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Tecma talks reform and foreign investment in Mexico with Congressman Carlos Angulo (PAN)

Tecma talks reform and foreign investment in Mexico with Congressman Carlos Angulo (PAN)

Congressman Carlos Angulo of Mexico’s Partido de Acción Nacional shares his views on recent economic reforms and opportunities for foreign investment in Mexico.

 

 

Tecma Group of Companies:

Overall, please correct me if my perception is mistaken, my understanding is that the reforms were carried out to do two things: one is that the Mexican government is looking to increase the taxbase in the medium-term. Would that be a correct assumption?

Carlos Angulo:

Theoretically that is the bet, but when you increase the tax rates you need to increase the tax base. Only the tax rates were increased. As a result, the captive taxpayers are now paying a lot more. The exception to this, however, is the export (maquiladora) industry, which still maintains many of its historic prerogatives through the issue of executive actions, not through legislation.

Tecma Group of Companies:

Maybe some time in the coming month or, perhaps, some time during this year, or later on down the line, we can get together to see what is happening with respect to getting some of those executiveactions translated into actual legislation and examining as to whether or not their has been any movement towards success in broadening the tax collection base in Mexico?

Carlos Angulo:

Yes, we will keep on pushing to correct that anomaly. In my way of thinking, as relates to the structural changes that have been made, if you do not have a correctly established tax system, the beneficial effects of the changes may be felt later than sooner.

Tecma Group of Companies:

Well, those things are related to structural changes in Mexico. Over the last two years, or more, there has been a change in the public security situation in Mexico. There have been some law and order issues, specifically from 2008 – 2010 that were very problematic when related to promoting foreign investment in Mexico. What is the current state of affairs respect to those particular issues?

Carlos Angulo:

The public security issue is still a big one in Mexico, although there are areas of the country that do not have it as a main concern anymore, such as: Tijuana and Ciudad Juarez. Juarez has been amiracle with respect to the turnaround that has taken place their. Tijuana also has a good track record now, but there are also areas in Mexico like Michoacan, Guerrero, Oaxaca and Tamaulipas. With the exception of Tamaulipas, those are the rural areas of Mexico. They do not have a lot of export industry present, although Michoacan has a lot of agro industry. Those areas of agroindustry are pricipaly related to Mexican investment, not foreign investment in Mexico. I can say that, overall, that the issues of public safety in Mexico there has been improvement.

Fortunately, where there are still issues foreign investment in Mexico does not have a significant presence. Foreign investment is a “big player” is in the Bajio area, Guanajuato, Queretaro and San Luis Potosi. Those issues are not really big there. In the border areas, with the exception of Tamaulipas, the issues related to public safety are not that big. Even in Tamaulipas, Nuevo Laredo, Reynosa and Matamoros the maquiladora, or IMMEX, industry has not been affected directly. In Juarez, when we had the biggest public safety issues, the maquiladora sector was not, basically, touched.

Tecma Group of Companies:

This is something that one might find somewhat surprising, but, yes, that was in fact the case. Looking at the numbers of today, as compared to those of 2010, as you have said the turnaround that you mentioned has occurred in the recent past in Ciudad Juarez has been somewhat miraculous.

Carlos Angulo:

Yes, we had gang violence and up to thirty assassinations a day at one point in 2010. Now we have less than one a day, so it has been a big turnaround. Also, things do not happen in very public places, but normally in very obscure areas of the city. The numbers for murder in Juarez are now lower than for US cities such as Chicago, Washington, D.C. and Detroit ( a lot lower than those areas).

Tecma Group of Companies:

This is very good for those of us that do business and have friends that live in Mexico to see this happen. Things were obviously very problematic at one time.

When you look at Mexico, when you talk about structural changes, and the tax systems that still need to be fine-tuned a little bit; telecommunications, which they are still working on; the energy sector reform, which is the biggest one that you just spoke of; from your perspective what would consider to be the main competitive advantage that will lead to increased foreign investment in
Mexico?

Carlos Angulo:

To start with foreign investment in Mexico can take advantage of the country’s workforce. Its workforce is highly trained. In the border areas, we have more than forty years of industrial experience. The performance of the workforce is extraordinarily good. Also, proximity to the United States makes transportation costs less and logistics a lot easier than shipping components or materials used in manufacturing from the other side of the world.

Mexico also provides safety for foreign investment in Mexico in terms of its treatment of intellectual property and issues related to export activities. I would say that the overall regulatory environment for export activities is very easy when compared to countries such as Brazil, for instance.

We have a huge competitive advantage in geography and workforce. It is easy to get things done. We are at the most three hours away from most major cities in the United States. Problems are easy to solve in this envirnoment, which is quite amicable for foreign investment in Mexico, and related export activities. The big winner over the course of the last several years has been the Mexican automotive industry. We are exporting we are exporting more than three million cars each year, and are the seventh largest manufacturer of passenger vehicles worldwide. Also, the aerospace industry is growing at a fast pace in areas such as Chihuahua, Queretarao and Tijuana. Foreign investors feel very comfortable participating in a business culture that is very familiar to them. This is the West, not the Orient that is difficult to understand in many respects. Mexico is a country that have been dealing with the United States “forever,” and is a country that is
part of North America. It is not a South American country. Business practices are very amicable, vis a vis other countries in the world.

Tecma Group of Companies:

From your perspective, how would you compare challenges that Mexico has faced at the beginning of this decade with the ones that you see it will encounter from now to the end of the decade?

