Improvements to the State of Hidalgo's business environment attract investors

Hidalgo – officially known as the Free and Independent State of Hidalgo – is named after Miguel Hidalgo y Costilla, one of the leaders of the Mexican independence movement. With an economy traditionally based on mining, Hidalgo had lagged behind some of Mexico’s more prosperous and dynamic regions. However, the state government has actively sought to foster growth in new sectors, develop infrastructure and create a more business-friendly regulatory framework. As a result of these efforts, it has recently recorded growth and foreign direct investment (FDI) figures that exceed the national average. Hidalgo also has the advantage of being close to Mexico City, the fifth-largest metropolis in the world and the most-populous city in North America, making it a strategic location for international businesses to establish themselves.

Increased Investment 

Under the new administration led by Omar Fayad Meneses, the state governor, Hidalgo has seen record-breaking levels of investment. In the first three years of Fayad’s term – between September 2016 and September 2019 – the state received MXN53.5bn ($2.8bn) in private investment. This is a considerable increase compared to the MXN21.2bn ($1.1bn) recorded over the first 29 months of the previous administration.

This figure includes a number of major investments from both Mexican and international companies. In November 2017 Grupo Modelo, the Mexican arm of the world’s largest beer manufacturer, AB InBev, announced that it would invest MXN14bn ($723.9m) to build a brewing and bottling plant in Apan, in the south of the state. The plant opened in March 2019 and has the potential to produce 2.4bn litres of beer at full capacity, making it the second-largest brewery in the world.

This remains the largest private investment to ever be made in Hidalgo and was followed by several other significant announcements, including the MXN10bn ($517.1m) Juandhó combined-cycle power plant, which began construction in December 2018.

Contrary to the trend elsewhere in Mexico, US investment in Hidalgo has fallen to less than 50% of total FDI. However, the state received funding from a variety of other sources, with countries in Asia, Europe and South America making up the remainder.

Geography & Climate 

Hidalgo is the 26th largest of Mexico’s 32 federal states, accounting for 1.1% of the country’s total landmass. The state’s capital, Pachuca, is located 90 km away from Mexico City. Hidalgo has a varied topography; although it is home to one of the highest villages in the country, Real del Monte, which sits 2718 metres above sea level, its lowest region, San Felipe Orizatlán, is around 175 metres above sea level. Hidalgo borders six other states: San Luis Potosí to the north, coastal state Veracruz to the north-east, Puebla to the south-east, Tlaxcala and Mexico to the south and Querétaro to the west. The climate is generally mild, with an average temperature of 16°C and average annual rainfall of 800 mm. However, there are significant weather variations across Hidalgo due to differences in altitude. As a result, a wide range of agricultural produce can be grown in the state, from maize to the agave plant.

Pre-colonial Background

Hidalgo has been inhabited by humans for millennia, most likely due to its year-round mild climate. The oldest artefact found in the area is an axe dating back to 11,000 In the first three years of the new administration the state received $2.8bn in private investment, a considerable increase on the $1.1bn recorded over the first 29 months of the previous administration BCE. The archaeological site near Tula, believed to be the prehistoric capital of the Toltec tribe, was the most prominent city in the region after the fall of Teotihuacán in the 6th century. The settlement benefitted from the presence of the mineral obsidian in local rocks, which was a precursor to Hidalgo’s strong link with mining activities.

Mining

Hidalgo’s mines opened shortly after the first Europeans arrived in the area, with Spanish colonisers wishing to send treasures back to their own country. The first silver deposits were discovered in April 1552 near Pachuca and Real del Monte.

Hidalgo soon became a key centre for mining, particularly after Pachuca-based Spanish merchant Bartolomé de Medina discovered the patio process for extracting silver from ore using mercury amalgamation in 1554. This was a significant advancement for the industry, and the technique went on to be used across the world for the next 300 years.

However, the industry also experienced some difficulties. In the 1720s the mines in Pachuca and Real del Monte were flooded and remained largely out of use. Two decades later they were drained and reconditioned, which brought about another mining boom. According to historical records, around 7m pesos of pure silver were produced by the state in this time. In 1851 the discovery of the Rosario mine in Pachuca brought the region’s largest mining boom. As a result, the population of the city increased from 4000 in 1850 to 15,000 in 1869.

Cornish Influence

One of the most significant structural impacts of the 1810-21 Mexican War of Independence was the partial destruction of the mines in Pachuca and Real del Monte. By the end of the war around 50% of the mines were abandoned and the remaining were only working at 10% capacity. Given the importance of mining as a key source of jobs and tax revenue, the Mexican government intervened to regenerate the industry by seeking the assistance of foreign investors.

The tercer conde (third count), who owned most of the mines in Pachuca and Real del Monte, made an agreement with two English investors – Thomas Kinder and John Taylor – who founded the Compañía Británica de Real del Monte (British Company of Real del Monte) in 1823. In 1824 they formed the Compañía de Caballeros Aventureros (Gentlemen Adventurers’ Company) and began recruiting miners from Cornwall, the most south-western county of the UK. The area was known in the 18th and 19th centuries for having the most skilled miners in the world. In 1825 more than 130 Cornish miners and engineers arrived in Veracruz by boat. They brought with them new technologies such as the steam engine, which was used to drain the flooded mines.

