Doing Business In: Mexico

González Calvillo, SC

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Arising mostly out of the COVID-19 pandemic and a continuation of governmental policies aimed primarily to shift away from structural reforms approved by previous administrations, the economic and business landscape in Mexico has continued under stress for the most part of 2021. Summer of 2021 culminated with midterm elections which balanced the political party majorities in Mexican congress, giving the opposition greater negotiation power given the loss of a qualified majority by the governing party. Election results were generally accepted and generated an important momentum for investors’ trust in Mexico.

As predicted in 2020, Mexico failed to implement effective measures to boost its economy amid the COVID 19 pandemic. While developed countries across Asia, Europe and North America installed rescue and recovery plans, the Mexican federal government opted to allow economic activity to recover without any relevant stimulus packages.

As an effect of the entry into force of the United States, Mexico, and Canada Agreement (“USMCA”) in July 2020, the Mexican Congress enacted a labor reform in the second quarter of 2021, strictly restricting the ability of companies to implement outsourcing schemes for their employees and work force. These legislative changes generated the need for corporations – domestic or otherwise- across all industries and sectors, to implement relevant corporate and organizational changes to its structure adjusting it to the new labor regulatory framework, as well as to maneuver the indirect impact from tax and social security obligations. After active involvement from the business community in Mexico in the drafting of amendments, the revised labor law was enacted including certain caps to legacy employee benefits, such as the obligation for employers to share profits with employees.

The labor reform is expected to have a strong effect for the manufacturing sector, which is pivotal for Mexico’s economy. Its message geared towards leading exports, taking advantage of its strategic geographical location and the fact its shares one of the world’s most commercially active borders does resonate. It is worth noting trade has been affected following the implementation of land border closures since March 2020 arising out the pandemic.

Despite challenges, there are several sectors likely to represent some interesting business opportunities for local and foreign investors, such as manufacturing and exports, long-term infrastructure, restructurings and insolvency, banking and finance, cannabis, and consumer goods and retail.

As expected, 2021 has shown a clear activity the Mexican financial sector will continue to flourish. Taking advantage of a Fintech law that generates certainty for investments in technology, combined with a very high portion of the population yet to be served by traditional financial institutions, expectations for growth in this sector are promising. During the last few months, several domestic fintech firms have successfully secured investment rounds with foreign investment being a constant participant. This trend is expected to increase within the next few years, maturing into a more stable market expected to impact household banking players, by assuming technology of the growing startup ecosystem.

As a waterfall effect to the Fintech drive, business startups along all other industries have shown active interest from venture capital investments in early and angel stages of capitalization. Recent regulatory changes (such as the labor reform) have generated positive disruption within the market, benefiting startups with a leaner structure that maximizes margins and provides interesting alternatives to venture capital investors.

Lastly, a swing in consumer behavior as a result of the COVID-19 pandemic, the e-commerce and logistics industries have seen unprecedented growth exceeding market expectations. This is expected continuing to see sustained growth following international trends walking away from brick and mortar.