicals. Private companies can
participate in production activities only beyond
the basic petrochemicals category, which includes
derivatives of basic petrochemicals (ie ethylene),
and more-downstream intermediate products, such
as PTA/PET, PVC, and end-products.
Piping
No. 1 in Latin America
No. 1 in Mexico
No. 1 in Europe
No. 1 worldwide
No. 1 in Latin America
No. 1 in Mexico
No. 1 in North America
No. 1 worldwide
No. 1 in Mexico
No. 2 worldwide
Dominant positions in the domestic market
helped build leadership positions worldwide.
Over the years, the industry structure described
above has led to the formation of monopolies or
quasi-monopolies in markets for major resins in
Mexico, including PET and PVC resins. Mexican
116
Alpek’s market leadership
Products
Market position1
Share1
PTA
PET
No. 1 in the Americas
No. 1 in the Americas
No. 2 worldwide
No. 1 in Mexico
No. 1 in Mexico
No. 1 in Mexico
45%2
40%2
9%2
45%2
25%
92%3
100%4
100%4
Polyester staple fiber
EPS
PP
CPL
1. Based on installed capacity. 2. PCI, Alpek internal estimates and market data. 3. Alpek’s
review of available market data for the product. 4. Alpek’s internal estimates.
Mexichem’s market leadership
PVC resin
Fluorspar
Hydrofluoric acid
Share
31%
39%
43%
78%
c20%
100%
Protected markets
Mexican petrochemical companies benefit from
import tariffs in some products and pricing
formulas that allow them to pass increased costs in
raw materials through to customers. Alpek, Alfa’s
petrochemical arm, has these protection
mechanisms, for example. According to the United
States International Trade Commission (USITC), a
general tariff rate of 6.5% is imposed on
imports of PTA and PET entering the US from
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Mexico: Auto production for exports is at record-high levels
(units)
Autos and auto parts
The world’s fourth-largest automobile exporter
2,500,000
Mexico’s exports are mainly concentrated on
manufacturing goods, which contribute 80.9% of
total export revenues, or 30.4% of GDP. Oil exports,
by contrast, account for about 16% of total exports,
or 4.9% of GDP. The automotive industry is the
country’s most important export sector, as it
represents 28% of total manufacturing exports,
or 7% of GDP – that is, 40% more than oil
exports. In 2011, Mexico exported 2.13m vehicles.
2,000,000
1,500,000
1,000,000
500,000
0
2004
2005
2006
2007
2008
2009
2010
2011
Source: Mexican Association of the Auto Industry (AMIA)
The auto industry is among the largest
countries that are not members of NAFTA, with
the exception of any jurisdiction that has entered
into a treaty specifying a different rate. Imports into
the US from the NAFTA region have preferential
treatment and pay no tariff. (They are reported
under harmonized codes 2917.36.00.00 for PTA
and 3907.60.00.00 for PET.)
Also, according to the Electronic Tariffs
Information System (Sistema de Informacion
Arancelaria Via Internet, SIAVI) of the Mexican
Ministry of Economics, general tariffs are
imposed on imports of PTA and PET into
Mexico at rates of 10% and 7.0%, respectively.
(The same harmonized codes apply.)
Auto Parts Manufacturing Cost Index, 2012 (US=100)
In recent years, Mexico has seen a constant flow of
investments from original-equipment manufacturers
(OEMs) because of its competitive manufacturing
costs and strategic location close to one of the
world’s largest auto markets, the US. In 2012, the
luxury car maker Audi announced the construction
of its first manufacturing plan in the Americas in the
Mexican state of Puebla.
Mexico will boost annual auto output by 1m units
within three years – a 38% jump from 2011 – as
foreign manufacturers use the country as an export
base, according to Carlos Guzman, head of
ProMexico, Mexico’s investment promotion agency,
in his comments to Bloomberg on 28 August 2012.
Cost comparisons in auto parts manufacturing
107.4
Japan
contributors to FDI in Mexico
25.0%
102.9
Australia
Germany
100.1
US
100.0
Italy
97.0
Canada
96.9
France
20.0%
19.4%
15.0%
96.6
96.2
Netherlands
10.0%
7.3%
95.0
UK
5.0%
87.6
Russia
2.2%1.9%
1.3%
87.0
Mexico
India
Total Labor &
Benefits
82.1
80
85
1.4%1.8%1.7%
0.0%
85.1
China
5.9%
4.2%3.8%
5.8%
94.6
Brazil
90
95
100
105
Facility Lease
Transportation
Utilities
110
Mexico
Source: Competitive Alternatives, KPMG’s Guide to International Business Locations,
2012 edition
Avg Mature
Avg High Growth
Source: Competitive Alternatives, KPMG’s Guide to International Business Locations,
2012 edition
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Compared to the auto industries in mature and highgrowth economies, Mexico’s benefits from lower
labor costs, facility leases, and utility costs. The costs
associated with auto parts manufacturing in Mexico
are similar to those in India, still higher than those in
China, but considerably lower than those in Brazil.
Domestic sales continue to recover but at a
slower pace than exports
In Mexico, the total number of autos sold
continues to recover but has not reached pre-crisis
levels of more than 1m units per year. In Brazil
and Argentina, where domestic sales are relatively
strong, 19 and 17 new cars are sold, respectively,
per 1,000 inhabitants; by contrast, Mexico sold 7
per 1,000 in 2010, which confirms the weakness
of its domestic market. One of the reasons for this
is that large numbers of used autos are imported,
both legally and illegally, from the US. However,
the recent elimination of the vehicle ownership
tax in Mexico may contribute marginally to sales
of new cars.
Aerospace
Although it is still an incipient industry in
Mexico, aerospace continues to develop
positively, as evidenced by the increasing number
of companies that have established a presence in
the country and by consistent growth in Mexico’s
aeronautical components exports.
Mexico: Number of aerospace companies
Mexico has 249 aerospace companies and
support entities. They are mainly concentrated in
six states and employ more than 31,000 people in
highly qualified positions.
By 2011, exports from the Mexican aerospace
industry reached a value of USD4.3bn. Foreign
and national investments in this arena exceeded
USD1bn in 2010 and USD3bn in the past three
years. According to the Strategic Program of the
Aerospace Industry 2010-2020, coordinated by
the Ministry of Economy, the industry is expected
to report exports of USD12.3bn for 2012,
implying a 14% average annual growth rate.
Consumer-oriented
In the past decade, Mexican industrials have
become leaner, more focused, and less cyclical
Industrial conglomerates in Mexico have reshaped
themselves in the past decade to reduce exposure
to cyclical businesses that had characterized their
portfolios some years previously. Mexican
industrial companies became leaner, retaining
operations in which they had market leadership
and technology, and divesting themselves of other
businesses that were less profitable because they
lacked either the scale necessary to compete or
sustainable competitive advantages. This strategy
allowed industrial companies to strengthen or
develop consumer-oriented businesses such as
retailing (department stores), processed food, and
niche telecommunications services.
Mexico: Trade balance of the aviation industry
300
5,000
238
250
249
4,000
199
200
150
3,000
160
150
2,000
109
100
61
1,000
50
0
0
2000
2005
2006
2007
2008
2009
2010
2002
2004
Imports
Source: Strategic Program of the Aerospace Industry 2010-2020, Mexican Federation
of the Aerospace Industry (FEMIA), Mexican Ministry of Economy
118
2006
2008
2010
2011
Exports
Source: National Flight Plan: Mexico’s Aerospace Industry Road Map. Promexico, 2012
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Global original-equipment manufacturers:
Recently announced investments in Mexico
OEM
GM
Amount
(USDm)
420
Audi
Ford
Nissan
Honda
VW
Mazda
GM
Nissan
1,300
1,300
2,000
800
400
500
540
1,050
Chrysler
VW
Chrysler-Fiat
Total
570
550
500
9,930
Date
announced
State
July 12 Guanajuato / San
Luis Potosí
Apr 12
Puebla
Mar 12
Sonora
Jan 12
Aguascalientes
Aug 11
Guanajuato
Jul 11
Puebla
Jun 11
Guanajuato
Jan 11 Estado de México
Mar 11
Morelos /
Aguascalientes
Oct 10
Coahuila
Sep 10
Guanajuato
Feb 10 Estado de México
Source: ProMexico
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Chapter 22: The energy
sector
 Although the Mexican economy has become less dependent on
oil revenues, the fiscal sector remains heavily reliant on the sector
 If structural reforms materialize, the oil and gas sector could attract
higher investment and boost economic growth
 The electricity segment also may undergo reforms that could
liberate its potential and reduce production costs

Government-dominated
The energy sector in Mexico is mainly handled by
the government – Petroleos Mexicanos (Pemex) for
oil and gas and the Federal Electricity Commission
(CFE) for electricity. Although electricity, oil, and
gas production have tracked Mexico’s
development, the absence of any major reforms has
become a recurring theme among investors. Were
such reforms to materialize, this could attract
important investments and benefit consumers by
offering better quality at a lower cost.
Heav y
4.0
3.5
Su per-light
2.0
1.5
20 12/ 01
20 09/ 01
20 06/ 01
20 03/ 01
2 000/ 01
1 997/ 01
1.0
0.5
0.0
Source: INEGI
120
Light
3.0
2.5
1 994/ 01
Milli on barrels per da y
Mexico: Oil production
The Mexican oil company Pemex has been stateowned since 1938, when a nationalization act
expropriated the oil holdings of US and
British companies.
Pemex has been economically important, because
it has been a profitable source of external
revenues for the country, in particular to the
government. In the past decade, given high oil
prices, Pemex has accounted for about 34.5% of
fiscal revenues.
Pemex has a monopoly on production of oil,
natural gas, and oil derivatives. It also is the only
company authorized to commercialize these
products in Mexico.
The oil company is working to stabilize
production, as output at its main oil field,
Cantarell, began to fall from 2000. Lack of
investment in the 1990s prevented it from
substituting its production in time to avoid this
decline. Total oil production peaked in 2004 and
declined until 2010, then stabilized up to 2012.
The company estimates that it will increase
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Mexico: Total crude oil production
(thou sands of bar rel s per day)
production again from 2013 because it has
diversified into several different projects. Energy
reform passed by Congress in 2008 allowed for an
increase in investment and a degree of
modernization in the operations. One of the main
results of this turnaround has been an increase in
the reserve replacement rate.
Mexico: Gas production
3600
3400
3200
3000
2800
2600
2400
2200
2000
19 84 198 8 1992 1 996 20 00 200 4 2008
Sour Ga s
7
Sw eet Ga s
Source: Pemex
6
5
Mexico: Crude oil exports
4
3
1
0
1 991
1994
199 7
20 00
2 003
2006
200 9
Source: Pemex
Although the energy reform of 2008 was an
advance that had tangible results, in the form of
higher investment and stabilization of production,
several measures were excluded, such as greater
independence and transparency for Pemex, as well
as the need for more investment and better
programs for associations with the private sector
to improve benefits of the oil company.
Production
Pemex is the world’s fourth-largest crude oil
producer, with output of 2.5m barrels per day.
Production peaked at 3.4m barrels per day in 2004.
The company estimates that it can increase
production at a growth rate of 3.0% p.a. At this pace,
it would take a decade to return to the 2004 peak.
Crude oil exports also have lost ground, although
at a slightly slower pace. Exports peaked at 1.9m
barrels per day, and the current level is 1.3m
barrels per day.
(thousan d of barre ls per day)
20 00
2
18 00
16 00
14 00
12 00
10 00
1 990 199 3 1996 1 999 20 02 200 5 2008 2 011
Source: Pemex
Production of natural gas has increased and has
been fluctuating recently between 6,000-7,000m
cubic feet.
Mexico: Natural gas production
(mil li on of cubic feet pe r day)
(bi ll ion cubi c fe et per day )
8
8000
7000
6000
5000
4000
3000
2000
199 0 199 3 1996 1999 2002 2005 2 008 2 011
Source: Pemex
121
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Mexico Handbook
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Investment and reserves
Mexico: Reserves replacement rate
140
120
100
80
(%)
The 2008 energy reform authorized an increase in
capital investment for oil exploration. The average
investment increased to 2.3% of GDP from 2008
onward, versus an average of 1.4% of GDP in the
previous three years.
60
40
Mexico: Exploration capex
20
3. 0
(USDbn)
2. 0
Source: Pemex
1. 5
1. 0
0. 5
0. 0
200 5
20 06 2 007
2008
200 9 2 010
2011
Source: Pemex
The increase in investment made it possible to
achieve a recovery in the proved reserve (1p)
replacement rate to 101.1% in 2012 from 22.7%
in 2005. The proved, probable, and possible
reserves (3p) increased to 107.6% in 2012 from
56.9% in 2005.
Mexico: Oil reserves
70
Equivalent Billi on Barr els
3P
2005 2006 2007 2008 2 009 2010 2011 1H12
2. 5
Prov ed
Prob able
Po ssible
60
50
40
30
20
10
0
19 99
20 01
2003
2005
200 7
200 9
involvement for the private sector in its alliance
with Pemex.... Brazil is one example…. Mexico
cannot waste this opportunity…. I believe that it is
possible to find mechanisms that guarantee, on
one hand, the state’s ownership of the oil in
Mexico but on the other, mechanisms to achieve
and encourage a greater involvement of the
private sector...we have to take much more
audacious steps.”
In brief, the president-elect was open about his
intention to allow Pemex to increase associations
with the private sector and to carry out a minority
share issue, as Petroleo Brasileiro (Petrobras), the
Brazilian oil and natural gas giant, did in 2010.
However, such a move in Mexico would require
constitutional changes, a challenging undertaking
for the new administration later this year in
dealings with a divided Congress. However, other
important steps to modernize Pemex would not
need constitutional changes, and the incoming
administration may focus on these.
20 11
Source: Pemex
Energy reform: The basics
In an interview with the Financial Times (18
October 2012), Mexican President-elect Enrique
Peña Nieto was quoted as saying: “Different
mechanisms could be explored to ensure an
122
1P
0
Several proposals for energy reform were
discussed in Congress prior to the approval of
watered-down version in 2008.The main steps that
had been mentioned are:
 Greater transparency for Pemex. The first step
would be to separate the company from the
public sector to make its operations and
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Mexico Handbook
October 2012
financial links to the federal government more
transparent, as well as to improve governance.