The arrival of the Cornish miners resulted in a historical and cultural connection between the two regions that is still visible to this day. A popular food in the state is pastes, inspired in look and taste by the famous Cornish Pasty. In addition, in Pachuca and Real del Monte there are a number of buildings that have a distinctive English style, including the capital city’s Monumental Clock, which has machinery identical to that of London’s Big Ben. The miners also brought football to Mexico; Pachuca FC was the first football club in the country, founded in 1892.

However, the English ownership of the mines was relatively short-lived. The Gentlemen Adventurers’ Company sold up in 1849, having failed to make enough money to justify their investment. Nevertheless, many Cornish miners continued to work in the area in the subsequent years.

Creation of the State 

Hidalgo originally formed part of the state of Mexico when the country’s constitution was written in 1824. Due to riots and violence in the early years of the republic, in 1861 the authorities decided to divide the state up in the hope of making it easier to manage. However, this was delayed due to the French invasion in 1862, which meant that the new state of Hidalgo was not created until January 1869. Pachuca was designated as its state capital, as it was already a key centre of economic growth for the region.

Apan

The soil and climatic conditions make Hidalgo an ideal location for the cultivation of the agave plant, which is used to make alcoholic beverages such as tequila, mezcal and pulque. The state quickly became the centre of production for the latter, particularly in the Apan region.

Around 150 years after pulque production began, Grupo Modelo opened their MXN14bn ($723.9m) brewery in Apan. The region is the main wheat-growing area in Hidalgo, making it an ideal location for the alcohol industry. Both pulque and beer producers also benefit from Apan’s close proximity to the large consumer market of Mexico City.

Economy

The variety of industries that have been established in Hidalgo in the last few centuries have given the state competitive advantages, which are proving beneficial as the state government pushes for economic transformation. The economy is changing as traditional sectors such as mining, metallurgy and textiles begin to give way to new industries including renewable energy, sustainable transport, agro-industry, pharmaceuticals and chemicals. For the current administration, improving the commercial environment will be essential to increasing investment and economic activity, in order to benefit both businesses and the population as a whole.

Politics 

Like the country’s president, state governors are elected on six-year, non-renewable terms. Fayad is a member of the Institutional Revolutionary Party (Partido Revolucionario Institucional, PRI), which governed Mexico for most of the 20th century. Hidalgo is currently led by a coalition government made up of the PRI, the Ecologist Green Party of Mexico and the New Alliance Party. Prior to taking office, Fayad represented Hidalgo in the Senate between 2012 and 2016, and was the mayor of Pachuca between 2006 and 2009.

At his inauguration, Fayad vowed to take a tough stance against corruption and to make attracting domestic and foreign investment a key priority for Hidalgo. He appointed Harvard-educated economist and civil servant José Luis Romo Cruz, who previously held senior roles at the Mexican Social Security Institute and New Mexico City International Airport, as the state’s secretary of economic development.

Despite being from different parties – with the government represented by the Party of the Democratic Revolution – the state and federal governments have shown they are able to work effectively together on a number of issues. This includes the construction of the new Mexico City airport, located near the south-western border with Hidalgo, which is expected to open in 2021. In addition, the regional and national governments have collaborated to combat fuel theft, and roll out new surveillance technologies to monitor the state’s security.

Public Finances 

While Mexico’s sovereign debt has increased under President Andrés Manuel López Obrador, international credit ratings agencies remain positive about Hidalgo’s prospects. In May 2017 Standard and Poor’s (S&P) raised the state’s credit rating from “mxA-” to “mxA” with a stable outlook, a rating it retained in May 2018 and 2019. The agency listed Hidalgo’s low debt level, stable liquidity position and prudent fiscal policies as reasons for this decision. Additionally, S&P recognised the state government’s efforts to streamline the regulatory framework for businesses, expecting economic conditions to improve further in the coming years as a result of these developments, as well as the “consolidation of high-value industries”.

Other ratings agencies have also recognised the state’s efforts to improve the commercial environment. Moody’s affirmed Hidalgo’s “Ba2/A2.mx” credit rating and stable outlook in January 2018 and in June 2019. In its full statement announcing the completion of the periodic review in June 2019, the agency reflected on a number of key considerations, many of which echoed the comments made by S&P. These included an improvement in the state’s liquidity position, low levels of debt and an absence of contingent liabilities, as well as “positive but volatile cash financing balances”.

Additionally, in a report published in March 2019 Moody’s highlighted the importance of Grupo Modelo’s major investment in the new brewery in Apan to the local economy. The report mentions the positive effect it will have on employment in the state, the predicted improvement in tax collection as well as the indirect impact of the increase in federal government resources allocated to Hidalgo.

