The State of Hidalgo focuses on attracting investment to encourage inclusive growth

In 2006 local conglomerate Grupo UNNE and Hong Kong-headquartered Hutchison Ports signed a strategic alliance to build the Intermodal Logistics Terminal of Hidalgo (TILH) in Tula, in the west of the state. Francisco Orozco, commercial director for Mexico at Hutchinson Ports, told OBG that the agreement envisioned “the terminal of the future”. The TILH became the only intermodal logistics terminal where both cargo rail networks – Kansas City Southern de México and Ferromex – connect with road links that criss-cross the country. At the time there was limited industrial activity in the surrounding area, but in the years since industrial parks have begun sprouting up.

Growth

Hidalgo is keeping pace with Mexico’s economic development. The state’s economy grew by 2.3% in 2018, above the national average of 2%. Hidalgo registered notable expansion in commerce, with a growth rate of 7.2% – the second-highest rate in Mexico – and the services sector, which grew by 3.9%, placing it seventh in Mexico. Hidalgo also experienced strong manufacturing export gains, increasing by 25% in 2018 to $2.2m, easily outpacing the national average of 10.2%. The international investment community is taking note of this progress. In May 2019 Standard & Poor’s reaffirmed its “mxA” rating for the state of Hidalgo with a stable outlook. The agency cited the state government’s “ambitious plan” that could “drive Hidalgo’s economic growth above the national average over the next three years”. The agency did note, however, that Hidalgo started from a comparative disadvantage, with a GDP per capita of $6500 in 2018, below the national average of $9800.

The state government has sought collaboration with international experts to formulate regulatory improvements that are able to attract investors. In June 2017 the OECD and Omar Fayad Meneses, the state governor, signed an agreement to consolidate economic advancements by jointly developing policies and best practices, as well as leveraging the state’s infrastructure, strategic location and human resources in order to boost competitiveness.

Shifting Focus

In recent years the state government has worked to facilitate private companies and investment, launching a package of reforms designed to ensure that being next door to one of the world’s largest consumer markets is an asset for the state and its people. For decades Hidalgo has struggled to develop in the shadow of Mexico City, but its proximity to the metropolis has also proven to be a blessing. State authorities have worked to enhance Hidalgo’s position through its interdependence with the capital by tapping its logistical capabilities and development in key government-identified sectors.

Recent years have also seen a shift away from the local economy’s traditional focus on mining. The government has targeted several strategic sectors that have significant potential, including energy, sustainable transport, pharmaceuticals, agri-business and telecommunications. Efforts to diversify have been strengthened by the fact that the region is relatively unscathed from the drug-trafficking violence that afflicts other parts of the country.

Hidalgo ranked as the fifth-most-peaceful state in Mexico after Yucatán, Tlaxcala, Campeche, Coahuila and Chiapas, according to the 2019 Mexico Peace Index by the Institute for Economics and Peace, a global think tank. The index takes into account factors such as the murder rate, violent crime, firearm crime, organised crime and the number of unconvicted prisoners. Hidalgo fared better than the national average in each of the five categories of the survey.

Closing the Gap 

In the years since the 2008 financial crisis Hidalgo has begun to close the output and productivity gap with the rest of the country, according to a May 2019 report released by the OECD. “Hidalgo’s current administration has recently managed to consolidate important investment projects in strategic sectors such as the electric automobile industry and food industry,” the OECD report stated. These recent changes have also been accompanied by the introduction of a new approach to stimulate the state’s economic development. The state has drawn upon its vital location, with its capital of Pachuca located just 90 km north of Mexico City; safe environment, with the third-lowest homicide rate in the country; and comparatively low costs of production and logistics. The rapid growth of Mexico’s capital has also drawn attention to Hidalgo, as the state is the only flat territory towards which Mexico City and its suburbs can expand.

Between 2009 and 2016 the state averaged GDP growth of 3.7%, exceeding the national average of 2.1%. Hidalgo’s productivity rose by 3% from 2010 to 2015, the 12th highest rate in Mexico’s 31 states and federal district, and 40% of the median of OECD countries. Its rapid urbanisation and shift towards industrialisation is reflected in its higher share of gross value added in manufacturing, at 20.6%, compared to the national average of 16.1%, according to the OECD. Even so, in 2016 Hidalgo contributed 1.6% of Mexico’s GDP, despite being home to 2.4% of the population.

The state stands to benefit from its demographics, with youth accounting for 28% of the population compared to an OECD average of 17.9%. The government acknowledges the need to improve the skills of this young workforce to make it competitive. Although this gap between job market demands and potential employees is continually being reduced, students in the state’s universities often pursue degrees in social sciences at a higher rate than computer science, despite the latter being in higher demand.

The OECD also outlined the headwinds facing development, underlining the importance of mitigating the high labour informality rate, the elevated share of low-skilled workers, underperforming cities, low tax collection rates, and socio-economic disparities between the north and the south of the state. The organisation also encouraged Hidalgo to link foreign direct investment (FDI) projects to the needs of the local economy and develop specific plans to improve the business environment and encourage innovation.