 Liberate part of the substantial tax revenues
that the company provides to the government
so that it can be used for investment.
Averaging 7.6% of GDP in the last decade,
this has accounted for slightly more than onethird of total public sector revenues. Since
2009, 2.0% of GDP has been budgeted for
investment. We estimate that at least an
additional 2.0% of GDP would be needed to
improve Pemex’s viability as a functioning,
independent company.
Mexico: Sources of electricity generation
3%
5%
2% 1%
Hy droelectric
22%
Thermoelectric
5%
Combined Cy cle
Dual
Coal-fire d
Nuclear p ow er
33%
29 %
Geothermal
Wind po we r
Source: Ministry of Energy
Mexico: Electricity production, market shares
 More freedom for Pemex to engage with the
private sector, to allow for risk-sharing
contracts and the more-proactive pursuit of
joint ventures.
The electricity segment
The state-owned Federal Commission of
Electricity (CFE) has a monopoly on electricity
distribution. The private sector may produce
electricity but it must be distributed by the CFE.
The agency produces 52,862 megawatts (MW),
and the private producers’ share accounts for
23.7% of total capacity.
23%
77%
Independent Energy Produc ers
24.6% of sales and less than 1.0% of companies
generate more than 50.0% of sales.
Mexico: Electricity distribution by clients and consumption
100
80
Industries
60
Hou seho ld s
40
20
0
Clients
The CFE serves about 36m customers, or more
than 100m inhabitants; 88.9% are households and
the rest are industrial users. The CFE must
provide electricity to an additional 1m people
every year. The household group accounts for
CFE
Source: Ministry of Energy
%
 There is a substantial pension liability with oil
workers that the government estimates at
7.0% of GDP. To make Pemex viable as an
independent company, pension reform could
be instituted for Pemex workers, similar to
changes made for other government workers
in 2007. As part of this reform, newly
recruited workers at Pemex would have a
defined contribution system instead of
defined benefit system.
Consum ption
Source: CFE
The electricity provided comes from several
sources: thermoelectric, hydropower, coal,
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Mexico Handbook
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Electricity prices are relatively high, a drawback
as regards international competitors. Although the
quality of service has improved substantially,
Mexico still lags behind other countries.
However, one advantage of the current system is
that the private sector is allowed to produce its
own electricity and sell any excess to the CFE. In
general, electricity availability is not a problem,
and there is plenty of room for growth in demand.
In terms of efficiency, Mexico still has room for
improvement. In effect, the amount of electric
power that is subject to pilferage and to waste as it
is distributed in the national network is nearly
double the average of member countries of the
Organization for Economic Cooperation and
Development (see the chart at bottom right).
Industrial prices per Kwh in USD (in terms of purchasing
power parity, or ppp)
300
Canada
Chile
250
Mex ico
UK
200
(USD PPP)
geothermal, wind, and nuclear. However, the most
common production method is a combined cycle
involving oil and other sources such as
thermoelectric or coal, for example.
OCDE members
150
100
50
0
1997
1999
2001
2003
2005
2007
2009
Source: International Energy Agency
Electric power subject to pilferage or wasted during
transmission
OECD members
South Korea
Germany
China
European Union
Unite d S tates
Chile
Russ ian Federation
Mex ico
Brazil
Venezuela
0
Source: World Bank
124
5
10
15
20
(% of output)
25
30
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Mexico Handbook
October 2012
Chapter 23: The tourism
industry
 Tourism revenue is a major source of foreign money
 It has significant potential, given Mexico’s extensive cultural
offerings, attractive beaches, fine weather, good food, and
availability of infrastructure for related parts of the economy
 The situation may improve with time, but the global slowdown and
Mexican violence will take a toll in the short and medium term

Tourism in economic terms
Tourism is a key segment in the Mexican economy,
given its importance as a source of income, foreign
currency inflows, and job creation. It also has
driven investment in lodging, transport, restaurants,
and recreation centers, as well as creating support
for infrastructure projects such as construction of
railroads, airports, and harbors.
Tourism’s contribution to GDP is fairly
significant at about 8% but is still below levels of
Tourism: Contribution to GDP
countries that excel in tourism, such as Spain,
where the segment accounts for slightly more than
10% of GDP. These percentages include not only
spending by international tourists, but also
domestic spending and contributions of other
activities related to tourism.
If we measure tourism revenues through
consumption, we find that Mexican residents
spent about MXN1,282bn on tourism last year.
Receptive consumption, which is related to
consumption spending by foreigners, amounts to
MXN196bn.
Foreign expenditure into the country via tourism
is equivalent to about 1% of GDP. However, the
segment’s contribution has been declining; this
amounted to about 1.5% of GDP at the end of the
1990s. Even so, after accounting for inflows and
outflows related to tourism, the net result is
positive for Mexico, as revenues close to 0.5% of
GDP enter the country.
Australia
Sw itzerland
Chile
New Zealand
Nicaragua
Austria
M ex ico
Spain
World
1
2
3
4
5 6 7
(% of GDP)
8
9
10 11
Source: Ministry of Tourism
125
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Mexico Handbook
October 2012
Types of tourists
Global attractiveness
Mexico had 75m international visitors in 2011.
Visitors are classified in four categories to
facilitate measurements of their economic impact:
non-border tourists, border tourists, border visitors
(“day-trippers”), and cruise ship passengers. The
most important suppliers of revenue are nonborder tourists, who contributed 80% of tourism
income, equivalent to USD9.4bn, in 2011, even
though they accounted for a low percentage of
total international visitors, close to 20%.
Mexico is among the world’s main tourist
destinations, receiving some 23m visitors
annually, measured only by those who spend at
least one night in the country. This places Mexico
close to Germany and the UK, though well below
Spain, China, the US, and France.
Border tourists, who spend at least one night in
the country, amounted to about 10% of total
international visitors, but their spending was
relatively low. About 70% of total international
tourists – this group totaled 52m in 2011 – visit
the country for only a few hours. These include
border visitors and cruise ship passengers,
although border visitors form the majority.
Average spending per stay by border visitors is
the lowest, at about USD30. The average is
highest for non-border tourists, at USD713.
Mexico: Visitors and spending by tourist type
100
% of Vis itors
90
% of Expenses
80
70
(%)
60
50
Portugal
Poland
Canada
Russian
Austria
Mex ico
Ge rm any
UK
Italy
Spa in
China
US
France
0
20
40
60
(m il li ons of touri sts)
80
Source: INEGI
The preferred destinations in the country,
measured by room occupancy, are Mexico City,
the Caribbean region of the Riviera Maya and
Cancun, Guadalajara, Los Cabos, and Acapulco.
With the exception of Acapulco and Guadalajara,
none of these places has been particularly affected
by recent drug-related violence.
Tourism is subject to the
external environment
40
30
20
10
0
Non-boarder
Tourist
Source: INEGI
126
Tourism by main destinations
Border Tourist
Day Trippers
Cruise
Passengers
Tourism to Mexico has been growing in line with
global trends; however, after losing some
dynamism during the global financial crisis of
2008-09, tourism in the country began to lag
behind the rest of the world. This may be
attributable in part to the global crisis –
particularly as reflected in the slow recovery by
the US economy – and to some extent to the
climate of violence in Mexico, although most of
the crimes occur in non-tourist towns. This effect
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Mexico Handbook
October 2012
is particularly notable in levels of border visitors,
which fell 27% between 2007 and 2011.
Mexico: Tourism spending
14
Growth in tourism (y-o-y)
12
140
(USDbn)
10
135
130
6
125
120
(I ndex)
8
4
115
2
110
1990
Tourists in Mexico
105
1993
1996
1999
2002
2005
2008
2011
Tourists in the world
100
Tourists
Border travelers
Cruise passengers
95
90
Source: INEGI
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: INEGI
Mexico: Tourism trends for non-border tourists
14
Though the numbers of non-border tourists have
almost recovered to pre-crisis levels, tourism
spending has not yet done so. Mexican tourismrelated services have had to offer promotions and
sales to lure travelers. Their efforts have been
successful, especially in the non-border tourist
segment, which produces the highest revenue.
13
12
(mil l ions of touri sts)
However, tourism from other parts of the world
has become more frequent than in the past.
Mexico has benefited from a significant increase
from Latin American countries such as Brazil and
Peru, which have doubled their previous numbers.
Of special interest is a doubling to tripling of in
Russian visitors, although that can be explained in
part by the low base for comparison.
11
10
9
8
7
6
1990
1993
1996
1999
2002
2005
2008
2011
Source: INEGI
Mexico: Average spending per tourist
800
750
700
(USD)
This trend of low-income tourism substituting
high-income segments is reflected in the reduction
of average expenditures per tourist. Indeed, the
current level of this spending, about USD700,
represents a return to levels last seen in 2006.
650
600
550
500
2000
2002
2004
2006
2008
2010
Source: INEGI
127
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Mexico Handbook
October 2012
Mexico: Tourism by nationality (airplane arrivals only)
Braz il
Argentina
Spain
UK
Canada
U.S .
0.0 0.5 1.0 1.5 2.0 2.5 3. 0 3.5 4. 0 4. 5 5. 0 5. 5 6. 0
(mi ll i ons of tour ists)
Mexico: Main variations in tourism by nationality (2008-11)
Belgium
Cuba
Netherlands
Total
Peru
Brazil
Russia
-50
0
50
100
150
200
250
(%)
Mexico: Most-visited places measured by room occupancy
Acapulco
Los Cabos
Guadalajara
Cancún
Rivie ra Maya
Mexic o city
0
5
10
15
20
(thousands of rooms)
128
25
30
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Mexico Handbook
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Chapter 24: The
automotive industry
 The automotive industry is one of the key strategic parts of the
Mexican economy
 Although this production has been mainly destined for export, the
domestic market is slowly gaining relevance
 Important investment projects are planned, which should support
sustained expansion

An auto-exporting country
The automotive industry is vital to Mexico, as its
production accounts for 6% of total GDP. It is
inherently linked to exports, as most of the autos
produced are destined for the export market.
However, domestic sales of nationally produced
cars also are improving, although they have not
yet returned to levels before the global financial
crisis occurred in 2008-09.
Mexico is the world’s eighth-largest automobile
producer. However, unlike China, where
production is mainly destined for domestic sales,
83.4% of the autos produced in Mexico are
exported. As a result, Mexico is the world’s
fourth-biggest auto exporter, tied with Spain.
The US is the main destination for Mexican auto
exports, absorbing close to 1.3bn, or 64%, of all
units exported. However, exports to regions other
Main automobile exporters
Main automobile producers
France *
F ran ce
Turk ey
Spain
C heck R epu blic *
M ex ico
UK
Braz il
U SA *
India
S pain
South Korea
Germa ny
Me x ic o
Jap an
South Kore a
US
Japa n
C hina
Germa ny
0
Source: Economics Ministry, 2011
5
10
15
(m il li o n s o f u n i ts)
20
0
1
2
3
(m il li ons of uni ts)
4
5
* 2010 data
Source: Economics Ministry, 2011
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Mexico Handbook
October 2012
than North America are starting to provide further
support to Mexico’s auto production; their share
has grown to 30% of all exports from 20% in
2007, reflecting an increase in the country’s
competitiveness.
Beyond this export diversification, autos produced
in Mexico have gained market share in the US,
where Mexican exports have grown at a faster
pace than US domestic auto sales. Though auto
sales in the US are still in a recovery phase and
have not yet returned to pre-financial crisis levels,
Mexican shipments to the US have already
recovered to those levels and continue to expand.
However, it is worth noting that renegotiation of
the Economic Complementation Agreement
(ACE55) with Brazil, which established
maximum quotas on annual imports from Mexico,
as well as the unilateral suspension of the same
agreement from Argentina, could rein in Mexico’s
auto exports to that region.
In the case of Europe and Asia, although trends
also are positive, the effect is less marked. Unit
sales were up about 40,000 from 2007 levels.
Mexico: Automobile exports globally
Europe
Asia
This is a reflection of Mexico’s gain in market
share at the expense of autos produced in the US
and those imported from Japan. This implies that
part of the production for the US market that was
made domestically and in Japan has been shifted
to Mexico in a strategic move by US and Japanese
automakers.
10%
1%
Latin America
15%
Afr ica
0%
Can ada
US
7%
65 %
Others
Auto sales in the US vs Mexican auto exports to the US
2%
120
110
Source: AMIA
(I ndex)
100
90
Mexico: Exports to regions (Index 2007=100)
80
350
70
60
300
50
2006
2007
2008
2009
2010
2011
US: Auto sales in th e US
Mexico: Auto mobile exports to the US
Source: Wards, AMIA
250
200
150
100
50
Mexican exports to other regions also have
increased. In particular, Latin America is
becoming an important support of Mexico’s auto
production, growing about 200% from 2007
levels, which translates into about 200,000 more
units exported. Exports to Canada and the US,
which have increased 18% in the same period,
also account for 200,000 more units.
130
2007
2008
North Americ a
2009
S outh A me rica
2010
2011
Europe
Source: AMIA
In addition to production of cars, Mexico has
developed an important market for manufacturing
of auto parts, which generated sales of
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Mexico Handbook
October 2012
Domestic market
The recovery in Mexico’s domestic auto sales
continues, though these have not returned to the
2006 peak.
Domestic sales behavior has consistently followed
consumer confidence trends, in particular the
component that measures capacity to purchase
durable goods. This index remains sluggish, below
levels in 2007. This seems to suggest that people
are still not confident about spending large amounts
of money in the current economic climate.
About 52% of cars sold in Mexico are imported
and the rest are produced domestically. However,
the level of imported cars was higher five years
ago, at almost 65%. This means not only that
people’s preferences are moving toward domestic
production, but also that automakers are
producing more cars to satisfy this market in
Mexico. Both factors support an increase in
national auto production.
Mexico: Domestic sales by automobile origin
(thousa nds o f auto mob iles)
8 00
Na tiona l
7 00
Im ported
6 00
5 00
are imported, legally and illegally, from the US.
