Empower your business to lead to opportunity in Mexico

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[Music] hello everyone and welcome to the econ americas podcast where we share under the radar investment opportunities across the americas from countries up in canada down to chile make sure to subscribe to our youtube channel and find us on all the major podcast platforms apple podcast spotify pocketcast and whatever you get your own feeds so in case you're a first time listener of this show econ americas is a startup research firm that provides financial and economic intelligence you can learn more about us and our services at econamericas.com and you can also follow us on all the major social media platforms i am daniel duarte editor at econ americas hailing from asuncion paraguay and in this episode we'll be discussing investment opportunities in mexico and today i'm joined by a very special guest his name is rafael ramirez de alba raphael is a professor of economics at ipad business school in mexico city he received his mba from columbia business school in new york city has extensive experience in the financial services industry having worked for the central bank of mexico goldman sachs and ge capital he has also experienced working in the private sectors as a consultant on financial and technological issues and as a member of the board of directors of several companies including tech startups rafael thank you for coming on the show it's my pleasure very very very happy to uh to be with you and your audience uh and especially very grateful for the opportunity to talk about mexico and the plentiful uh investment support opportunities that are uh in the country thank you for the invitation perfect and rafael to kick off our conversation uh we would like to give our listeners and viewers a brief overview of mexico's economy today because many might know that mexico has been a destination for manufacturing companies since the nafta agreement but has has that trend consolidated or changed in any way or have other sectors emerge to compete for foreign investment since well definitely uh the signing of the of the north american free trade agreement uh some decades ago was was really uh an event that changed the mexican economy for good in in many many ways and you're absolutely right that has um since since the signing of the of the agreement uh a lot of manufacturing companies set up a set of operations in mexico particularly in the auto industry so even today around 22 percent of our exports are vehicles or auto related but at the same time other other other industries have also developed there's been a a very big increase in terms of of electric components and electronics in general industrial machinery as well and also the agricultural sector has has seen a sort of renaissance [Music] mainly in the production of high value stocks and and fruits and vegetables that are appreciated in the us so there's a big uh industry developing and has has developed a lot to export fruits and vegetables to the us so that that that's also has been greatly expanded by by nafta and at the same time i think one of the one of the most interesting developments in the last few years has been the development of of some clusters around advanced uh industrial processes and around digital digital products uh there are plenty of companies in jalisco state that are that are you know startups in the digital space that are doing very interesting things and uh and have a very bright future i think and we we we should also talk about the aerospace cluster that has developed around the queretaro area which is also uh you know a very up-and-coming uh important industry in mexico right yes there is a wide array of of new industries indeed and even though mexico is among the largest recipients of foreign direct investment in all latin america if not the largest um why do still many mexican startups entrepreneurs flock to silicon valley or the new york stock exchange or even toronto to raise capital what is missing in in not just in mexico but in in the region through to develop capital markets well i think that's a that's a great question uh i think that first of all we we're very close to the us so it's it's very natural for us to sort of go there and and try to raise capital via private investments or the public market so it's very very very natural and uh in in general in mexico most of the financing really has come from the banking sector via traditional loans uh as you know our stock market is relatively small relatively small in terms of number of companies and in terms of their market cap uh represented in the stock market um and it's very and it's very hard for for for companies to to raise capital in the in the stock market it's much easier for people to raise you know loans from from banks in the in the traditional way and in terms of uh of financing of new ventures i think that um the main obstacle is that there aren't a lot of big pools of capital that are domestic that are you know dedicated to funding those types of initiatives most people who want to raise capital for a new venture for something related to uh to a new company especially in the tech space uh really has to go uh look abroad for for for most of the investment especially after the initial rounds where you get most of your money from friends and family when you you really get into the institutional space then the big pockets of money and expertise as well are are in the us which doesn't mean that mexico doesn't have it does it does have a an interesting and growing uh venture capital industry and private equity in general uh mainly being funded via foreigners but with funds that are set up in mexico and also from a number of family offices that have seen private equity and venturing as interesting avenues to diversify their their holdings and and really get into that into that space so so yes it's it's relatively small but i think it's growing and i think it's gonna continue growing in the next few years especially if we can manage to uh achieve some level of macroeconomic stability that uh makes people you know more willing to spend their money and invest in in mexico which is at this time still some of a question mark interesting and we have seen in some countries in latin america a drive to expand retail investor access to [Music] capital markets in general for instance in brazil there has been a large push to get retail investors really regular workers access to investing in the stock market and in colombia with digital banks and and has this trend and of course