Despite the noise, Mexico seems to be turning the corner on foreign investment

Investor sentiment in Mexico, as detailed in the central bank’s latest survey of private sector analysts, continues to be dreary with 58% of respondents in April saying it’s a “bad moment” to invest in the country.

The result, nevertheless, is a marked improvement from the 66% responding similarly in the March survey, coming along with upward revisions to forecasts for GDP growth (to 4.8% from 4.5%) and foreign direct investment (FDI) from the previous survey. 

The positive signals come one month ahead of Mexico’s pivotal mid-term elections on June 6, that will lift considerable uncertainty – regardless of the outcome – over the legislative agenda in the second half of President Andrés Manuel López Obrador’s (AMLO) presidency, which is set to end in 2024. 

The other looming question mark weighing on the economy – the outlook on COVID-19 and vaccinations – should also become much clearer in coming weeks, with government officials turning up chatter that a major acceleration in the vaccination rollout will be launched this month. 

That could entail the recently negotiated start of domestic production of the Sputnik vaccine and/or the rollout of the “Sputnik-light” variant that must be taken every six months. 

With those two questions resolved, FDI to Mexico looks nearly certain to improve, bolstered by the global reorientation of trade toward nearshoring, the USMCA trade agreement with Canada and the US and the likely passage of some form of the multi-billion dollar infrastructure package north of the border. 

With the survey released Monday, a median of respondents estimate FDI in 2021 at US$26.99bn, a US$500mn boost from the US$26.50bn in the March poll. 

The amount would still be a 7.2% decline from the level reported by the economy ministry for 2020 – US$29.08bn. And the 2020 figure marked a contraction of 11.7% from 2019. 

These numbers, however, are remarkably good compared to the contraction in FDI seen worldwide with the pandemic, with the global total falling 42% in 2020, according to the UN Conference on Trade and Development’s (UNCTAD) investment trends monitor report, released in January,

That report also estimated a 37% drop in Latin America and the Caribbean, with Mexican FDI standing strong. 

Digging into the 2020 data, the US is by far the largest country of origin, supplying 36.8% of FDI last year, with Canada in third place with 9.7%.

In another sign the USMCA is clearly heating things up, Mexican direct investment to the US soared 500% in 2020.

And manufacturing, responsible for 47.2% of 2020 FDI to Mexico, is definitely at the core, with USMCA-fueled supply chain expansion able to move forward with the treaty’s enactment after being on hold since the start of negotiations in 2017.

The ministry added that 212 foreign investment projects were announced in 2020, representing US$16.25bn.

China is not to be forgotten. Mexico may well serve as a bridge to the US in terms of being able to set up local operations within the regional trade framework to the benefit of Chinese investors and the Asian country’s broader Latin American economic ambitions.

And on that note, there have been some recent signals that while more Chinese investment is definitely in the pipeline, Chinese companies would like to see a free trade zone, similar to that in Costa Rica and other countries, to help them gain an advantage.

Not all equal

So, while we see that FDI to Mexico is holding up compared to both the region and the globe, not all sectors are seeing the same potential growth that manufacturing is enjoying. 

The electricity sector, for example, has been particularly impacted by ongoing domestic policy interventions, with multiple lawsuits currently holding up implementation of recent legal modifications to market rules – and a final supreme court ruling possibly still a year away. 

According to recent comments from Susana Ivana Cazorla, founding partner of Mexico City energy consulting firm SICEnrgy, "You are already seeing a negative impact, to invest you need certainty, you need at least the promise that the rule of law will be respected and not constant threats against private investment," reported news outlet El Periódico de la Energía.

The specialist cites data from the foreign investment commission showing that FDI in energy reached a historical maximum of US$6.84bn in 2018, the year the López Obrador administration took office.

Since then, she added, FDI in the sector fell to US$2.7bn in 2019 and US$1.7bn in 2020. And while energy represented 20.3% of FDI in 2018, two years later it had contracted to 5.8%. 

"The most important reduction occurred in 2019 with the change of administration and the threats that began from day one against the electricity sector," Cazorla was quoted as saying.