However, the recent elimination of the vehicle tax
in Mexico may contribute marginally to sales of
new cars.
Competitive advantages
Low labor and transport costs are among the main
reasons why major international companies have
set up plants in Mexico, mainly for the purpose of
exporting.
As in other manufacturing industries, the effective
supply chain is another important factor that helps
facilitate production of goods at lower costs.
A skilled labor force also is a supportive factor in
development of the automotive industry in
Mexico. In particular, the proportion of engineers
in the population has been growing steadily in the
past few years.
Proportions of engineers in populations are increasing
(eng ineers per thousand inhabitants)
USD32.6bn in 2011. Most of that production is
destined for the US.
0.7
0.6
0.5
U.S.
0.4
Mex ico
0.3
0.2
0.1
1999
2001
2003
2005
2007
2009
4 00
Source: Unesco
3 00
2 00
2 006
200 7
2008
20 09
201 0
2011
Source: AMIA
In Brazil and Argentina, where domestic sales are
relatively strong, 19 and 17 new cars,
respectively, are sold per 1,000 inhabitants;
Mexico sold 7 per 1,000 in 2010, which indicates
the weakness of its domestic market. One of the
reasons for this is that large numbers of used cars
Eight automobile brands are established in Mexico,
but high-profile companies such as Audi have
announced investments to set up plants and start up
assembly units in the coming years. The country’s
competitiveness could attract more companies.
We calculate that total investment in this industry
amounted to close to USD6bn in 2011, which may
translate into an increase of about 50% in
automotive production over the next three to five
131
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Mexico Handbook
October 2012
years. This would make Mexico the world’s
seventh-largest automobile producer and the thirdbiggest exporter.
Eight major automobile brands are produced in Mexico
Chr ysle r
Volkswage n
1 2%
19%
Fiat
2%
Toyota
2%
Ford
18%
Employment
The auto industry also is important in terms of
employment, as about 15% of all jobs created in
the manufacturing sector correspond to the
auto industry. It also generates a significant
number of indirect jobs such as auto sales and
after-sale services.
Mexico: Employment in manufacturing and autos (average)
3, 000
20%
25 %
Honda
2%
(Tho usands)
Nissan
Source: AMIA
2, 500
Genera l Motors
2, 000
1, 500
1, 000
500
0
2 007
20 08
M anu fac tu ring
Source: INEGI
132
2009
2 010
20 11
Auto sec tor
Mexico Handbook
October 2012
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Appendix
133
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October 2012
1. Economics: Annual and quarterly economic forecasts
Mexico: Annual economic forecasts
Gross domestic product
Nominal gross domestic product
Private consumption
Gross fixed investment
Industrial production
Unemployment rate
Consumer price inflation
Total fiscal balance
Primary fiscal balance
Merchandise exports
Merchandise imports
Trade balance
Current account balance
Remittances
External debt, year-end
External borrowing requirements
Foreign currency reserves (IMF)
Monetary policy rate
3-month money
MXN/USD
MXN/USD
Mexican mix oil price (USD/barrel)
(% y-o-y)
(MXNbn)
(USDbn)
(% y-o-y)
(% y-o-y)
(% y-o-y)
(Average %)
(Year-end)
(Average %)
(% GDP)
(% GDP)
(USDbn)
(USDbn)
(USDbn)
(USDbn)
(% GDP)
(USDbn)
(USDbn)
(% GDP)
(Year-end USDbn)
(USDbn)
(Year-end USDbn)
(Year-end %)
(Year-end %)
(Year-end)
(average)
(average)
2006
2007
2008
2009
2010
2011
2012e
2013e
5.2
10,379.1
951.8
5.7
9.9
5.7
3.6
4.1
3.6
0.1
2.5
250.3
256.6
-6.3
-6.0
-0.6
25.6
20.2
2.1
107.6
36.5
67.7
7.0
7.2
10.8
10.9
53.1
3.3
11,320.8
1,035.8
4.0
6.9
2.0
3.7
3.8
4.0
0.0
2.2
272.3
282.6
-10.3
-11.1
-1.1
26.1
31.8
3.1
123.1
25.4
78.0
7.5
7.6
10.9
10.9
61.7
1.2
12,181.3
1,092.0
1.7
5.5
-0.1
4.0
6.5
5.1
-0.1
1.8
291.9
309.5
-17.6
-17.3
-1.6
25.1
27.2
2.5
129.9
38.7
85.4
8.3
8.2
13.8
11.2
84.3
-6.0
11,937.2
883.4
-7.2
-11.8
-7.7
5.5
3.6
5.3
-2.3
-0.1
230.0
234.9
-4.9
-5.1
-0.6
21.3
16.3
1.8
163.8
41.8
90.8
4.5
4.6
13.1
13.5
57.5
5.5
13,089.7
1,036.4
5.0
6.2
6.1
5.4
4.4
4.2
-2.8
-0.9
298.9
301.7
-2.9
-4.5
-0.4
21.3
20.8
2.0
190.1
53.3
113.6
4.5
4.5
12.37
12.6
72.1
3.9
14,342.3
1,152.9
4.5
8.9
3.8
5.2
3.8
3.4
-2.5
-0.6
349.9
351.1
-1.2
-11.1
-1.0
22.8
20.3
1.8
201.3
60.3
142.5
4.5
4.5
14.0
12.4
101.1
3.6
15,593.4
1,146.6
4.5
7.2
3.5
4.6
4.1
4.1
-2.4
-0.2
378.2
378.3
-0.1
-8.1
-0.7
23.9
22.9
2.0
208.7
65.0
167.4
4.5
4.7
13.5
13.6
99.9
3.2
16,736.0
1,267.9
5.5
5.7
3.1
4.4
3.6
3.9
-2.0
-0.3
411.0
410.6
0.4
-10.1
-0.8
25.7
26.6
2.1
223.1
73.0
185.3
4.5
4.7
12.9
13.2
107.9
3Q11
4Q11
1Q12
2Q12
3Q12e
4Q12e
1Q13e
2Q13e
4.3
14,456.0
1,172.8
3.5
5.7
3.1
3.4
88.1
92.0
-3.9
-5.0
-1.7
3.7
1.3
138.0
4.5
4.3
13.9
3.9
15,315.5
1,122.1
3.5
4.8
3.8
3.5
90.2
90.9
-0.7
-2.3
-0.8
4.4
1.6
142.5
4.5
4.4
14.0
4.5
14,943.3
1,151.2
4.4
5.0
3.7
3.9
89.7
87.9
1.8
1.2
0.4
4.4
1.5
150.3
4.5
4.4
12.8
4.1
15,219.9
1,123.2
3.6
4.8
4.3
3.9
94.5
92.9
1.5
0.4
0.2
6.5
2.3
157.3
4.5
4.5
13.3
3.2
15,620.5
1,170.2
3.7
4.7
4.8
4.6
96.1
97.0
-1.0
-3.7
-1.3
5.2
1.8
163.6
4.5
4.4
13.8
2.7
16,560.9
1,216.2
2.3
4.1
4.1
4.4
98.0
100.0
-2.1
-6.0
-2.0
6.8
2.2
167.4
4.5
4.4
13.5
2.7
15,963.1
1,189.1
2.8
4.5
4.3
4.0
97.3
94.3
3.0
-2.4
-0.8
7.2
2.4
171.3
4.5
4.4
13.4
3.0
16,378.5
1,235.3
2.8
4.1
4.2
4.5
102.2
100.5
1.8
-1.8
-0.6
6.6
2.1
175.1
4.5
4.4
13.2
*Numbers in shaded areas indicate forecasts.
Source: HSBC, INEGI, Banxico, SHCP
Mexico: Quarterly economic forecasts
Unemployment rate
Merchandise exports
Merchandise imports
Trade balance
Foreign currency reserves (IMF)
3-month money (%)
MXN/USD
*Numbers in shaded areas indicate forecasts.
Source: HSBC, INEGI, Banxico, SHCP
134
(% y-o-y)
(MXNbn)
(USDbn)
(% y-o-y)
(Average %)
(Year-end)
(Average %)
(USDbn)
(USDbn)
(USDbn)
(USDbn)
(% GDP)
(USDbn)
(% GDP)
(EOP, USDbn)
(EOP, %)
(EOP, %)
(EOP)
abc
Mexico Handbook
October 2012
Economics: Economic activity
Index of coincident indicators (seasonally adjusted series)
Index of leading indicators (seasonally adjusted series)
05/08
130
08/07
08/00
110
120
04/92
08/94
09/03
05/00
110
05/09
10/93
80
11/81
04/85
08/95
03/92 02/94
(-1) (-6)
05/81
(-6)
90
80
07/87
70
01/87
12/92
(-10)
09/82
60
(-3)
(-7)
11/98
12/90 (-10)
(-7)
Presidential periods
50
(-4)
07/86
(-6)
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Recessions
Coincident Index
Source: INEGI
Source: INEGI
Global economic activity indicator (annual variation)
Global economic activity indicator index
128
11
8
124
5
120
(Index)
2
(%)
02/09
04/95
04/83
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
-1
116
112
-4
-7
108
-10
104
-13
2006
2006
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
2012
2012
Seasonally adjusted series
Trend
Source: INEGI
Source: INEGI
Industrial production index
Percentage of use of installed capacity
123
82
121
81
119
80
117
79
115
(%)
(Index)
04/05
02/03
11/97
06/84
65
50
03/04
(-3)
100
(Index)
(Index)
95
(-9)
113
111
77
|
109
78
76
107
75
105
103
74
2006
2007
2008
2009
Source: INEGI
2010
2011
2012
2007
2008
2009
Original serie
Trend
2010
2011
2012
6 month mov . av g.
Source: INEGI
135
abc
Mexico Handbook
October 2012
Economics: International trade
Trade balance
Exports and imports (seasonally adjusted series)
31,000
29,000
27,000
(USDm)
(USDm)
33,000
1,600
1,100
600
100
-400
-900
-1,400
-1,900
-2,400
-2,900
-3,400
25,000
23,000
21,000
19,000
17,000
2007
2008
2009
2010
2011
2012
2006
2008
2010
Ex ports
2012
Imports
Source: INEGI
Source: INEGI, central bank
Non-oil exports (seasonally adjusted series)
Oil exports and imports (seasonally adjusted series)
6,000
28,500
26,500
5,000
4,000
22,500
(USDm)
(USDm)
24,500
20,500
3,000
18,500
16,500
2,000
14,500
2006
2007
2008
2009
2010
2011
1,000
2012
2006
Ex ports Non-Oil
Trend
2007
2008
2009
2010
Oil ex ports
2011
2012
Oil imports
Source: INEGI
Imports (seasonally adjusted series)
Automobile exports in units
5,200
24,000
4,700
22,000
4,200
20,000
3,700
18,000
3,200
16,000
2,700
14,000
2,200
12,000
240,000
220,000
180,000
(Units)
(USDm)
200,000
160,000
140,000
120,000
100,000
80,000
2006
2007
2008
2009
2010
2011
60,000
40,000
2006
2012
2007
2008
Units
Consumer goods
136
Capital goods
Intermediate goods (RHS)
Source: AMIA
2009
2010
2011
6 Month mov . av g.
2012
abc
Mexico Handbook
October 2012
Economics: Domestic demand
Retail sales index
Same-store sales and total (real annual % change, six-month
moving average)
15
128
13
126
11
124
9
7
120
(%)
(Index)
122
5
3
118
1
116
-1
-3
114
-5
112
-7
2006
2007
2008
2009
2010
Sesonally adjusted series
2011
2012
2006
2007
Trend
2008
2009
2010
Total
Source: INEGI
Source: ANTAD
Same-store sales index
Consumer confidence index
120
2011
2012
Same-store
113
108
115
(Index)
(Index)
103
110
105
98
93
88
100
83
95
78
2006
2007
2008
2009
Index
2010
2011
2012
2006
2007
2008
2009
2010
2011
6 Month mov . av g.
Source: ANTAD
Source: INEGI
Consumer credit
Possibility of purchasing durable goods (CCI)
170
2012
Trend
120
110
155
(Index)
100
140
90
80
125
70
60
110
50
95
2006
2006
2007
Source: Central bank
2008
2009
2010
2011
2012
2007
2008
SA Index
2009
2010
2011
2012
Trend
Source: INEGI
137
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Mexico Handbook
October 2012
Economics: Employment
Manufacturing employment (seasonally adjusted series)
Real average earnings for employed person
103
103
102
100
101
(Index)
(Index)
97
100
99
94
98
91
97
2007
88
2007
2008
2009
2010
2011
2008
2012
2009
2010
2011
2012
Trend
Source: INEGI
Source: INEGI
Urban unemployment rate
Temporary and permanent workers enrolled in the IMSS
social security system
16,000,000
7.5
7.1
15,500,000
6.7
15,000,000
(Workers)
(Rate)
