Accountancy in Mexico

Background

Mexico is the twelfth country in the world in size and the third largest country in Latin America, just behind Brazil and Argentina. It is located in the southern  part of North America and occupies an area of 1,972,550 square kilometers (1,232,844 square miles). On its north, Mexico borders the US, and to the south Guatemala and Belize.

Mexico’s population is estimated over 127 million, making it the eleventh most populous, and the most populous Spanishspeaking, country in the world.

Mexico is a federation comprising thirtythree states, including Mexico City, which is its capital and largest city. The federal government consists of three branches: executive, legislative, and judicial.

The Executive power is headed by the president and his cabinet. The president is elected every six years by means of a general election and can only serve one term.  The Legislative power is vested upon the Congress of the Union, a two-chamber legislature comprising the Senate and the Chamber of Deputies. The Judicial power is exercised by the judiciary, consisting of the Supreme Court of Justice of the Nation, the Council of the Federal Judiciary, and the collegiate, unitary, and district tribunals.

Mexico’s Economy

Mexico’s economy is the 14th largest in the world in nominal terms and the 10th largest by purchasing power parity, according to the International Monetary Fund. Mexico is ranked 47th for doing business and is 5th place in obtaining credit worldwide.

Mexico’s is an export-oriented economy, where more than 90% of its trade is under free trade agreements (FTAs). The country has entered into a network of 12 Free Trade Agreements with more than 46 countries, including the European Union, Japan, Israel, and much of Central and South America. The most influential FTA is the North American Free Trade Agreement (NAFTA), between the United States, Canada and Mexico, which came into effect in 1994,

Mexico has two main sources of wealth:  oil and tourism, which represent almost 30% of the gross domestic product. Its industry is a mixture of modern and outmoded industry increasingly dominated by the private sector. Recent administrations have expanded competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution, and airports.

Foreign investment is most common in manufacturing, mining, and financial services. Within the manufacturing sector, the largest are the automobile and auto parts producers, and steel manufacturers. The maquiladoras (in-bond processing plants) have achieved the largest growth rates in recent years.

Mexico has been able to maintain its annual average inflation below 5% in recent years. Also, its exchange rate of the official currency, the peso, with the U.S. dollar remained close to $18 pesos per dollar until the 2nd quarter of 2016. During 2017, it averaged 19.82 with variation of

9.18%. There are no exchange controls in Mexico and no restrictions on repatriation of investments and profits.

Current economic situation

Mexico’s economy has faced external pressures but it has proved resilient. The external environment is difficult, with the global economy remaining in a low-growth trap and poor expectations depressing trade, investment, and wages. More specifically causing Mexico trouble are the collapsing oil prices, which decreased government receipts, cutbacks in energy sector investments, and the sharply depreciating Mexican peso.

Mexico’s modest global growth and stagnant trade has led to a decelerating economy, with annual GDP growth slowing to 2.3 percent in 2016, down from 2.6 percent in 2015. The overnight interest rate has been raised by a total of 350 basis points over the past 15 months, to 6.5 percent by March 2017, partly in response to the Mexican peso’s depreciation against the US dollar. The rise in fuel prices by 15-20% in January 2017 raised annual consumer price inflation by February  2017 to 4.9 percent.

Exports have not been expanding sufficiently to compensate for this, but a decline in imports and a significant increase in workers’ remittances (up by 8.8 percent to US$ 27 billion) have led to a modest reduction in Mexico’s deficit, to US$27.9 billion (2.7 percent of GDP) in 2016. A surge in Foreign Direct Investment (FDI) fully financed the current account deficit, thereby lessening reliance on diminishing portfolio capital flows.

The uncertainty of US-Mexico relations and the potential renegotiation of the North American Free Trade Agreement mean that investment into trade and manufacturing in Mexico is being held back. This is likely to lead to a further economic slowdown.

The public sector met its deficit target with an overall fiscal deficit of 2.9 percent of GDP in 2016. The growth of non-oil tax revenue compensated for the fall in oil revenues and allowed the government to meet additional spending requirements, such as financial support to the National Oil Company PEMEX, increasing interest payments and pension costs. The ability  of the public sector to contribute to growth is, however, constrained by the need for fiscal consolidation and for stabilizing the debt-to-GDP ratio.

Domestic demand remains the main driver of economic activity, supported by recent structural reforms that have cut prices to consumers, notably on electricity and telecoms services.

Banco de Mexico has been trying to counter inflationary pressures, particularly in the wake of the US presidential election. Furthermore, to ensure debt sustainability, there are expenditure cuts in the 2017 budget, aiming to return to a primary surplus. Despite efforts to reduce the budget deficit, there is the potential for reallocating expenditures and further limiting tax expenditures therefore enabling an increase in spending on  child care, health, poverty reduction,  and infrastructure.


Latest version updated 25th October 2017

Country Breakdown

127.5

Million

Population

$

Mexican Peso

Currency

$ 8200

GDP

1.964

Million

km2