“The State of Hidalgo has long experienced economic stagnation, yet since the aftermath of the global financial crisis, its economy has performed better than the average of Mexican states,” the OECD said in its report. “Between 2003 and 2015, Hidalgo’s GDP per capita grew by an annual average of 2.4%, above the national average of 1.1%.” Hidalgo is working under the OECD findings and recommendations in order to overcome the barriers and bottlenecks found by the organisation, in order to set a path of sustained economic development and shared prosperity.

Investment Surge 

Efforts to attract private investment from both within Mexico and abroad have been paying off. The state secured around MXN53.5bn ($2.8bn) in private investment from when Fayad took office to September 2019. This is a considerable increase compared to the MXN21.2bn ($1.1bn) recorded during the first 29 months of the previous administration, according to figures from the Secretariat of Economic Development (Secretaría de Desarrollo Económico, SEDECO) of Hidalgo. These figures have reflected a general upwards trend, as the state received $294.3m in 2005 and 2006, the first two years of the 2005-10 term.

Just under 50% of foreign investment into Hidalgo in recent years has come from the US, with companies from China, Japan, Sweden, Germany, France, Brazil, Austria and the UK all having entered the state since September 2016. Hidalgo received a major boost in investment in November 2017 when Grupo Modelo – the Mexican arm of the world’s largest beer maker, AB InBev – announced it would invest MXN14bn ($723.9m) in a new brewing and bottling plant in Apan, located in the south of the state. Modelo’s commitment was the largest private sector investment made in the region. The Modelo facility, along with several other domestic and international arrivals, showcases the rapid rate at which investment is entering the state, a trend that shows no sign of slowing. In December 2018 construction began on the MXN10bn ($517.1m) combined-cycle Juandhó hydroelectric power plant. José Luis Romo Cruz, then-state secretary of SEDECO, told local press that month that the facility is expected to produce 650 MW of electricity a day, a figure that approximates the energy consumed daily in Hidalgo.

Strategic Thinking 

State authorities have been working to attract investment and talent into four strategic sectors that offer above-average salaries to workers and therefore have more of an economic impact, namely agri-business, energy, sustainable transport and pharmaceuticals. The average salary per month in Mexico for those in agri-business is MXN16,000 ($827), MXN13,560 ($709) in sustainable transport, MXN13,000 ($672) in energy, and MXN12,128 ($627) in pharmaceuticals, all well above the national average salary of MXN9000 ($465). Efforts to funnel funding into these sectors have been successful, with 71% of the investment into Hidalgo going to these categories. According to SEDECO, since 2016 the state has received MXN16.1bn ($832.5m) of investment into agri-business, MXN11.8bn ($610.2m) in energy, MXN5.4bn ($279.2m) in sustainable transport and MXN452m ($23.4m) in pharmaceuticals.

The prioritised sectors are spread across the state. For example, while the north-eastern region of Huasteca focuses on commerce, agriculture and cattle raising, in the south-eastern plains – where Modelo is based – the emphasis is on industry and agriculture. The state’s logistics centre is in the south-western Tula-Tepeji region, where the TILH is located. These tailored targets aim to encourage inclusive growth and overcome north-south economic disparity.

In addition to the four targeted sectors, the state is looking to reinforce telecommunications in order to strengthen not only physical but communicative connectivity as well. In September 2018 Hidalgo became the first state in Latin America to lay out a legal framework aimed at facilitating the development of telecommunications infrastructure in its municipalities. The agreement simplified procedures for authorising the deployment of telecommunications infrastructure and sped up processes related to the installation of antennas and fibre-optic cables.

Build the Base 

The local authorities are looking to attract further investment in order to take advantage of the trickle-down effects throughout the wider economy, and as such are developing programmes to enhance Hidalgo’s competitiveness. SEDECO established two initiatives aimed at funnelling benefits from external investments throughout the economy. The first, Pon Tu Negocio, Yo Te Apoyo (“Set Up Your Business, I Will Support You”) has provided financing for some 7960 entrepreneurs since its launch in August 2017. Mi Primer Empleo, Mi Primer Salario (“My First Job, My First Salary”) offers recent graduates paid, six-month internships in the private sector and has linked 1964 young people to 696 companies since its launch, also in August 2017. SEDECO announced one year later that 46% of students in the programme had been hired by the companies that they interned for.

Workforce 

SEDECO estimates that the MXN53.5bn ($2.8bn) in private investment generated some 15,900 direct jobs and close to 39,000 indirect jobs. These openings account for almost 17% of the 233,761 workers registered with the Mexican Institute of Social Security (Instituto Mexicano de Seguridad Social, IMSS) in Hidalgo in the first quarter of 2019. IMSS numbers are used as an indication of the levels of formal employment, and these figures make the state the 21st largest contributor to Mexico’s formal workforce. Job growth is also expanding at a higher rate in Hidalgo than the country at large, with the state adding 6832 jobs in the first three months of 2019 alone. This represented a growth rate of 3%, above the national average of 1.3% and put the state behind only Nayarit, Sonora and Querétaro in terms of workforce expansion. Jobs in the state have also shifted towards permanent positions. Between 2005 and 2010, 52.8% of new jobs created were permanent, but between 2017 and 2019 this figure had risen to 91.4%. Fayad expects continued job creation, with the number of employment opportunities forecast to expand by 3.1% between December 2018 and the third quarter of 2019, compared to the expected national average of 2.1%.