6.3
5.9
5.5
14,500,000
14,000,000
5.1
4.7
13,500,000
4.3
13,000,000
3.9
2006
2006
2007
2008
2009
2010
Sesonally adjusted series
2011
2007
2008
2009
2010
2011
Total insured
Trend
6 Month mov. avg.
Source: IMSS
Wage Index
Real Wage Index (average contribution to IMSS)
139
137
135
133
131
129
127
125
123
121
119
117
115
113
111
130
128
126
124
122
(Index)
(Index)
Source: INEGI
120
118
116
114
112
110
108
106
2006
Source: HSBC
138
2012
2012
2007
2008
2009
2010
2011
2012
2006
2007
Source: IMSS, HSBC
2008
2009
2010
2011
2012
abc
Mexico Handbook
October 2012
Economics: Inflation
Biweekly consumer inflation (annual variation)
Average inflation rates, 2011-1H12
6.5
Concept
2011
1H12
Average annual Average annual
variation
variation
Inflation
3.41
3.95
Core
3.21
3.43
Tradable
4.19
4.64
Tradable food
6.48
6.70
Tradable other
2.42
3.06
Non Tradable
2.40
2.43
Non-core
3.92
5.75
Agriculture
2.72
6.70
Administered & agreed
4.58
5.21
Totals might not equal sum of components due to rounding
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2005
2006
2007
2008
2009
Headline
2010
2011
2012
Core
Source: INEGI
Source: INEGI
Monthly Inflation
Pattern in fruit and vegetable prices, with large increases
alternating with declines annually
25.0
10.0
6.0
9.0
5.5
15.0
4.5
5.0
10.0
(%)
6.0
(%)
7.0
5.0
(%)
20.0
8.0
5.0
4.0
4.0
3.0
3.5
0.0
2.0
3.0
-5.0
1.0
2007
2008
2009
2010
Core
2011
2012
-10.0
Non-Core
2001
2003
2005
2007
2009
Source: INEGI
Administered and concerted prices
Tradable and non-tradable goods’ prices
9.5
8.0
8.0
6.5
(Annual variation, %)
(Annual variation, %)
Source: INEGI
6.5
5.0
2011
5.0
3.5
3.5
2.0
2.0
0.5
2006
2007
2008
2009
2010
2011
2012
0.5
2006
Source: INEGI
2007
2008
2009
2010
2011
Tradable
2012
Non-Tradable
Source: INEGI
139
abc
Mexico Handbook
October 2012
2. FX markets
Nominal FX
Real exchange rate (multilateral)
16
16 0
14
14 0
12 0
(I ndex)
(M XN/USD)
12
10
10 0
8
80
6
60
4
1995
1 999
200 1 2 003
200 5
2007
20 09
19 97
Source: Banxico
Source: Banxico
S&P 500 Index and FX
Oil prices and FX
16
15
0
16
2 00
15
4 00
8 00
12
1 ,00 0
1 ,20 0
10
9
(MXN/ US D)
13
11
200 7
2 009
30
60
12
11
90
1 ,40 0
10
1 ,60 0
9
1 ,80 0
8
1 20
2 004 20 05 20 06 20 07 200 8 200 9 201 0 2011 2012
S&P 500, inv erted (R HS)
M XN / U SD
Source: Bloomberg, HSBC
MXN speculative positions
MXN volatility
O il pr ice, inv erted (R HS)
9
17
50
5
10
16
40
4
11
15
3
12
2
13
1
14
0
15
-1
16
30
(MXN/US D)
(US D - MXN i nver te d)
6
14
20
13
10
12
0
11
10
200 8
2 009
20 10
M XN (ne t U S D)
Source: Bloomberg
140
201 1
0
Source: Bloomberg
(U SD bn)
200 3 2 005
13
2004 20 05 200 6 2007 20 08 200 9 2010 20 11 201 2
M XN / U SD
2 001
14
6 00
(Index )
(MXN/ US D)
14
1999
2011
2011
-10
2008
200 9
2010
20 11
2012
20 12
U S D-M X N
(U SD/ barr el )
1997
M XN Curn cy
Source: Bloomberg, HSBC
3 0-d ay Annua lized Vo latility (RHS)
(%)
19 95
abc
Mexico Handbook
October 2012
3. Fixed income markets
Central government debt distribution
100
Domestic debt distribution by rate type
%
1 00%
Infla tion -linked
80
80%
60
Floating-ra te
60%
40
40%
Fix ed-
20
20%
0
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Domestic
199 9
2001
2004
2006
2 009
20 11
Ex ternal
Source: Banxico
Source: Banxico
MBonos holdings by sector
Cetes holdings by sector
M XN m
900000
400,000
800000
350,000
700000
M XN
300,000
600000
250,000
500000
200,000
400000
300000
150,000
200000
100,000
100000
50,000
0
Jan-08
0
Aug-08
M ar-09
Oct-09
M ay -10 Dec-10
J ul-11
B anks
Foreign residents
P ension Funds
M utual F unds
M ar-12
Jan-09 J un-09 O ct-09 M ar-10 Aug-10 Jan-11 J un-11 N ov -11 Apr-12
Banks
Pension Funds
Source: Banxico
Source: Banxico
TIIE swap curve shows a strong correlation with the US
counterpart
Afores: Asset allocation
bp
300
Foreign res idents
Mutual Funds
4%
22%
19%
250
200
4%
150
100
22%
21%
50
8%
0
Mbonos
Udib onos
Non-gov ernm ent securities
Othe r
Jan-08 Jul-08 J an-09 Jul-09 Jan-10 J ul-10 Jan-11 Jul- 11 Jan-12 Jul- 12
Spread 10/2 US Sw ap rate
Source: Banxico
Spread 10/2 TIIE
Cetes
Floating-rate bonds
Equities
Source: Banxico
141
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Mexico Handbook
October 2012

4. Equity market: Mexico Stock Market indicators
Mexico: IPC index and moving averages
Mexico: Forward PE
45,000
18
40,000
16
+1SD
35,000
14
30,000
12
Avg
25,000
10
-1SD
20,000
8
15,000
2007
2008
2009
Mexico IPC
2010
2011
200 Day
2012
6
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
50 Day
Source: HSBC, Bloomberg
Source: HSBC, MSCI, Datastream
Mexico: Dividend yields (%)
Mexico: Estimated EPS growth (%) for 20012 and 2013
4.5
45
4.0
40
3.5
35
3.0
30
2.5
25
2.0
20
1.5
15
2012
2013
10
1.0
98
00
02
04
06
08
10
12
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Mexico: PBV vs ROE
Mexico: Earnings yield vs EMBI Mexico
4.0
30%
3.5
25%
13%
20%
11%
15%
9%
10%
7%
3.0
Jul-12
Sep-12
bp
15%
550
450
350
2.5
2.0
1.5
1.0
5%
04
05
06
07
08
Mexico PBV (RHS)
142
650
09
10
11
12
250
150
50
5%
03
04
05
06
07
Earnings Yield
Mexico ROE
Source: HSBC, Bloomberg
08
09
10
11
EMBI Mexico
12
Sector/stock
Consumer Discr.
LIVERPOOL
TLEVISA
Consumer Staples
AC
BIMBO
KOF
FEMSA
GMODELO
KIMBER
WALMEX
Financials
COMPARC
GFINBUR
GFNORTE
Industrials
ALFA
GAP
GCARSO
Materials
CEMEX
GMEXICO
MEXCHEM
MFRISCO
PENOLES
Telecoms
AMX
Weighting Total mkt
(%) cap (USDm)
7.7
0.9
6.8
30.1
1.2
2.4
2.8
9.7
3.3
1.9
8.8
9.5
0.6
3.0
5.8
4.5
2.7
0.7
1.2
17.4
4.3
6.3
2.1
1.5
3.3
30.7
30.7
24,443
11,236
13,207
165,655
11,429
11,361
26,121
29,917
29,221
6,887
50,720
32,822
1,908
18,365
12,549
18,996
9,086
2,236
7,673
72,784
9,177
25,144
8,722
10,628
19,113
96,735
96,735
ADTV*
(USDm)
43
3
40
312
9
22
8
23
29
28
192
117
38
23
56
21
9
7
4
557
430
97
23
6
2
706
706
_____Actual market ratios ______
PE
PB
DY
22.7
20.6
24.8
28.9
29.0
31.8
29.0
26.7
31.9
25.0
28.7
22.6
12.3
38.9
16.5
19.3
22.1
17.0
18.7
78.4
N.D.
9.6
31.5
250.4
22.2
15.7
15.7
3.2
3.3
3.2
5.3
4.0
3.0
3.5
3.0
5.1
13.3
5.1
2.9
3.3
3.2
2.1
2.2
2.4
1.3
2.9
5.2
0.8
2.9
4.3
11.8
6.4
4.4
4.4
0.5
0.5
0.6
2.1
1.6
0.5
1.7
1.6
3.8
4.2
1.2
1.2
2.0
0.9
0.8
2.9
1.1
6.2
1.4
1.4
0.0
3.9
0.7
0.0
2.6
1.2
1.2
_____________Local currency performance (%) ______________ _________________ USD performance (%) __________________
1M
3M
6M
YTD
12M
1M
3M
6M
YTD
12M
-0.7
1.2
-2.6
4.9
11.9
0.9
7.0
8.8
-2.2
6.1
1.8
2.7
7.0
-1.6
2.8
1.9
5.1
-1.5
2.2
4.0
2.1
0.5
-0.8
7.1
11.4
-1.9
-1.9
5.7
7.0
4.3
7.8
20.6
0.1
-2.9
1.6
18.6
12.6
4.2
7.5
-1.9
20.7
3.8
7.6
19.2
0.8
2.6
12.3
37.8
6.5
12.7
-5.2
10.0
-6.5
-6.5
9.4
8.2
10.7
19.5
51.8
5.0
28.7
20.3
31.1
12.2
-12.6
20.8
4.5
34.6
23.4
14.4
31.6
3.8
7.6
9.2
12.2
4.2
33.6
-5.7
1.4
6.6
6.6
6.2
11.2
1.2
21.6
53.5
9.1
24.6
21.7
31.2
14.6
-3.6
29.4
-13.8
38.0
63.9
28.4
49.0
8.5
27.6
23.1
52.3
13.9
42.2
5.9
1.1
3.1
3.1
24.2
27.9
20.6
37.5
54.3
29.7
37.1
35.8
56.5
27.1
21.9
41.2
-11.0
59.3
75.3
39.4
66.9
9.2
42.0
51.1
140.4
29.0
48.6
23.2
14.3
10.7
10.7
2.1
4.7
-0.5
6.4
12.8
4.6
7.8
9.1
-1.0
8.1
3.6
5.1
9.0
-0.2
6.4
4.2
7.3
0.6
4.7
7.8
8.5
3.9
2.5
11.1
13.2
-1.6
-1.6
15.7
16.8
14.5
17.9
30.2
8.8
4.1
10.3
31.5
25.5
14.6
19.6
9.4
34.1
15.3
16.9
29.3
9.9
11.5
23.4
52.1
17.2
22.5
4.6
20.7
0.8
0.8
8.0
5.7
10.4
18.3
49.2
4.6
27.2
19.8
29.6
11.0
-13.6
19.5
3.7
33.8
21.0
13.0
30.9
3.9
4.2
6.7
8.7
1.2
31.5
-6.7
-1.3
5.4
5.4
15.3
20.7
9.8
31.9
66.5
18.4
35.2
32.1
42.4
24.3
4.3
40.4
-6.5
49.8
77.8
39.3
61.7
17.8
38.4
33.5
65.2
23.5
54.3
14.9
9.7
11.9
11.9
28.3
30.8
25.8
37.5
55.9
31.0
36.3
35.2
55.2
27.9
21.4
37.0
-13.1
55.8
68.3
37.3
61.1
12.6
38.2
45.1
119.8
27.5
44.7
19.7
13.7
10.0
10.0
Mexico Handbook
October 2012
Equity market: Mexico MSCI Index, market performance and valuation by sector and stock
Data as of 25 September 2012.
*ADTV = 12-month average daily traded volume.
Source: HSBC, Bloomberg, Mexico Stock Market
abc
143
144
Sector/Stock
ADTV* ______ Actual market ratios _______
(USDm)
PE
PB
DY
_____________Local currency performance (%)______________
1M
3M
6M
YTD
12M
_________________ USD performance (%) __________________
1M
3M
6M
YTD
12M
10.5
6.4
1.6
0.9
0.3
0.3
0.2
0.4
0.2
31.2
38,747
13,207
9,344
11,236
830
697
576
1936
922
169,660
178
40
2
3
12
30
56
23
12
328
20.7
24.8
52.2
20.6
5.3
7.2
3.8
11.9
40.0
26.2
2.2
3.2
2.9
3.3
0.7
1.0
0.4
2.5
3.7
4.4
0.26
0.59
0.39
0.49
0.00
0.00
0.00
0.60
0.00
1.69
1.0
-2.6
-17.0
1.2
14.0
10.0
3.6
-1.6
0.5
3.1
-3.5
4.3
-7.3
7.0
-6.6
9.9
-42.0
0.0
6.7
5.6
-13.8
10.7
-55.1
8.2
-20.6
-20.2
-49.8
7.3
9.1
15.8
-11.9
1.2
-63.4
11.2
-18.6
-6.9
-52.3
-3.0
36.4
19.8
1.7
20.6
-47.8
27.9
-4.9
-19.8
-62.6
20.5
79.9
35.8
3.6
-0.5
-16.2
4.7
16.7
15.5
7.4
-0.7
1.6
4.7
7.7
14.5
2.1
16.8
8.1
25.3
-34.1
10.4
18.2
15.6
-15.1
10.4
-55.7
5.7
-23.2
-21.3
-49.5
5.5
7.8
14.3
-4.4
9.8
-60.3
20.7
-11.7
1.0
-48.2
5.2
47.9
29.9
2.6
25.8
-46.4
30.8
-5.4
-22.0
-63.7
23.5
77.7
36.0
11.0
8.6
2.8
1.8
1.8
2.9
1.9
0.2
0.2
7.2
6.1
0.6
0.5
3.0
0.9
0.9
6.2
3.4
0.5
0.6
0.6
0.6
0.4
17.2
6.8
3.9
0.6
3.1
1.9
1.0
23.9
23.9
50,720
29,917
29,221
11,361
6,887
26,121
11,429
2,466
1,539
15,681
12,549
1,908
1,224
18,365
2,061
2,061
23,046
9,086
5,589
2,236
1,147
2,561
2,426
75,369
25,144
9,177
2,585
19,113
8,722
10,628
96,735
96,735
192
23
29
22
28
8
9
8
8
111
56
38
18
23
61
61
117
9
41
7
39
3
18
562
97
430
5
2
23
6
706
706
28.7
26.7
31.9
31.8
25.0
29.0
29.0
21.5
12.4
16.4
16.5
12.3
20.4
38.9
19.0
19.0
16.1
22.1
15.2
17.0
N.D.
18.0
8.3
64.6
9.6
N.D.