in the u.s uh as you may have heard the investment in in in the stock market and all sorts of securities in this year has exploded and as people have more time to you know be online and and check out many different things in this year of the pandemic so have we seen this same trend in mexico or or not yet oh absolutely absolutely there are a number of players who are trying to get into the space um i would venture that you know many many traditional brokerage firms are are starting experimenting with providing tools to uh small investors so that they they can tap different sorts of investments and and really invest in the capital markets and also you see a lot of emphasis coming from [Music] big international players like blackrock for example uh trying to sell their funds in mexico making a big push and trying to reach the individual investor and providing them with tools and alternatives to to invest their money so i i i'm seeing that as well it's still relatively small so there's a lot of opportunity there [Music] but especially focusing on sort of not the big fortunes of or people who have a lot of money to invest but really people who have sort of sort of um relatively small amounts personally but that they want to invest in trying to find better returns that what they can get in a bank that's something that uh that's still a big opportunity in in the future there's also a number of of interesting things going on like for example crowdfund funding platforms that have been very very successful and it also it's all driven by the search for for yield right i mean if you are a small investor in mexico as in many other countries around the world and you keep your money in the bank you're going to get at most you know 0.5 interest and really nothing so uh being able to to to invest your money uh via these platforms in an intelligent way uh where you don't run excessive risks i think it's very interesting another opportunity that i would like to point out is that there are a number of platforms that are trying to do this in the reta in the real estate space a very interesting experiment going on these days uh i'm following that quite closely but there are companies like cien ladrillos 100 bricks that are exact that are trying to do precisely that allowing small investors to participate in the financing of real estate and and and they are having good results and i'm very positive about the prospects for that atikera go puerto rico set out to become a tax heaven to lure individuals and companies from both the u.s mainland and abroad however a combination of natural disasters government mismanagement and unsustainable death led to the u.s commonwealth's bankruptcy in 2016. to remain attractive to foreign capital and entrepreneurs puerto rico decided to double down on tax incentives with a new law the tax incentive code or act 60 seeks to make the island an international hub for service providers it encourages investors and companies to relocate to puerto rico and connect with clients outside the island however some industries are eligible advertising education graphic design call centers consultancy trading companies health services legal services taxes and accounting construction engineering architecture and data processing the fiscal benefits for new business in these export sectors are a flat four percent corporate tax rate on net income from sources outside puerto rico for 15 years renewable for 15 more years no taxes on the distribution of dividends a 50 exemption on municipal taxes and a 75 exception on property taxes there are also benefits for individuals act 60 includes a special regime for investors willing to relocate to puerto rico they are fully exempt on all pacific incomes such as dividends and interests interests and dividends that qualify as puerto rico sourced income are subject to exemptions from the u.s federal income tax to benefit from these incentives investors must prove they effectively reside in puerto rico and do not maintain closer ties to other jurisdictions they can also benefit from property taxes exemptions if they buy a hum in the first two years of moving to puerto rico business owners who choose not to move to puerto rico along with their business can still get attractive deals companies whose main business owner does not reside in puerto rico must pay four percent corporate tax rate and an additional six period five percent rate to the u.s federal government in total ten period five percent pursues the 21 percent if operating from the u.s mainland if you want to learn more about tax incentives in puerto rico make sure to check out our show notes where we have included a link to a backgrounder on the topic by econ americas [Music] great and as as you said the search for yields is a phenomenon that's going across the world in the developing countries interest rates are now very low even negative in real terms so investors are searching for opportunities in the emerging markets and what would you us recommend or what areas industry sectors are the ones on your radar for these kinds of investment well some of the some of the ones that we already discussed at the beginning of the conversation i think that anything that has to do with uh low-cost production in mexico to sell to the u.s has a lot of potential so anything that's related to the auto industry because it's not only you know the assembly of cars but all the things that that go into that so a lot of uh suppliers of that industry have tremendous opportunities to to expand their businesses so that'll be number one number two explore opportunities in in in the in the in the farm in the in the farming space in the agricultural space again uh trying to export to the us and and and and really linking supply chains between mexico and the us i think it's also an interesting opportunity there's also uh if you look at the at the local market the domestic market we are still a country that um you might describe as a as a middle-income country so there's still a lot of things that need to be built so anything related to construction i think it's gonna experience a renaissance in the next following years of course now we're living through a period of transition with the covet pandemic and and you know the changes that that has brought a lot of of office space stance empty especially in big cities in mexico city guadalajara and monterrey a lot of retailers are rethinking their strategies but the reality is still that that there's a lot of need for property for property development both commercial and and and residential so that that's also