“The growing number of permanent jobs is a particularly encouraging statistic because Hidalgo has traditionally seen its labour force migrate as there were not enough companies investing and creating permanent jobs,” Edgar Espínola, president of the Business Coordinating Council of Hidalgo, told OBG. “Now, we are seeing people from other states come to work in Hidalgo, as happened with the Modelo plant.”

Wages are also growing, albeit at a pace below the national average. The average salary in Hidalgo was MXN9634 ($498) per month in the first quarter of 2019, below the national average of MXN11,165 ($577). Salaries expanded by 2.6% year-on-year (y-o-y) in Hidalgo, slightly below the national average of 2.7%. Out of Mexico’s 31 states and federal district, Hidalgo ranked 12th in terms of wage expansion.

Despite progress in wages, informality remains stubbornly high. As of the first quarter of 2019 some 74% of those working in Hidalgo were doing so informally, putting the state behind only Oaxaca, Guerrero and Chiapas, according to the National Institute of Statistics and Geography. The national average for the percentage of informal workers was 56.9%.

Showing Resilience

The surge in private investment has been a boon for Hidalgo, which has traditionally been dependent on public investment and spending. A change in government at the federal level in December 2018 resulted in delays in releasing the budget, with implications for state and local governments, as well as businesses. “The local business community and the construction sector in particular have been suffering since the shift in government,” Espínola told OBG. “We have received barely any funding for state investments. Thankfully, in Hidalgo we have a fast-growing private sector.” He noted, however, that the transition to an economy driven by the private sector is not an overnight process and local firms remain dependent on public projects. According to SEDECO, activity in the construction sector fell by 23.4% y-o-y in the first quarter of 2019, with production in public works projects falling by 51.9% over the same period. Private construction rose by 42.3% y-o-y in the first quarter of 2019, but it was not enough to offset the drop in public investment. Countrywide, activity in the sector fell by 2.4%, with public construction production falling by 11.7% and private output rising by 4.2%.

Safe Haven 

Whether Hidalgo can continue this speed of economic development depends to a large extent on how the wider economy fares in the short to medium term. The state has little control over several factors that directly affect its economy, such as the exchange rate, inflation, interest rates, federal budget and policy, and risk premium investors place on Mexico. What is more, certain federal policies and decisions – including the cancellation of Mexico City’s proposed new airport, the stagnation of some aspects of energy reform, and the expanded role of the heavily indebted state-owned Petróleos Mexicanos (Pemex) – have caused uncertainty in global markets. In June 2019 Fitch downgraded Mexico’s sovereign rating from “BBB+” to “BBB”. In addition to Pemex concerns, the agency said there is “ongoing weakness in the macroeconomic outlook... exacerbated by external threats from trade tensions, some domestic policy unreliability and ongoing fiscal constraints.” The same month Moody’s lowered its outlook on its “A3” rating to negative. “Moody’s anticipates a challenging year for Mexico’s economy and expects growth to slow to 1.5% in 2019 from 2% in 2018 with risks tilted to the downside given a persistent weakness in private investment,” the agency said. “Moreover, Moody’s believes that the government’s mixed messages and unclear policy signals will continue to negatively affect business confidence and investment prospects.” However, Hidalgo’s progress will also depend on its competitiveness within Mexico and whether it can transform into something of a safe haven for investors despite uncertainty at the national level. The state has identified areas where it can distinguish itself. “People underestimate the level of responsibility state governments have,” SEDECO’s Romo told OBG. “Many of the factors that companies weigh in investment decisions – regulation, legal certainty, security – depend more on the state than the federal government. Our priority is to optimise the things we can control. We have a vision for action.”

SEDECO identified early on that one area the state could control was the business environment, Romo explained. Earlier moves included the creation of a single window to allow both citizens and businesses to carry out transactions easily, and the implementation of an improved regulatory system that has reduced the wait times for permit approvals. “While economic stability at a federal level is essential for the country to prosper, Hidalgo has done a lot to stand out,” Noé Paredes, director-general of Grupo UNNE, told OBG. “The drive and dynamism that the state has brought to the table has been very important.”

Future Expansion 

Some 13 years after the agreement to build the TILH was signed, the logistics port is reporting strong growth and has diversified operations. “After so many years of effort, we are seeing our labour pay off,” Orozco told OBG. “Volumes are up, clients are satisfied, and more and more potential clients are coming to this area.” For both the TILH and Hidalgo, the outlook depends to an extent on fortunes at the federal level. In any case, Hidalgo is working to turn become a region defined by development. To do so, the authorities are attracting investment, creating jobs and building supply chains. With a slew of investments through to 2022, the government is aiming to ensure that the benefits of expansion are felt across the broader economy while still remaining localised.