9.4
22.2
31.5
250.4
15.7
15.7
5.1
3.0
5.1
3.0
13.3
3.5
4.0
1.6
1.4
2.8
2.1
3.3
3.1
3.2
4.6
4.6
1.8
2.4
2.7
1.3
0.9
2.1
1.1
4.6
2.9
0.8
1.3
6.4
4.3
11.8
4.4
4.4
1.20
1.57
3.75
0.48
4.17
1.67
1.64
0.68
0.00
2.40
0.77
2.03
4.41
0.92
0.00
0.00
1.98
1.13
1.27
6.23
0.00
3.28
0.00
1.18
3.85
0.00
0.00
2.60
0.66
0.00
1.23
1.23
1.8
8.8
-2.2
0.9
6.1
7.0
11.9
-3.2
-3.6
3.8
2.8
7.0
1.7
-1.6
-10.0
-10.0
1.2
5.1
0.2
-1.5
2.5
-2.4
3.4
4.1
0.5
2.1
4.6
11.4
-0.8
7.1
-1.9
-1.9
4.2
1.6
18.6
0.1
12.6
-2.9
20.6
-7.0
2.8
0.1
3.8
-1.9
-1.7
20.7
-1.1
-1.1
14.7
19.2
17.0
0.8
8.5
7.7
35.0
14.9
6.5
37.8
27.4
10.0
12.7
-5.2
-6.5
-6.5
-12.6
20.3
31.1
5.0
12.2
28.7
51.8
-0.2
5.7
10.7
23.4
4.5
4.3
34.6
4.4
4.4
10.6
31.6
0.0
3.8
3.1
24.8
0.5
12.0
4.2
12.2
26.5
1.4
33.6
-5.7
6.6
6.6
-3.6
21.7
31.2
9.1
14.6
24.6
53.5
-6.2
33.0
22.8
63.9
-13.8
18.3
38.0
-6.7
-6.7
23.0
49.0
0.0
8.5
44.0
39.7
-3.3
29.7
13.9
52.3
62.5
1.1
42.2
5.9
3.1
3.1
21.9
35.8
56.5
29.7
27.1
37.1
54.3
2.4
57.3
38.3
75.3
-11.0
50.7
59.3
12.7
12.7
32.2
66.9
0.0
9.2
53.7
60.7
2.9
58.7
29.0
140.4
96.7
14.3
48.6
23.2
10.7
10.7
3.6
9.1
-1.0
4.6
8.1
7.8
12.8
-1.6
-0.8
6.3
6.4
9.0
3.4
-0.2
-5.5
-5.5
3.3
7.3
0.5
0.6
6.2
0.2
5.3
7.7
3.9
8.5
6.9
13.2
2.5
11.1
-1.6
-1.6
14.6
10.3
31.5
8.8
25.5
4.1
30.2
1.8
13.0
11.1
15.3
9.4
8.6
34.1
11.7
11.7
26.0
29.3
30.6
9.9
23.4
17.0
45.7
26.2
17.2
52.1
39.8
20.7
22.5
4.6
0.8
0.8
-13.6
19.8
29.6
4.6
11.0
27.2
49.2
-1.2
2.4
9.4
21.0
3.7
3.4
33.8
5.4
5.4
9.3
30.9
0.0
3.9
-0.2
22.1
-0.8
9.6
1.2
8.7
23.8
-1.3
31.5
-6.7
5.4
5.4
4.3
32.1
42.4
18.4
24.3
35.2
66.5
1.7
44.3
33.2
77.8
-6.5
28.3
49.8
4.0
4.0
32.0
61.7
0.0
17.8
56.2
51.6
4.9
40.7
23.5
65.2
76.3
9.7
54.3
14.9
11.9
11.9
21.4
35.2
55.2
31.0
27.9
36.3
55.9
4.3
57.0
32.9
68.3
-13.1
43.4
55.8
12.1
12.1
31.1
61.1
0.0
12.6
48.0
65.4
-0.7
54.2
27.5
119.8
100.0
13.7
44.7
19.7
10.0
10.0
Source: HSBC, Bloomberg, Mexico Stock Market
abc
Consumer
Discr.
TLEVISA
ELEKTRA
LIVERPOOL
HOMEX
GEO
URBI
AZTECA
ALSEA
Consumer
Staples
WALMEX
FEMSA
GMODELO
BIMBO
KIMBER
KOF
AC
CHEDRAUI
GRUMA
Financials
GFNORTE
COMPARC
BOLSA
GFINBUR
Healthcare
LAB
Industrials
ALFA
ALPEK
GAP
ICA
ASUR
OHLMEX
Materials
GMEXICO
CEMEX
ICH
PENOLES
MEXCHEM
MFRISCO
Telecoms
AMX
Weighting
Total mkt
(%) cap (USDm)
Mexico Handbook
October 2012
Equity market: Mexico IPC Index, market performance and valuation by sector and stock
_______________ PE (x) ________________ __________________PBV (x) ___________________ ______________ Dividend yield_______________
Fwd 12m
2012e
2013e
2014e
2011
2012e
2013e
2014e
2011
2012e
2013e
2014e
Consumer Discretionary
Consumer Staples
Financials
Industrials
Materials
Telecom Services
20.1
22.1
15.0
16.1
20.7
11.6
21.5
25.2
17.0
15.8
26.5
12.6
17.8
21.1
14.0
15.5
17.9
11.6
16.9
18.1
12.1
13.1
16.5
10.5
3.3
3.8
2.5
2.4
1.5
4.5
2.8
3.7
2.2
2.1
1.5
3.8
2.5
3.2
2.0
1.9
1.4
3.7
2.4
2.9
1.5
1.7
1.5
3.3
1.7
1.8
0.9
1.5
3.0
7.0
0.6
1.9
1.0
1.8
3.1
1.6
1.2
2.1
1.4
1.8
2.3
2.3
__________________ ROE ___________________
2011
2012e
2013e
2014e
1.8
2.3
1.7
2.0
3.1
3.2
13.5
13.5
11.8
11.3
0.9
28.8
12.9
14.6
13.2
13.5
5.7
30.3
14.0
15.1
14.1
12.4
8.0
32.0
14.2
15.7
12.5
13.0
9.3
31.1
Source: HSBC, I/B/E/S, MSCI, Thomson Reuters Datastream
Mexico Handbook
October 2012
Equity market: Mexico sector valuations
Equity market: GEM valuations
Emerging
markets
Czech Rep.
Hungary
Poland
Egypt
Russia
South Africa
Turkey
China
India
Indonesia
Korea
Malaysia
Philippines
Taiwan
Argentina
Brazil
Chile
Colombia
Mexico
LatAm
EM Asia
GEMs
___________________PE ____________________ ____________________PB _____________________ __________________ DY (%) __________________ __________________ ROE (%) ___________________
12m 12m
5 year 10 year
12m 12m
5 year 10 year
12m 12m
5 year 10 year 12m 12m
5 year 10 year
trailing fwd ’12e ’13e ’14e
avg.
avg. trailing fwd ’12e ’13e ’14e
avg.
avg. trailing fwd ’12e ’13e ’14e avg. avg. trailing
fwd ’12e ’13e ’14e
avg.
avg.
10.5 10.5
9.0 8.0
10.1 10.6
9.0 7.9
4.8 5.0
13.1 11.3
11.3 10.1
9.3 8.6
14.6 13.0
14.8 13.2
10.2 8.4
15.4 13.9
17.3 15.4
17.1 14.4
3.1 3.1
10.7 9.9
17.0 15.1
15.7 12.5
19.8 16.5
12.6 11.4
11.7 10.2
11.0 9.9
10.5
9.4
10.5
8.4
4.9
13.0
11.1
9.2
13.9
14.5
9.6
15.1
16.9
16.7
3.2
11.0
16.8
15.0
18.6
12.7
11.3
10.8
10.5
7.6
10.6
7.7
5.0
11.1
9.8
8.4
12.2
12.8
8.1
13.7
15.0
13.7
3.1
9.5
14.7
11.9
15.9
11.0
9.9
9.6
10.3
6.3
10.0
7.9
4.7
10.1
8.8
7.6
10.8
11.0
7.3
12.6
13.9
12.1
3.1
8.6
13.2
14.7
14.0
9.9
8.8
8.7
11.0
8.7
10.9
9.8
6.7
10.5
8.8
12.1
15.0
12.6
10.0
14.0
13.9
14.9
9.0
10.1
15.5
14.9
13.3
11.0
12.0
10.9
12.6
9.4
12.0
10.7
7.9
10.3
9.2
12.1
14.6
11.0
9.4
13.9
13.5
13.9
11.2
8.4
15.8
16.3
12.9
10.2
11.4
10.7
1.7
0.9
1.2
0.5
0.7
2.2
1.7
1.4
2.3
3.4
1.2
2.1
2.7
1.7
1.1
1.3
2.0
1.5
2.8
1.6
1.6
1.5
1.6
0.9
1.2
0.8
0.6
2.0
1.5
1.3
2.0
2.9
1.1
1.9
2.4
1.6
0.9
1.3
1.9
1.3
2.5
1.5
1.4
1.4
1.7
0.9
1.2
0.8
0.7
2.2
1.7
1.4
2.2
3.3
1.2
2.0
2.6
1.7
1.1
1.4
2.0
1.4
2.7
1.6
1.5
1.5
1.6
0.8
1.2
0.8
0.6
2.0
1.5
1.2
1.9
2.8
1.1
1.9
2.3
1.6
0.9
1.3
1.8
1.3
2.5
1.5
1.4
1.3
1.4
0.8
1.1
0.6
0.6
1.8
1.3
1.1
1.8
2.5
0.9
1.7
2.2
1.5
0.7
1.2
1.7
1.0
2.5
1.4
1.2
1.2
2.0
1.2
1.4
1.8
1.0
1.8
1.4
2.0
2.5
3.1
1.3
1.9
2.2
1.7
2.0
1.7
1.8
2.0
2.6
1.9
1.7
1.7
2.1
1.4
1.6
2.3
1.2
1.9
1.5
2.1
2.8
3.1
1.4
1.9
2.2
1.8
2.1
1.9
1.8
2.0
2.7
2.0
1.8
1.7
6.8 6.9
3.7 4.6
5.0 5.0
3.9 4.6
3.8 4.1
3.6 4.1
2.8 3.2
3.5 3.7
1.6 1.7
2.6 3.0
1.2 1.3
3.3 3.6
2.4 2.5
3.5 3.7
13.4 11.7
4.2 4.3
3.8 3.9
2.7 3.3
2.2 2.0
3.6 3.6
2.6 2.8
3.0 3.2
6.9
4.0
5.1
4.0
4.0
3.7
2.9
3.5
1.7
2.8
1.2
3.4
2.3
3.5
11.9
4.2
3.9
2.9
1.8
3.5
2.6
3.0
7.0
4.8
5.0
4.8
4.2
4.1
3.3
3.8
1.8
3.0
1.3
3.6
2.6
3.7
11.7
4.3
3.9
3.4
2.0
3.7
2.9
3.3
7.0
6.0
5.2
5.4
4.4
4.6
3.5
4.1
2.1
3.5
1.4
3.8
2.9
4.1
12.8
4.8
4.3
3.8
2.5
4.2
3.1
3.6
6.3
4.3
4.5
5.3
2.8
4.0
3.9
3.1
1.5
3.4
1.7
3.7
3.5
4.4
5.4
3.6
4.5
3.9
3.2
3.7
2.9
3.2
5.3
3.9
4.2
4.5
2.5
4.0
3.7
3.0
1.6
3.6
1.9
3.8
3.1
4.1
4.1
4.5
4.2
3.9
2.8
4.4
2.9
3.8
16.4
10.3
12.4
5.2
15.2
16.9
15.0
15.3
15.7
23.0
11.6
13.6
15.4
10.0
34.3
12.3
11.9
9.8
13.9
12.6
13.3
13.5
15.6
10.7
11.2
10.0
13.0
17.7
15.0
14.7
15.7
22.2
13.1
13.8
15.5
11.5
29.1
13.1
12.2
10.2
15.4
13.4
14.0
13.9
16.3
9.7
11.8
9.8
14.2
17.0
14.9
14.9
15.7
22.6
12.7
13.5
15.3
10.1
33.3
12.4
11.6
9.0
14.6
12.7
13.6
13.6
15.4 13.6
11.0 12.4
11.1 11.1
10.1 8.1
12.6 12.1
17.9 17.8
15.0 15.0
14.6 14.6
15.7 16.4
22.1 22.3
13.2 12.9
13.9 13.9
15.5 15.9
11.8 12.6
27.9 22.8
13.3 13.5
12.4 13.1
10.6 6.6
15.7 17.5
13.7 13.8
14.1 14.1
13.9 13.9
18.3
13.8
13.1
17.4
14.4
16.6
16.3
16.3
16.6
24.7
13.2
13.6
15.5
12.3
26.6
17.0
11.6
12.2
19.9
16.9
14.5
15.1
15.5
16.2
13.9
21.2
14.3
17.2
15.8
16.0
18.1
24.4
14.1
13.6
14.6
13.5
24.0
22.3
11.0
12.1
20.1
19.1
15.1
16.0
Source: I/B/E/S, MSCI, Thomson Reuters Datastream, HSBC
abc
145
146
World
Consumer Discr.