Carlos Angulo:

I would say that we need to complete the construction and implementation of the rule of law in Mexico, principally the government. We must avoid corruption. The only way to do this is, not tolet it happen, but to create an environment of transparency. With regard to the issue of transparency as it applies to the Constitution, we have made a quantum leap.

Secondary laws where we now have the capability to provide information live and on-line for public bids and for government can now be done with 100% transparency. I believe that, if we can solve the rule of law issue, it will have very positive ramifications for foreign investment in Mexico.

Tecma Group of Companies:

This requires a tremendous amount of work, and it is worth the undertaking and effort to do. Maybe you can comment on what I hear from those potentially making foreign investment in Mexico? Mexico is very stable from a financial perspective, while some countries have been pretty prodigious in getting themselve indebted over the past decade. Mexican economic policymakers have been pretty successful in exercising fiscal restraint, and have a pretty healthy balance of payments as well as current accounts situation. Would you be able to comment a bit regarding the fiscal stability of Mexico?

Carlos Angulo:

Yes, in the two most recent administrations were run by my party, the PAN, by President Fox and President Calderon. The biggest changes were those that were designed to stabilize precisely that, the macroeconomics in Mexico. The biggest challenge that President Calderon had in 2009 was dealing with the financial breakdown at the global level. Mexico was not affected severely vis a vis other countries. We maintained financial restraints in place and did not have a major financial crisis in Mexico, as a result. The autonomy of our central bank had been a major factor in that regard. Our central bank holds foreign reserves that are among the largest held by any country.

Right now the government has the authorization to enter into public debt. To my way of thinking to a greater degree than I am in accordance with. I voted against the percentages of public debt that the government is authorized to carry right now. Now we have to recognize that we have a constitutional amendment in place that requires special majorities to secure that the current government will not go on a “crazy”spree of contracting public debt. We have in place a constitutional restraint for public debt not only for not only the federal government, but also for state and municipal governments. A lot more controls are in place. I believe that Mexico will continue to have a stable macroeconomic situation vis a vis other countries in the world.

Tecma Group of Companies:

A lot of those making foreign investment in Mexico find its macroeconomic stability to be a positive characteristic, in part because this leads to political stability. One final question: for lack of a better word, it is really quite “revolutionary.” For a bit more than seventy years, there was no ability of foreign participants to have any sort of involvement in Mexico’s energy sector. Now things that have been altered through constitutional change, that you have referred to, from your perspective, again, what opportunities will arise for people that are seeking investment opportunities in the energy sector in Mexico?

Carlos Angulo:

You have to consider that upstream, downstream and mid-stream investing is completely open now, and that electricity generation and sale is now 100% open to those wishing to transact foreign investment in Mexico. There is a huge opportunity in Mexico. To give you a few “hints” one of the biggest investment opportunities in the sector is in the storage of oil and gas throughout thevcountry. We have a huge shortage of storage capacity that represents a huge opportunity for foreign investors. Also, we have very big opportunities for the oil and gas companies of the world to invest in offshore and shallow water drilling. Round one rules for the opening up of oil fields for this activity have been issued and the public bids for shallow water are open for the Campeche,Veracruz and Tabasco areas. There is a huge opportunity there.

Also, there is a huge opportunity for the commercialization of domestic and industrial natural gas. Mexico will transition into another regime that will provide for to receive foreign investment in Mexico for alternate sources of energy such as solar, wind and the production of methane from waste resulting from agricultural activities and the decomposition of organic materials in places like city dumps. Foreigners will have the opportunity to invest in these types of projects.

Manufacturing components for the generation of solar power is a huge opportunity, when one considers the fact that the country is among those that have the most solar exposure in the world. These fields represent huge areas of opportunity.

Tecma Group of Companies:

The opportunities for foreign investment in Mexico that you point out in the energy sector will have an interesting effect. Not only will they affect the price of energy, but also they will impact the cost of electricity that is required by manufacturers for their production operations. In addition to a wage structure that is now competitive, Mexico will also be very competitive in terms of the power that it offers to industry. This will make it possible for a lot of companies that may have been reticent to manufacturing in Mexico to do so. Big energy users like aluminum extrusion companies, or plastic injection molding firms and companies involved in the stamping of metals can be done more economically as a result of energy reform. From a business perspective, it seems as though the energy reform is an area that will be a very big catalyst in terms of attracting capital and in terms of creating jobs for Mexicans. Would you agree with that assesssm

Carlos Angulo:

Indeed, one of the fastest positive effects that we will see will be related to power generation. I believe that the costs are going to go down very soon with new investments, and also as a result of the conversion of fuel oil to natural gas. This will have an immediate impact. There are a number of pipelines that are under construction right now that will feed all the CFE power plants with natural gas. There are also new companies out there that may be investing in power plants that will be fed by natural gas, as well. I believe that that will lower the cost of electricity all over Mexico, and the first area to be impacted positively will be in the area of the fixed costs related to producing and providing goods and services in Mexico.

Tecma Group of Companies:

That is a good thing to hear. Carlos, I want to join you today for joining me in this discussion, and, also, it is evident that you have covered an awful lot of ground here. One of the things that some of the listeners of our recordings do is to take advantage of contact information provided to us by those with whom we talk. Would you be willing to provide contact information for those that wish to ask specific questions regarding what we have talked about today. How might they be able to get questions to you?

Carlos Angulo:

Absolutely, my email address is carlosangulo50@gmail.com. My telephone number dialing from the United States is 011-52-1-656-638-0218.

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