Connectivity

Due to its location in the centre of the country, Hidalgo is well connected to other parts of Mexico, particularly Mexico City and the neighbouring state of Veracruz. In 1866 the first railway line was opened, between the capital city and Veracruz, which passed through Hidalgo. By 1899 there were 374 km of railway lines in the state, operated by five companies. To this day, transport links remain an important factor in attracting investment.

Now, two cargo rail operators pass through Hidalgo: Kansas City Southern de México and Ferromex. The state is home to the only terminal where both networks intersect, located around 65 km north from Mexico City. The terminal is a joint venture between local conglomerate Grupo UNNE and Hong Kong holding company Hutchison Ports.

The railway network operates alongside a comprehensive road network. The Arco Norte ( Northern Arc) motorway, which began operations in two phases in 2009 and 2011, respectively, has been a crucial part of boosting Hidalgo’s connectivity to the rest of the country. The toll road is a 223-km circuit around the Mexico City metropolitan area, passing through the south of Hidalgo to the industrial Bajío region in the country’s centre, north of the capital. This strategically places the state on the route between the eastern Gulf ports, the country’s industrial heartland and the Pacific Ocean. Carretera Federal 57 passes through the west of Hidalgo, eventually continuing north to connect Mexico to the US border in Texas.

In terms of public transport, Pachuca is home to the state’s only large-scale transportation network, the rapid transit bus system known as Tuzobús. The network covers 18 km with 33 stations and 19 feeder bus routes. According to the “OECD Territorial Review of Hidalgo” published in 2019, Tuzobús carries 110,000 passengers per day. However, the report notes that only around 10% of daily commutes are made using Tuzobús, with many people opting to use informal methods of transport or their own vehicle. As of the end of 2018 there were 382 vehicles per 1000 people in Hidalgo, considerably higher than the national average of 341 per 1000. The OECD predicts that, as urbanisation and economic growth continues, this figure will rise further.

Peaceful State 

According to the 2019 Mexico Peace Index published in April 2019 by the Institute for Economics and Peace, a global think tank, Hidalgo ranks as the fifth-most-peaceful state within the country, after Yucatán, Campeche, Tlaxcala and Chiapas. This was an improvement on its 2018 score of sixth place. The index is measured using a combination of criteria including the rate of murder, violent crime, firearm crime, organised crime and the number of unconvicted prisoners. Hidalgo had low scores for all five categories, showing it to be safer than the national average. In addition, the state has one of the lowest rates of recidivism in the country according to the index. Citing FBI data, the murder rate in Hidalgo – at 5.1 per 100,000 residents – was lower than the US average in 2017 of 5.3.

Demographics 

According to the most recent estimates from the National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía, INEGI), as of the fourth quarter of 2017 the population of Hidalgo was around 2.96m. Of this total, 47.8% were men and 52.2% were women. Local government data estimates that the population will reach 3m by 2023. Figures from the National Council for the Evaluation of Social Development Policy show that the average real monthly income in the first quarter of 2019 was MXN1409.8 ($72.90). This rose by 7.1% compared to the same period of 2018.

The most recent INEGI data from March 2015 shows that the population is fairly well distributed across the state, with around 10% – or 277,375 people – living in Pachuca. The second-largest city, Tulancingo de Bravo, had 161,069 inhabitants.

In terms of socio-economic conditions, there is a visible urban-rural divide in Hidalgo. According to the OECD, 36% of the state’s population live in its three largest urban centres, but 48% of economic activity and 42% of total employment is based in these areas. There are a significant number of indigenous Mexicans living in Hidalgo. INEGI data from 2015 found that around 15% of the state’s population spoke an indigenous language, of whom 10% were not able to speak Spanish.

Education

Hidalgo’s young population is one of its economic advantages, and a key driver of job creation and investment in education. Over 22,000 students graduated from the 106 higher education institutions in the state in 2017. In addition, the proportion of 19-25 year olds in higher education has risen significantly in the past 20 years, from 5% in 1995 to 33% in 2015. The next step for the state is to ensure the increased activity in the tertiary education sector is matched with the creation of new skilled jobs (see Education analysis).

Outlook 

Following a series of record-breaking investments, and a focus from both the public and private sector on building the infrastructure needed to boost the state’s socio-economic conditions, Hidalgo has gained both national and global attention as an attractive business location. As the state government continues to create high-value jobs and improve the regulatory framework it is hoped that Hidalgo will be able to rival some of Mexico’s most advanced regions in terms of prosperity and safety.

In order to ensure that the administration continues to work towards its policy objectives, it is likely that future collaboration between state and federal governments will play an important role, given the political capital that President López Obrador currently holds on a national level.

However, the state’s main aim of attracting further domestic and international investment will also rely on other factors. For example, the success of the regulatory reforms and improvements is vital to convince the business community of the benefits in working with Hidalgo. Nevertheless, the state has several advantages, including close proximity to Mexico City and major road networks, a range of both new and well-established industries operating in the area, and a young and educated workforce.