Consumer Staples
Energy
Financials
Healthcare
Industrials
Inform, Technology
Materials
Telecom Services
Utilities
Market aggregate
Sector neutral*
12.7
15.5
10.1
10.2
12.8
11.8
12.5
11.2
12.6
14.6
11.8
12.4
US Europe GEMs
15.1
15.5
11.6
11.5
12.6
12.6
12.4
12.5
19.8
14.8
13.0
13.8
8.8
11.0
12.3
10.6
14.9
12.1
8.9
16.7
10.0
10.5
10.8
11.6
10.0
19.9
6.8
8.7
19.0
11.5
11.6
9.7
12.1
11.5
9.9
12.1
EMEA EM Asia
14.8
18.4
4.7
9.1
15.9
10.3
9.5
9.1
10.8
10.1
7.9
11.3
8.7
19.2
9.1
8.1
20.4
10.8
11.4
10.6
13.3
13.2
10.2
12.5
LatAm
Brazil
Mexico
15.8
21.1
8.6
10.4
21.6
18.4
15.8
9.2
11.4
10.6
11.4
14.3
12.5
20.8
8.8
9.8
21.6
18.7
15.8
6.7
12.5
9.3
9.9
13.7
20.1
22.1
NA
15.0
NA
16.1
NA
20.7
11.6
NA
16.5
17.6
Chile Argentina
20.9
17.4
NA
11.3
NA
19.7
NA
18.4
11.3
12.6
15.1
15.9
NA
NA
3.2
2.7
NA
NA
NA
NA
3.3
NA
3.1
3.1
Peru Colombia
NA
NA
NA
11.8
NA
NA
NA
11.8
NA
NA
11.8
11.8
NA
24.9
8.8
12.4
NA
NA
NA
36.1
NA
43.2
12.5
25.1
China
India
10.9
21.3
8.6
6.3
17.7
9.5
19.2
8.6
11.6
11.6
8.6
12.5
9.6
28.6
11.3
12.6
21.4
12.0
15.5
8.6
16.3
12.1
13.0
14.8
Russia S. Africa
NA
NA
4.1
5.8
NA
NA
NA
9.1
9.6
11.5
5.0
8.0
15.3
18.5
8.1
10.6
16.7
10.8
NA
9.4
11.9
NA
11.3
12.7
Korea
7.0
14.9
8.5
7.1
17.2
9.9
8.6
9.0
8.7
30.3
8.4
12.1
Taiwan Malaysia
14.3
19.5
27.7
12.5
NA
13.8
13.8
17.1
17.2
NA
14.4
17.0
12.2
16.2
18.2
11.9
36.4
13.3
NA
13.2
20.6
13.4
13.9
17.3
Turkey
9.4
23.2
8.7
9.1
NA
9.3
NA
8.7
11.2
NA
10.1
11.4
Mexico Handbook
October 2012
Equity market: 12-month forward PE matrix for countries and sectors
* Sector neutral PE for the market is calculated by taking simple average of the 10 sectors.
Source: HSBC, IBES, MSCI, Thomson Reuters Datastream
abc
Name
Ticker
Covering
analyst
HSBC
rating
Price Mkt cap ADTV*
21-Sep (USDm) (MXNm)
Alfa
Alpek
Alsea
America Movil
Arca Continental
Bolsa Mexicana de Valores
Cemex
Chedraui
Coca-Cola Femsa
Compartamos
Consorcio Ara
Corporacion Geo
Desarrolladora Homex
Empresas ICA
FEMSA
Financiera Independiente
Genomma Lab
Gruma
Grupo Aeroportuario del Centro
Grupo Aeroportuario del Pacífico
Grupo Aeroportuario del Sureste
Grupo Bimbo
Grupo Carso
Grupo Financiero Banorte
Grupo Herdez
Grupo Kuo
Grupo Modelo
Grupo Televisa
Kimberly-Clark de Mexico
Megacable Holdings
Mexichem
Orgranizacion Soriana
Sare Holding
TV Azteca
Urbi Desarrollos Urbanos
Wal-Mart de Mexico
ALFAA.MX
ALPEKA.MX
ALSEA.MX
AMX.N
AC.MX
BOLSAA.MX
CX.N
CHDRAUIB.MX
KOF.N
COMPARC.MX
ARA.MX
GEOB.MX
HOMEX.MX
ICA.MX
FMX.N
FINDEP.MX
LABB.MX
GRUMAB.MX
OMAB.OQ
PAC.N
ASR.N
BIMBOA.MX
GCARSOA1.MX
GFNORTEO.MX
HERDEZ.MX
KUOB.MX
GMODELOC.MX
TV.N
KIMBERA.MX
MEGACPO.MX
MEXCHEM.MX
SORIANAB.MX
SAREB.MX
AZTECACPO.MX
URBI.MX
WALMEXV.MX
Mateos, Juan Carlos
Mateos, Juan Carlos
Chevez, Francisco
Dineen, Richard
Torres, Lauren
Ribeiro, Paulo
Suarez, Francisco
Chevez, Francisco
Torres, Lauren
Galliano, Victor
Suarez, Francisco
Suarez, Francisco
Suarez, Francisco
Suarez, Francisco
Torres, Lauren
Galliano, Victor
Chevez, Francisco
Herrera, Pedro
Suarez, Francisco
Suarez, Francisco
Suarez, Francisco
Herrera, Pedro
Mateos, Juan Carlos
Galliano, Victor
Gomez Tagle, Enrique
Mateos, Juan Carlos
Torres, Lauren
Dineen, Richard
Mateos, Juan Carlos
Dineen, Richard
Mateos, Juan Carlos
Chevez, Francisco
Suarez, Francisco
Dineen, Richard
Suarez, Francisco
Chevez, Francisco
Overweight
Overweight (V)
Overweight
Neutral
Neutral
Overweight
Neutral (V)
Overweight
Overweight
Neutral
Neutral
Overweight (V)
Overweight (V)
Overweight (V)
Overweight
Neutral
Overweight
Overweight
Neutral (V)
Neutral (V)
Neutral
Neutral
Neutral
Neutral
Overweight
Overweight
Neutral
Overweight
Neutral
Neutral
Overweight
Neutral
Neutral (V)
Underweight
Underweight (V)
Overweight
226.51
33.93
18.7
25.24
91.21
26.55
8.44
32.89
128.33
14.76
4.03
16.16
31.78
24.39
91.64
4.20
25.17
35.12
28.77
39.70
85.01
31.06
43.09
69.36
33.26
27.00
116.12
23.12
28.75
29.00
60.95
41.33
1.13
8.62
7.58
36.75
9,220
5,587
932
99,615
11,330
1,221
9,165
2,395
26,271
1,748
407
696
754
2,279
32,454
235
2,289
1,534
748
1961
2656
11,218
7,798
13,010
1,082
965
19,694
15,453
7,070
1,941
8,852
5,733
61
2,054
536
49,667
162
92
19
142
62
40
88
22
12
57
10
53
40
79
42
1
133
25
4
2
4
65
18
310
15
1
245
37
65
4
123
18
9
17
66
656
______ PE _______
2012e
2013e
13.11
15.77
28.15
12.58
25.20
20.12
-11.13
18.68
24.57
11.25
7.21
6.87
3.26
10.71
22.70
9.33
17.43
16.27
17.67
23.41
20.06
26.43
17.68
14.58
17.97
15.06
31.12
10.70
24.17
12.12
18.10
19.30
-14.09
11.98
2.84
24.67
13.52
12.12
19.81
11.18
21.87
16.11
-24.90
17.20
21.11
10.41
6.94
5.73
4.25
7.52
20.24
7.65
13.35
10.78
15.08
22.11
18.57
22.55
16.85
11.74
16.16
13.30
28.77
10.10
21.42
12.27
16.44
17.44
19.56
10.85
2.97
19.65
_ EV/EBITDA ___
2012e
2013e
___ PB ____ Dividend yield EPS growth (%)
ROE (%)
2012e 2013e 2012e 2013e 2012e 2013e 2012e 2013e
6.67
7.90
9.44
5.73
13.58
9.83
9.89
7.56
12.17
N.A.
5.87
4.15
3.49
9.56
10.99
N.A.
9.56
6.27
9.00
9.93
12.38
11.02
9.87
N.A.
9.21
6.69
7.32
7.46
12.56
6.19
9.47
9.36
36.22
5.68
2.98
14.14
2.42 2.16
2.56 2.15
3.63 3.40
3.88 3.30
7.76 9.11
2.80 2.66
0.76 0.79
1.65 1.53
0.23 0.21
2.88 2.41
0.55 0.50
0.87 0.72
0.64 0.55
0.80 0.73
3.10 3.22
6.39 5.68
4.07 3.11
1.33 1.17
2.47 2.90
1.11 1.11
2.06 1.98
2.74 2.47
2.72 2.46
1.99 1.75
3.29 3.06
1.54 1.40
4.63 4.47
3.82 3.40
12.93 12.71
8.83 8.55
3.84 3.22
1.84 1.67
0.26 0.23
2.12 1.83
0.37 0.33
4.74 4.21
6.02
6.70
7.06
5.36
11.93
7.69
8.52
6.67
10.33
N.A.
5.84
3.87
3.70
10.02
9.71
N.A.
7.80
5.56
7.87
9.95
11.23
9.72
8.47
N.A.
8.51
6.33
6.53
7.10
11.47
5.76
8.42
8.35
14.51
5.25
2.73
11.17
1.50
1.64
1.41
1.07
1.33
4.47
0.00
1.07
0.17
2.49
0.00
0.00
0.00
0.00
0.17
0.00
1.72
0.00
3.85
7.21
3.07
0.42
1.38
1.28
2.34
0.37
3.21
0.11
3.97
0.00
2.12
1.04
0.00
1.30
0.00
1.21
1.57
1.77
2.02
1.27
1.49
5.59
0.00
1.16
0.17
2.69
0.00
0.00
0.00
0.00
0.19
0.00
2.25
0.00
4.49
4.51
3.29
0.49
1.37
1.70
5.12
0.92
5.09
0.47
4.09
0.00
0.45
1.15
0.00
1.13
0.00
1.43
81.84 -3.01
20.11 30.10
53.89 42.11
5.64 12.49
24.11 15.23
5.45 24.94
-46.74 -55.30
53.43
8.61
19.23 16.43
5.92
8.08
12.12
3.84
-10.07 19.89
128.49 -23.41
-43.61 42.46
20.76 12.16
174.11 21.86
18.73 30.63
-11.16 50.93
19.89 17.16
-2.92
5.92
12.14
8.05
12.63 17.24
48.45
4.94
34.08 24.19
1.22 11.15
N.M. 13.24
1.97
8.15
49.92
5.92
-63.12 12.85
12.10 -1.25
123.91 10.09
24.86 10.67
-56.72 -172.07
-0.66 10.49
1.54 -4.34
17.63 25.52
16.42
22.16
13.58
27.54
15.02
13.92
-6.68
9.34
13.62
26.29
7.67
13.85
20.16
7.29
9.09
10.67
26.84
8.63
10.65
5.02
10.83
10.74
16.70
15.53
19.60
10.83
14.40
16.64
54.73
14.52
23.76
9.59
-1.88
16.86
12.94
18.71
14.06
19.10
17.57
26.69
15.37
17.12
-3.46
9.41
13.86
24.29
7.47
14.76
13.25
8.91
9.20
11.62
28.81
11.75
12.08
5.42
11.23
11.40
15.34
16.51
20.28
11.12
14.42
15.72
68.66
12.54
21.51
9.64
1.36
15.97
10.97
20.29
Mexico Handbook
October 2012
Equity market: HSBC stock coverage
HSBC ratings: V = Volatile
Source: HSBC estimates
abc
147
Mexico Handbook
October 2012
Equity market: Mexican companies’ estimated dividend yields
(MXN)
Company
Gap
Kimber
Bolsa
Oma
Asur
Grupo Modelo
Herdez
Compartamos
Alpek
Alsea
Lab
GFNorte
Arca Continental
Walmex
Azteca
Chedraui
AMX
Kuo
Soriana
GCarso
Grupo Televisa
Alfa
Mexichem
Bimbo
Femsa
Kof
Ara
Geo
Homex
ICA
Findep
Gruma
Mega
Sare
Urbi
Average
Source: HSBC, I/B/E/S, Datastream
148
__________ Dividend per share ___________
2012e
2013e
1.97
0.09
0.09
0.64
2.64
0.27
0.07
0.03
0.04
0.03
0.04
0.10
0.09
0.03
0.01
0.03
0.27
0.02
0.03
0.02
0.13
0.09
0.02
0.01
0.15
0.20
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
2.12
0.09
0.11
0.74
2.85
0.43
0.12
0.03
0.04
0.04
0.05
0.10
0.10
0.04
0.01
0.03
0.32
0.02
0.03
0.02
0.55
0.09
0.02
0.01
0.16
0.21
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
_____________ Dividend yield (%) ______________
2012e
2013e
5.14
4.64
4.56
3.96
3.42
3.28
2.95
2.23
2.03
2.03
1.99
1.90
1.59
1.26
1.20
1.19
1.08
1.00
0.93
0.65
0.60
0.58
0.50
0.40
0.17
0.16
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
2.18
5.53
4.77
5.70
4.62
3.70
5.21
5.47
2.41
2.03
3.00
2.60
2.06
1.78
1.54
1.20
1.22
1.28
1.00
1.03
0.65
2.57
0.59
0.50
0.47
0.19
0.17
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
2.83
abc
Mexico Handbook
October 2012
Equity market: Forward PE for stocks, average +/-1SD
Alfa
America Movil
24
20
18
16
14
12
10
8
6
4
2
0
22
20
18
16
14
12
10
8
1998 2000 2002 2004 2006 2008 2010 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Grupo Bimbo
22
26
20
23
18
20
16
17
14
14
12
11
10
8
8
03
01 02 03 04 05 06 07 08 09 10 11 12
04
05
06
07
08
Fomento Economico Mexicano, FEMSA
Grupo Aeroportuario del Pacifico
09
10
11
12
30
25
25
20
20
15
15
10
10
5
5
03
04
05
06
07
08
09
10
11
12
07
08
09
10
11
12
149
abc
Mexico Handbook
October 2012
Forward PE for stocks, average +/-1SD
Grupo Carso
Corporacion Geo
20
40
35
15
30
25
10
20
15
5
10
5
0
0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
98
00
02
Grupo Mexico
16
25
14
20
12
04
06
08
10
12
11
12
15
10
10
8
5
6
4
0
03
04
05
06
07
08
09
10
11
12
03
04
05
06
Grupo Modelo
30
20
25
15
20
10
15
5
10
0
03
04
05
06
150
07
08
09
10
11
12
05
06
07
07
08
08
09
09
10
10
11
12
abc
Mexico Handbook
October 2012
Forward PE for stocks, average +/-1SD
Coca-Cola Femsa
24
25
22
20
20
18
15
16
14
10
12
10
5
8
03
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
04
05
06
Genomma Lab
Mexichem
07
08
09
10
11
12
20
25
18
20
16
14
15
12
10
10
8
5
6
0
4
09
10
11
12
08
09
10
Grupo Televisa
Wal-Mart de Mexico
26
28
24
26
22
24
20
11
12
22
18
20
16
14
18
12
16
10
14
03
04
05
06
07
08
09
10
11
12
03
04
05
06
07
08
09
10
11
12
151
abc
Mexico Handbook
October 2012
Equity market: Price-to-book value vs return on equity (1)
Alfa
America Movil
4.0
3.5
350
3.0
2.5
250
300
2.0
1.5
1.0
2.5
12
2.0
10
200
1.5
150
1.0
8
6
4
100
50
0.5
0.0
04
05
06
07
08
P/BV
09
10
11
2
0.0
0
03
0.5
0
03
12
04
05
06
07
08
P/BV
ROE
Grupo Bimbo
09
10
11
12
ROE
2.5
12
3.5
16
2.0
10
3.0
14
8
1.5
12
2.5
10
6
1.0
4
0.5
0.0
03
04
05
06
07
08
P/BV
09
10
11
2.0
2
1.5
0
1.0
12
8
6
4
03
04
05
06
ROE
07
08
P/BV
3.5
35
3.0
30
09
10
11
12
ROE
1.4
7
1.2
6
1.0
5
15
0.8
4
10
0.6
3
5
0.4
25
2.5
20
2.0
1.5
1.0
03
04
05
06
07
P/BV
152
08
09
10
11
12
2
06
07
08
09
P/BV
ROE
10
ROE
11
12
abc
Mexico Handbook
October 2012
Price-to-book value vs return on equity
Grupo Carso
Corporacion Geo
50
5
22
40
4
20
4
30
3
18
3
20
2
16
10
1
14
0
0
7
6
5
2
1
0
03
04
05
06
07
08
P/BV
09
10
11
12
12
07
08
09
10
P/BV
ROE
Grupo Mexico
11
12
ROE
3.5
30
5
3.0
25
4
20
3
35
30
25
15
2
20
15
10
1
5
0
2.5
40
2.0
1.5
1.0
0.5
03
04
05
06
07
08
P/BV
09
10
11
10
5
0
03
12
04
05
06
07
08
P/BV
ROE
Grupo Modelo
09
10
11
12
ROE
5.0
16
4.0
24
4.5
15
3.5
4.0
14
3.0
22
20
3.5
13
2.5
3.0
12
2.0
2.5
11
1.5
2.0
10
1.0
9
0.5
1.5
03
04
05
06
07
P/BV
08
09
10
11
12
18
16
14
12
10
8
07
08
09
10
P/BV
ROE
11
12
ROE
153
abc
Mexico Handbook
October 2012
Price-to-book value vs return on equity
Coca-Cola Femsa
12.0
10.0
80
4.0
35
70
3.5
30
3.0
25
2.5
20
2.0
15
1.5
10
60
8.0
50
6.0
40
30
4.0
20
2.0
10
03
04
05
06
07
08
09
P/BV
10
11
1.0
5
03
12
04
05
06
07
08
P/BV
ROE
Genomma Lab
Mexichem
09
10
11
12
ROE
8.0
26
6.0
30
7.0
24
5.0
25
6.0
22
4.0
20
5.0
20
3.0
15
4.0
18
2.0
10
3.0
16
2.0
14
1.0
5
1.0
12
08
09
10
11
P/BV
0.0
0
03
12
04
05
06
ROE
07
08
P/BV
Grupo Televisa
Wal-Mart de Mexico
6.0
25
7.0
5.0
20
6.0
4.0
15
5.0
3.0
10
4.0
2.0
5
3.0
0
2.0
09
10
11
12
ROE
30
25
20
1.0
03
04
05
06
07
P/BV
154
08
09
10
11
12
15
10
03
04
05
06
07
P/BV
ROE
08
09
10
ROE
11
12
abc
Mexico Handbook
October 2012
Equity market: Consensus 2012 and 2013 EPS estimates