an industry that i think is going to experience a lot of growth in the future and and finally uh going back to the digital transformation theme uh there's a lot of very good talent in mexico developers and programmers that uh that can be tapped uh and and really allow them to serve a worldwide markets not only the us but it's anywhere around the world so investing in high-tech companies that uh program and develop in mexico i think is also a very interesting opportunity exactly well this pandemic if he has shown anything is that remote work can work uh great in in many cases and barriers to you know labor is just not uh nowadays not just a big barrier in in borders is basically the digital barriers are falling down so that's an era everyone is is is focusing on now i would like to touch on two developments that i think are interesting and in one case the mexican billionaire ricardo salinas made an announcement these days that his bank bancoasteka was going to uh the business in bitcoin but the central bank of mexico was quick to clarify and basically say no bitcoin transactions are um well more or less it said bitcoin transactions were illegal in mexico so do you think this uh situation will stand i mean bitcoin or other cryptocurrencies having a hard time entering the mexican market well it's it's it's interesting that you mentioned that because i let me uh let me put it this way i don't think banco de mexico really said that it's it's uh it's people are not allowed to buy or sell bitcoin or that bitcoin in some shape or form is forbidden what they said is that and i think they are absolutely right about that is that it's still a very volatile uh investment sure um it's not for everyone people should be should be aware of that i think that now that valuations have come down dramatically from the highs of you know sixty thousand dollars per bitcoin now to close to thirty thousand thirty five thousand a lot of air has come out of that of that balloon so uh i think people are are being more thoughtful about you know what can happen with cryptocurrencies they can go up very quickly but they can also go down so i think banco mexico is is is acting prudently in saying you know people be be careful about this uh be conscious of what you're doing and it is also true that uh financial institutions still have a lot of regulations and and things that they can't do in terms of providing access to buying and selling your bitcoin but it's it's not forbidden in in any way shape or form in fact you have a you know a relatively young startup called bitso that's that's set up in mexico it's a perfectly legal operation and they buy and sell uh cryptocurrencies and and and there's nothing wrong with that so uh and also i i would also point out the fact that mexico is one of the few countries i think around the world that has a relatively advanced fintech law that was passed a couple of years ago in which uh crypto currencies are considered and uh and authorities realized that there are a lot of ways in which not only cryptocurrencies but the blockchain technology can can be beneficial and they've set up you know a safe safe space for for people to experiment uh you know doing it through legal means and setting up their companies and being a fintech but i don't think i don't think or any other authority financial authority in mexico is really sending the message you know this is forbidden don't do this but just be careful about it follow the rules and and make sure you don't put other people's money in here in the process yeah i think it also comes on the heels of el salvador's project so caution is is the sentiment here that the central bank is trying to get across so um and of course remittances in latin america is a huge market that cryptocurrencies are serving as you mentioned bit so and and others are really making a lot of hybrids into that sector and the other development i wanted to discuss was the supreme court's recent ruling um to legalize recreational marijuana or cannabis but previously there were some laws legalizing it and some state it was it is already legal so it's a bit confusing the the legal situation of of cannabis in mexico do you see investment in this industry anytime soon the likes of the united states or canada or are there still regulatory hurdles and not to mention the issue of cartels being you know threatened by the legal market yeah i i honestly think we are still some some time uh away from from really finding opportunities in in that industry in in mexico i i think the the regulatory framework is not as solid as it should be and um don't get me wrong i'm personally in favor of it uh i i've always pushed for uh for the legal use of substances like this like i think prohibition is is the worst thing we can do about it but still um i don't think the legal framework and the regulatory framework it has been established with a sufficient degree of confidence that would allow major investments in this space in mexico at this time now could this change in the future it probably will but uh but i think there are a lot of you know important initiatives and and and pieces of legislation in the agenda that that are going to take precedence before really considering making a big push to make um this type of investments uh more more solid on a from a legal point of view from a regulatory point of view right exactly and we covered for instance the medical marijuana industry in colombia and even though they have a very advanced legal framework there are still many issues for exporting the raw flowers for instance in colombia that is still not allowed and that has limited the their markets and really the the growth of the industry so um they're still it i mean the the the medical and the legal uh recreational market is still very very uh incipient in the region and speaking about the pandemic in a recent interview the chief of the bank of international settlements said something along the lines that emerging markets will take longer to recover than develop markets because of vaccination and and and economies being more affected than than the rest of the world and as the federal reserve and other central banks start raising rates that will presumably drain capital from emerging markets and how can the region and maybe mexico prepare for that uh coming economic environment well let me start by saying that uh personally i i don't think that the the fed is going to raise rates any time soon or are they going to really have a more hawkish uh monetary policy in the next few months or years so i think that that that's still