The future of any economy depends on several critical factors. One of those stands out among the rest. Investment, unlike consumption or government investment is not one of those live-for-today elements of aggregate spending. It’s the element that uniquely creates the capacity for the future creation and trade of goods and services. Whether private or public, investment is very tomorrow-focused, from the near- right up to the very long-term projects. Given the decades-long exponential increase in technology, investment is arguably far more critical than in the past. Clearly, the world has serious challenges on the investment front; how is Mexican investment faring?
Given its dependence on the global investment climate, Mexico’s story actually begins at the world level. A global ‘investment hesitation’ is underway, thanks to the turmoil that’s engulfing global trade policy. True, positive steps were taken last December when the United States and China moved forward on their Stage I deal, inking it on January 15. Brexit also became clearer on that same December week, assuaging global financial markets that the United Kingdom and Europe would not be in a perpetual funk. But for Mexico, the pièce de resistance was the signing of the USMCA agreement. Initially viewed inside Mexico as a near-impossibility, securing an agreement with the Americans (and Canada) that required little in the way of change to bilateral commerce is a coup that should – all other things being equal – secure Mexico’s investment future.
Why? Well, Mexico’s investment path has benefited greatly from free trade with North America. Inbound direct investment has ballooned to an average of $33 billion annually. Openness, ample modern infrastructure, proximity and access to the planet’s top economy and a steady abundance of skilled and semi-skilled workers have together drawn a steady stream of investments in the auto, aerospace, machinery and tech sectors.
Attitudes began changing in 2017, when U.S. anti-trade rhetoric became reality. Not only was global trade on watch, but Mexico was a particularly hot U.S. target. Carrier was pressured to abandon its Mexico investment plans and stay in Indiana. Ford was next on the list, and it also redeployed a key Mexican project. It seemed that every new opening south of the Rio Grande would be under the Administration’s microscope, and that in addition, the threat or imposition of walls, tariffs, border adjustment taxes were Mexico’s new reality. Settlement of USMCA should solve most of that – so, is investment in for another surge?
Current numbers suggest the opposite. Private investment has fallen in 5 of the last 6 quarters. Construction is down 10% on a year-to-year basis, and falling, weighing down total industrial production. Manufacturing sector confidence is on a 30-month down-trend, one that steepened in the past 12 months. The outlook calls for decline: purchasing managers collectively see the next 6 months slipping in terms of production new orders and employment. This could all be the delayed impact of NAFTA uncertainty. Or it could be even more serious.
Coincident with the external existential threats is a change in government. That change added a significant layer of internal uncertainty onto an already-murky outlook. In addition to making investment decisions in the oil and gas sector, other energy projects, and the Mexico City airport, the new government has cancelled the auctions of energy assets, and thrown into doubt the honouring of privatization contracts inked under the prior administration. To date, these are sector-specific, and investment in other industries is still being welcomed. Even so, current moves likely have international investors wondering.
How will this play out? On balance, domestic investors still seem more reticent than non-energy international investors. As the world sorts out its policy differences – which it is doing faster than expected – Mexico risks getting left behind. That would be a great shame, because its monetary and fiscal policy is stable, and its potential is so great. In a world replete with ageing populations, Mexico boasts a young, growing, available and increasingly skilled labour force, in addition to the investment attributes already listed. The world also has lots of private investment cash that’s just waiting for policy certainty.
The bottom line?
There is time, but not much. The world is moving toward trade resolution, and when it does, private direct investment promises to surge. In the race to attract this capital, countries will be under pressure to demonstrate their suitability for long-term plays. Mexico still makes a strong case; greater certainty would help.
This commentary is presented for informational purposes only. It’s not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.