Alfa
America Movil
17
17
16
16
1.7
1.7
2013
15
1.6
1.6
1.5
1.5
1.4
1.4
1.3
1.3
15
14
14
13
13
12
2013
12
2012
2012
1.2
11
11
10
2011
10
1.1
1.1
2011
2012
2012
Grupo Bimbo
6.5
6.5
2013
6.0
1.8
2013
6.0
5.5
5.0
5.0
1.6
1.5
1.5
1.4
1.4
2012
1.3
4.5
2012
1.2
4.0
2012
1.2
1.1
2011
1.1
2012
6.0
5.5
6.0
2013
5.5
2.7
2.7
2.6
2.6
2.5
5.0
5.0
4.5
4.5
2012
4.0
3.5
2011
1.7
1.6
1.3
4.0
2011
1.8
1.7
5.5
4.5
1.2
4.0
3.5
2012
2.5
2013
2.4
2.4
2.3
2.3
2.2
2012
2.1
2011
2.2
2.1
2012
155
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Mexico Handbook
October 2012
Consensus 2012 and 2013 EPS estimates
Grupo Carso
Corporacion Geo
2.8
2.7
2.8
4.0
2.7
3.8
4.0
3.8
2013
2.6
2.6
3.6
2.5
2.5
3.4
3.4
3.2
2013
2.4
3.6
2.4
3.2
2.3
2.3
3.0
2.2
2.2
2.8
2.8
2.1
2.6
2.6
3.0
2012
2.1
2012
2.0
2011
2.0
2012
2.4
2011
2.4
2012
Grupo Mexico
6.0
0.50
0.50
5.5
5.5
0.45
0.45
5.0
5.0
0.40
0.40
4.5
4.5
0.35
4.0
0.30
3.5
0.25
2011
6.0
2013
4.0
2012
3.5
2011
2012
2013
2012
0.35
0.30
0.25
2012
Grupo Modelo
4.2
4.2
8.0
8.0
4.0
4.0
7.5
7.5
3.8
3.8
7.0
2013
7.0
2013
3.6
3.6
6.5
3.4
3.4
6.0
3.2
5.5
3.0
5.0
2011
3.2
6.5
2012
6.0
5.5
2012
3.0
2011
156
2012
5.0
2012
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Mexico Handbook
October 2012
Consensus 2012 and 2013 EPS estimates
Coca-Cola Femsa
1.7
1.7
8.0
1.6
1.6
7.5
1.5
7.0
7.0
1.4
6.5
6.5
1.3
6.0
1.2
5.5
2011
1.5
2013
1.4
1.3
2012
1.2
2011
2012
Genomma Lab
Mexichem
2.2
2.2
2.0
1.8
2.0
8.0
2013
7.5
2012
6.0
5.5
2012
4.0
4.0
2013
3.5
3.5
3.0
3.0
2.5
2.5
1.8
2013
1.6
1.6
1.4
1.4
2012
1.2
2011
1.2
2012
2012
2.0
2011
Grupo Televisa
Wal-Mart de Mexico
3.6
3.6
3.4
2013
3.4
3.2
3.2
3.0
3.0
2.8
2.8
2012
2.6
2011
2.6
2012
2.0
2012
1.8
1.8
1.7
1.7
2013
1.6
1.6
1.5
1.5
1.4
1.4
2012
1.3
1.2
2011
1.3
1.2
2012
157
158
Banxico quarterly inflation
Consumer Price Index
Central bank expectations survey
Central bank minutes
Market impact
High
Very high
High
High
Frequency
Quarterly (released one and a half months after the
quarter is concluded)
Biweekly(released no later than the 10th and 25thof
each month)
Monthly (released the first business day of each
month)
Eight times per year (released two weeks after the
monetary policy rate decision is made)
Release time
12:00 local time
08:00 local time
09:00 local time
09:00 local time
Source
Banxico, Mexico’s central bank
The National Institute of Statistics (INEGI)
Description
The central bank sets out detailed economic analysis The Consumer Price Index (CPI) is an indicator that
and inflation projections on which the Monetary Policy is used to measure the price changes of households’
Committee bases its interest rate decisions in four
representative basket of goods and services.
sections: 1) an overview of inflation’s recent
evolution, 2) a detailed summary of the recent
economic and financial environment, 3) an analysis of
monetary policy and inflation determinants, and 4)
inflation perspectives and projections on inflation and
growth. The report includes economic forecasts for
up to two years.
The central bank publishes a summary detailing
private-sector analysts’ forecasts of the main
macroeconomic variables, including GDP, inflation,
exchange rate, interest rates, employment and
wages, external accounts, and public finances.
The minutes from the central bank’s monetary policy
meetings offer some insight into the debate by the
five policy committee members in setting rates.
Although the members and their comments during
the meetings are not identified in the documents, the
minutes give some sense of the support and dissent
behind rate moves and the issues that are being
considered.
Computation
—
The index measures prices in 46 cities in 32 states.
About 118,000 prices are gathered every two weeks
from 48 segments of the economy. Food prices are
collected at least twice during the two-week period,
unlike the rest of the prices, which are collected only
once. An index of relative prices is then constructed
for each product, which is also used to generate the
national indices relative to each household’s
consumption pattern. The Laspeyres formula is used
to calculate the overall index by using CPI weightings
for December 2010, which is additionally the base
period.
Banxico collects forecasts from about 30 privatesector economic consultants from national and
foreign economic institutes, commercial banks,
investment banks, and consulting firms. In addition to
the forecasts, the survey measures analysts’
confidence and possible risks that could hinder
economic growth.
Minutes are written on the day of the decision at the
monetary policy meeting, and edited and published
two weeks later. Each document is usually about 20
pages long.
Start date
2000
January 1969
January 2000
January 2011
Importance
The report offers a detailed analysis of Banxico’s
assessment of the economy. It gives a broader idea
of risks and perspectives on inflation and economic
activity that ultimately influence policy rate decisions,
and the fourth section of the report usually contains
the most market-sensitive information. The report is
presented at a public press conference, where the
Banxico governor is asked questions, which further
increases the market sensitivity of the inflation
report’s release.
Banxico has an inflation target. As a result, a
significantly weaker- or stronger-than-expected
inflation figure can have immediate implications for
monetary policy expectations.
It provides the most comprehensive survey of
economic expectations. The survey does not specify
what each individual analyst’s forecasts are, but such
a breakdown is available from other private-sector
surveys of expectations.
The minutes help market analysts have a better
understanding of key factors influencing monetary
policy decisions and keep track of committee
members’ overall perspective. The minutes help
analysts assess the future direction of monetary
policy.
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Source: HSBC
Mexico Handbook
October 2012
Mexico: Economic Indicators
Consumer confidence
Gross fixed investment
HSBC Manufacturing PMI
Medium
High
Medium
very high
Frequency
Monthly (released the first Friday of each month)
Quarterly (released between the 14th and 18th of the Monthly (released between 7th and 10th of each
month)
month, with an approximate three-month lag)
Monthly (released the first working day of each
month)
Release time
08:00 local time
08:00 local time
08:00 local time
Not specified yet (tentatively at 9:00 a.m. local time)
Source
National Institute of Statistics (INEGI)
HSBC, Markit
Description
An index that examines consumers’ confidence and
expectations about the economy and spending
conditions for the previous month.
GDP measures the total value of final goods and
services produced by the economy during the
reporting period. Figures are released first from the
supply side and a month later from the demand side.
This index represents spending on fixed assets by all
companies in the private sector. This includes
spending on machinery and equipment, construction
that will represent a good basis for future production.
However, this indicator is released with a significant
lag of about three months.
The purchasing manufacturing index (PMI) is a
monthly survey of selected companies that provides
indications of what is happening in the private-sector
economy by tracking variables such as business
activity, new orders, employment, and prices across
all sectors. Readings above 50.0 signal an
improvement or increase from the previous month,
while readings below 50.0 signal deterioration or a
decrease from the previous month.
Computation
The consumer confidence survey consists of five
questions and is conducted during the first 20 days of
each month in 2,336 urban households in 32 states.
Two questions ask how the household’s situation
compares to that a year earlier, and how it will be a
year from now. Two questions ask how the country’s
economic situation is now, compared to a year ago,
and how it will be a year from now. The final question
is whether now is a good time to purchase durable
goods relative to a year ago. For the first four
questions, the individual can say that the situation is
much better, better, the same, worse, or much worse.
The question related to the possibilities of purchasing
durable goods has three possible answers: better,
same, or worse. These responses are then
aggregated to form five sub-indices, which are
averaged to calculate the total index. Then the total
index and sub-indexes are reported with 2003=100
as the base year.
Two GDP figures are released. The first is from the
supply side and gives the final value of goods
produced, and is broken down into services,
industrial, and agricultural sectors. One month later,
the same GDP figure is released, but broken down by
the demand side:. consumption, investment,
government spending, exports, and imports. INEGI
releases the index of implicit prices, with which the
GDP deflator can be calculated. This index is
released as a nominal GDP series 15 days after the
first real GDP series are released. The series are
adjusted for seasonal and calendar effects. Revisions
to GDP numbers can be made from the next quarter.
Generally, however, the most comprehensive
revisions occur once per year, when the fourthquarter and full-year GDP numbers are released.
Since 2010, quarterly GDP figures have also been
released by state.
The index measures investment in domestic and
imported machinery and equipment, as well as
construction. The gross fixed-investment index is
calculated using Laspeyre’s formula, and the base
year for the series is 2003, which is set to100.
The survey is based on questionnaire responses
from a panel of senior and purchasing executives in
more than 400 manufacturing companies. The
Manufacturing PMI is calculated by aggregating five
individual indices, which are weighted as follows:
New orders 30%, output: 25%, employment: 20%,
suppliers’ delivery times 15%, and stock of items
purchased 10%. The weightings of each sub-index
were selected according to each component’s ability
to lead the economic cycle. The survey also covers
questions on export orders, backlogs of work, prices
charged, raw material prices, stocks of finished
goods, quantity of purchases, and stock of
purchases. These sub-indexes complement the
analysis of the sector. Executives can offer three
responses: better, same, or worse. The series are
seasonally adjusted.
Start date
April 2001
1993
January 2003
May 2012
Importance
Private consumption accounts for about 70% of
Mexico’s GDP. However, the correlation between the
index and the level of consumption is lower than that
in the US, diminishing the importance of the index.
Analysts have suggested that Mexicans tend to be
“pessimistic” in answering the questions about
confidence, lowering the aggregate index based on a
subjective answer. The question about purchasing
power is more direct, and that part of the index is
regarded as being a better predictor of the strength of
demand for durable goods.
This is the most important indicator, as it is the
broadest measure of economic activity and is
coincident with the economic cycle. Both the demand
and supply numbers are important, as they show the
drivers of GDP. However, given that real GDP figures
on the supply side are released first, they tend to be
more relevant for the markets.