some some some you know years away some years away uh but still your point is very valid i think you know the the main um challenge that we have in mexico is really strengthening the uh the rule of law in general and the uh predictability of decisions taken by the federal government i think that has some that's something that hasn't helped in the past few years the situation is not as bad as some people might present it uh there are positive aspects to the to the current administration that um that make me optimist uh for example i think that one of the main drugs to growth in the next few years for a lot of latin american emerging countries has been the level the level of debt that they have incurred and we haven't done that in mexico um public finances are relatively stable um debt to gdp levels are below 50 which is pretty reasonable so uh if we can manage to provide a more uh welcoming uh environment for investment in general especially foreign investment but also domestic investment and uh and and and and keep the level of of of government debt and government finances under control not being a source of of macroeconomic uh instability i think that's going to help a lot and uh and and you see it in in the numbers and the figures that are being published just these days uh you know around the recovery in mexico just to give you um some idea of the numbers we're talking about the mexican economy contracted around eight and a half percent last year because of the pandemic and projections for this year are are are are being increased uh you know as as we go along and now the latest uh market consensus is uh of growth of around six percent or so in 2021 which is pretty pretty good and and it should continue a little bit lower than that but it should continue into 2022 probably at a level of around three and a half percent uh per year so uh mexico i think is is one of the countries around the world that uh maybe not as quickly as china and some other countries but uh but it's gonna rebound uh in the in in the next few months in the next few years and and and also you have to consider that being so close to the us and our economy being so tied up with the economy of the us if the u.s economy grows as strongly as as a lot of people expect at least in 2021 201 20 and 20 and 22 that's going to benefit mexico i mean we're seeing in mexico a record level of remittances for example the numbers just came out and and we're blowing every record every time they are reported the level of foreign direct investment in mexico around 29 billion dollars per year has been pretty stable even through last year's pandemic and uh and and and most of our exports go to the u.s 70 of our exports go to the us so to the extent that the u.s economy grows i think mexico is is going to benefit from that and if you uh if you consider that monetary policy won't be as tight and as as as early as some people expect i think the prospects of of the mexican economy are good in the next following years sure we all hope so in in all our countries and finally uh why won't you leave us with a thought or a trend that you see that is going to really alter the way work or the economy works in the coming years maybe something related to artificial intelligence i saw that you read a book uh about that recently uh how is that going to impact the way we trade and work well let me give you an idea i just just for the record i i haven't written the book i wish i had i i write about the subject and i teach about the subject and and let me share with you a recent interview that i just read that was uh where they interviewed the cto of microsoft who's in charge of of our the artificial intelligence developments that are carried out by the company and he said a couple of very interesting things and and he made it in relationship to a new book that he has just published and and the first one is that we're in the initial stages of digital transformation of new technologies like artificial intelligence where is even though it seems to a lot of people that they they are already behind and it's going to be impossible for them to catch up the message here is that we're just starting so there's plenty of opportunity to transform yourself digitally and if you set your mind to it and dedicate the resources to really catch up with people who are more advanced along this route so that was a good message and the second message was that contrary to this expectation that a lot of people have that artificial intelligence is going to take away all the jobs and we need to establish universal basic income and stuff like that he gave a very positive view and said well listen a lot of these technologies are really opening up a lot of opportunities for people who are not data scientists who are not programmers who are not you know on the forefront of these but but but these developments really provide them with tools to be more effective in what they do to make better decisions via better predictions so uh so i think i'm very very positive about this technology i think it's going to open up a lot of possibilities that we haven't even thought about so i would invite the audience to really you know take a look at what's going on and and get more familiar with the technology and start using it uh to the extent possible in their day-to-day decisions both personally and in their companies so i'm very positive about that i don't think it's going to take away all of our jobs in fact it's going to open up a lot of new possibilities and i think that's the way of the future my concern my concern is not that it's gonna advance too quickly but that some regions of the world some countries in the world some companies will will fall behind and will not take advantage of all the wonderful things that we will be able to do with this technology just because of a knee-jerk reaction to it and and you know sort of trying to to bury your hand your head in the sand and and look to the past and try to ignore what's going on if you embrace it if you study it if you if if you uh really use it i think it's going to be very beneficial for companies for people and for humanity as a whole so that'll be a message i would like to leave with your audience thank you that was very insightful indeed and i will put the book in the show notes so folks if you want to check it out go to econamericas.com podcast we'll have all the links there also to rafael's website his work what he's written everything will be there and rafael thank you again for coming on the show please stay tuned folks for more content like this thank you you