Investment is an important component of aggregate
demand. Given that investment has accounted for
about 20% of total GDP since 2001, the indicator is a
useful tool to track the evolution of this component of
GDP on a monthly basis. However, the data released
correspond to several months earlier, making this a
lagging indicator of the economic cycle.
Based on PMIs from other countries, these indicators
have proved to be an accurate leading indicator of
the manufacturing sector and the broader economy.
A second advantage of these indicators is that they
are released in a timely manner.
Source: HSBC
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Market impact
Mexico Handbook
October 2012
160
Manufacturing / non-manufacturing PMIs
Monthly indicator of economic activity
Market impact
Very high
High
Very high
High
Frequency
Monthly (released the between the 11th and 14th of
each month)
Eight times a year; precise dates are announced at
Monthly (released on the third day of the month,
unless this day is a holiday or a Friday, in which case, the beginning of the year
the release date is the next working day)
Monthly (released the between the 22nd and 26th of
the month, with a two-month lag)
Release time
08:00 local time
12:00 local time
09:00 local time
08:00 local time
Source
Mexican Institute of Finance Executives (IMEF)
Description
Industrial activity measures the output of the
industrial sector of the economy in the preceding
month. The index covers four sectors: manufacturing,
mining, construction, and utilities. An aggregate index
is released, as well as one for each sector.
The manufacturing and non-manufacturing PMIs
indices measure companies’ opinions on the
economic environment. The number is between 0100, with a number above 50 indicating the sector is
expanding, a number below 50 indicating the sector
is contracting, and 50 indicating no change from the
previous month.
The monetary policy decision is accompanied by a
one-page press release that offers a brief description
of the factors influencing the monetary policy rate.
This index measures the final value of production
from the agricultural, industrial, and services sectors.
Computation
Companies across Mexico are surveyed on their
production for the month. To make the release
consistent with its US counterpart, INEGI uses the
Classification System North American Industry
(NAICS) to create indices for 321 of the 374
industries included. These are then aggregated into
four sector indices – manufacturing, mining,
construction, and utilities – and one aggregate index,
weighted by each sector’s share of GDP. For each
index, 2003 is the base year, which is set to 100.
About 150 executives from manufacturing companies
and 250 executives from non-manufacturing
companies are surveyed nationwide. Executives are
asked five questions, namely whether new orders,
production, employment, supply deliveries, and
inventories increased or decreased relative to the
previous month. Executives can offer five responses:
increased greatly, increased somewhat, stayed the
same, decreased somewhat, or decreased greatly.
The responses to these questions are weighted
equally to create the aggregate figure. Individual
series for each question are also given. As not all
executives return the survey on time, the figure is
subject to revisions in subsequent releases. These
revisions, however, tend not to move the market.
Survey responses reflect the change in the current
month compared to the previous month.
The five voting monetary board members cast their
votes, and the rate decision is determined by a
simple majority vote. In the case of a tie, the law
states that the chairman of the meeting has the
deciding vote. The meeting requires attendance by at
least three members of the board.
A sample of companies is interviewed. The numbers
for each sector are aggregated and weighted by each
sector’s share of GDP. The monthly economic activity
indicator (IGAE for its abbreviation in Spanish) is
calculated using Laspeyre’s formula, with 2003 as the
base year and set to 100. The data are adjusted for
seasonality.
Start date
January 1993
January 2004
2003
January 1993
Importance
Industrial activity is often used as a proxy for monthly
economic activity and is a coincident indicator of the
economic cycle. The industrial index is also
monitored by investors, as the sector accounts for
about 30% of total Mexican GDP. Although less
broad than the monthly economic activity indicator,
the release is more timely. Mexican industrial
production has been highly correlated with the US
industrial cycle. Currently, about 80% of exports are
to the US, most of which are from the manufacturing
sector. Therefore, this indicator helps monitor
whether external demand is contributing to Mexican
economic growth.
These indicators have proved to be accurate leading
indicators of the turning points of the manufacturing
sector and the broader economy. A second
advantage of these indicators is that they are
released in a timely manner. In addition to the
aggregate figure, investors tend to follow the new
orders and production numbers, which tend to be the
most leading sub-indices.
The determination of the monetary policy rate is of
the utmost importance for Banxico, which has an
inflation target. In setting the monetary policy rate,
Fondeo, the central bank also signals whether it
plans to adopt a tighter, looser, or neutral policy
stance. The rate announcement does not include any
breakdown of votes, which are released two weeks
later when minutes of the meeting are published.
Although it includes only a sample of companies, the
monthly economic activity indicator, IGAE; is a
monthly proxy for, and shows a strong correlation
with, quarterly GDP. Consequently, it is an essential
tool to monitor the performance of the economy in the
short run and can be used to predict the less
frequent, but more comprehensive, GDP figures. This
indicator is released about 15 days after industrial
production data are released; however, it is a broader
indicator, as it also includes the agricultural and
service sectors.
Source: HSBC
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Mexico Handbook
October 2012
Retail sales
Trade balance
Market Impact
Medium
High
Medium
Medium
Frequency
Monthly (released on the third Friday of the month if
the month starts on a Monday; otherwise, the
indicator is released on the fourth Friday)
Monthly (released around the 20th of each month)
Monthly(released around the 25th of each month)
Monthly (released the first business day of each
month)
Release time
08:00 local time
08:00 local time
08:00 local time
08:00 local time
Source
Description
INEGI releases urban and national unemployment
rates for the preceding month. These refer to the
percentage of the labor force that is actively looking
for jobs. Quarterly, additional labor force
measurements are given. From January 2012, these
were included on a monthly basis.
INEGI releases commercial establishments’
indicators, including retail sales, employment, and
average wages in the retail industry. Retail sales are
also reported by sub-sectors and by state. These are
reported as indices in real terms with 2003 as a base
year. The release corresponds to retail data from two
months prior.
The trade balance, defined as exports – imports, is
given for the previous month and broken down into
some detail. The report includes information
regarding the components of exports (oil and non-oil)
and imports (consumption, intermediate and capital).
Additionally, information regarding exports’
destination or imports’ origin is available. Information
is presented in nominal dollar terms.
This release estimates the amount of money
transfers that Mexican foreign workers sent to Mexico
two months prior via money orders, personal checks,
electronic transfers, or cash and in-kind payments.
They are presented in nominal dollar terms.
Computation
Unemployment rates are estimated through surveys
completed by a sample of the population. To be
counted as part of the labor force, an individual must
be 14 years or older. The calculation of the
unemployment rate has followed the methodology of
the International Labor Organization of United
Nations.
There is a monthly national survey in retail stores
asking for total sales, among other figures. This
survey is carried out in large and midsize retail stores
in 37 cities. An index is built for each of the nine subsegments of retail sales. Currently the index is
weighted by the value of sales, taken from the 2004
economic census. The index is released in real
terms, deflated by the consumer price index. The
series is also released adjusted for seasonal and
calendar effects.
The statistics of exports and imports are obtained
from customs reports in Mexican ports of entry. The
series are released adjusted by seasonal and
calendar factors.
There are several sources to estimate wage
remittances. Postal and telegraphic money orders are
the oldest form and the most common. Banks,
exchange bureaus, and any other company that is
entitled to provide the service must submit a
transaction report to Banxico, including electronic
transfers.
Start date
2000 (new methodology)
2001
1995
1995
Importance
Investors tend to monitor the urban unemployment
rate, as the national unemployment rate tends to be
volatile due to agricultural employment. This statistic
is criticized, as the unemployment rate given by the
survey appears too low, given Mexico’s labor market
conditions, even though the survey strictly follows
international standards. The reason for this is that a
lack of unemployment benefits and low personal
wealth for many Mexicans means that the majority of
the population cannot withstand long periods without
a job. Individuals, therefore, tend to accept lowquality or part-time employment, lowering the
unemployment rate. Quarterly, additional measures
of the labor market are included that shed some light
on these issues. These include the partial occupation
rate, general pressure rate, wage-earner rate, critical
conditions occupation rate, and employment rate in
the informal sector. From January 2012, these
measures are included on a monthly basis.
This is an important indicator, coincident with the
economic cycle, that reflects the strength or
weakness of consumer spending. As consumption is
approximately 65% of GDP, this indicator is an
important indicator of economic growth.
Since Mexico is a very open economy, in which
exports plus imports represent 60% of GDP,
investors tend to analyze the components of exports
and imports. Non-oil exports are important, as they
tend to be a leading indicator for the Mexican
industrial sector, while total imports are coincident
with the economic cycle. It is important to distinguish
between oil and non-oil exports since the former are
determined by external factors, while the latter are
dependent on country’s level of competitiveness. The
composition of imports denotes the level of
investment in Mexico through capital goods imports
or the level of domestic consumption through
consumer imports.
Remittances are a substantial source of foreign
money to the Mexican economy from Mexican
workers or from workers with Mexican origins,
working mostly in the US. This indicator is coincident
with the Mexican economic cycle, and tends to be
correlated with the US housing cycle, which provides
many jobs for those Mexicans working in the US. The
revenues are sent predominantly to poor families,
and more than 80% of the revenues are spent on
basic consumption.
Source: HSBC
Wage remittances
161
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National/urban unemployment rate
Mexico Handbook
October 2012
Mexico Handbook
October 2012
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Sergio Martin and Juan Carlos Mateos
Each analyst whose name appears as a contributor to this report certifies that the views about the subject security(ies) or
issuer(s) or any other views or forecasts expressed in the section(s) of which (s)he is author accurately reflect his/her personal
views and that no part of his/her compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or view(s) contained therein: Lorena Dominguez, Claudia Navarrete, Jaime Aguilera, Alejandro MartinezCruz, Clyde Wardle, Francisco Chevez, Manisha Chaudhry, Richard Dineen, Ivan Enriquez, Victor Galliano, Enrique Gomez
Tagle, Berenice Muñoz, Mariel Santiago, Francisco Suarez, Lauren Torres, James Watson.
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock
to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the
potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months
(or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be
expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points
for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
162
Mexico Handbook
October 2012
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 09 October 2012, the distribution of all ratings published is as follows:
Overweight (Buy)
47%
(27% of these provided with Investment Banking Services)
Neutral (Hold)
38%
Underweight (Sell)
15%
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1
2
3
This report is dated as at 10 October 2012.
All market data included in this report are dated as at close 09 October 2012, unless otherwise indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
163
Mexico Handbook
October 2012
Disclaimer
* Legal entities as at 8 August 2012
Issuer of report
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited,
HSBC México, S.A., Institución de Banca
Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank,
Múltiple, Grupo Financiero HSBC
Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow;
Paseo de la Reforma 347.
‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited,
Colonia. Cuauhtémoc, C.P. 06500
Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative
Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and
México D.F.
Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking
Teléfono: + 52 55 5721 2222
Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc,
Fax: + 52 55 5721 2178
London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul
Website: www.hsbc.com.mx
Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank
Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia
Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong
Kong SAR
This document has been elaborated, produced and approved by HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC for the general information
of its “wholesale” customers. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place
between the recipient and such affiliate.
The stated opinions do not constitute a view about the quality of the issues referred to, the solvency of the issuers or their activities or of financial intermediaries or
securities brokers who participate in the transactions. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or
subscribe for any investment or any advice or recommendation with respect to investment or financial decision. HSBC has based this document on information obtained
from sources it believes to be reliable but which it has not independently verified. HSBC makes no guarantee, representation or warranty and accepts no responsibility or
liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are
subject to change without notice.
HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión
Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated
by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia
S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras
(SUGEF). Banco HSBC Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF).
In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general
information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank
Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to
persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular
investment objectives, financial situation or particular needs of any recipient. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking
Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and
Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This
publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking
Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking
Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Hong Kong, this document has been
distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and
professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited
makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular
person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In the
UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.
The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Korea, this publication is
distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking
Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and
Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both
HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. This publication is distributed in New
Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.
Each of the legal entities listed above is a member of the HSBC Group of Companies and classified in the Latin American and Caribbean region. This document is
intended to be distributed in this region by HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC. Unless governing law permits otherwise, you
must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this
document.
In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials
(collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary
is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities,
commodities or other financial instruments).
© Copyright 2012. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, ALL RIGHTS RESERVED. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior
written permission of HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC. MICA (P) 038/04/2012, MICA (P) 063/04/2012 and MICA (P)
206/01/2012
164
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3:08 AM
Page 1
Mexico
October 2012
Sergio Martin joined HSBC in 2008 as the Chief Economist for Mexico. Previously he was senior economist at the International
Monetary Fund for more than 7 years. Before that he was the Chief Economist for Mexico for two major banks in Mexico. His work
experience also covers government positions in the Planning and Budget Ministry and the Council of Economic Advisors to the
President of Mexico. Mr. Martin holds a PhD in Economics from the New School for Social Research.
Juan Carlos Mateos*, CFA
Mexico Equity Strategist and Industrials Analyst; Head of Equity Research, Mexico
HSBC Mexico S.A.
+52 55 5721 3607
juan.mateos@hsbc.com.mx
In the Spotlight... Mexico Handbook
Sergio Martin
Chief Economist, Mexico
HSBC Mexico S.A.
+52 55 5721 2164
sergio.martinm@hsbc.com.mx
In the Spotlight...
Mexico Handbook
Competitive, open, and only a truck ride away
Juan Carlos Mateos joined HSBC in June 2008 as Head of Mexico Equity Research. He has more than 20 years’ experience in the
Mexican corporate and financial sectors, including stints with Procter & Gamble and Grupo Gigante, and experience from both the
buy and sell sides of the finance industry. Juan Carlos is a CFA charter holder and has an MBA from Harvard. Juan Carlos has won
several awards from the Institutional Investor and LatinFinance surveys, including being part of the top Mexico and Latin America
research teams, and being individually ranked second as a top analyst.
By Sergio Martin and Juan Carlos Mateos
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
Issuer of report: HSBC Mexico S.A., Institución de Banca Múltiple, Grupo Financiero HSBC
October 2012
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

In the Spotlight… Mexico Handbook-Competitive, open, and

Transcription

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