Mexico: Mexico seeks to keep FDI on steady course

Uncertainty over US policy, inclunding proposals to impose a levy on imports, will likely impact Mexico’s foreign investment flows this year, though this could be offset in the medium term by investor interest from elsewhere.

According to a mid-February statement by the Ministry of Economy, foreign direct investment (FDI) in the country reached $26.74bn in 2016, down 5.8% on the previous year. However, fourth quarter results were better than expected at $5.73bn, up 17% year-on-year.

Despite concerns over shifting policy with Mexico following the presidential election last November, the US continued to be the major source of FDI, at 38.9% of the total – though this was down 14 % points on the previous time– followed by Spain (10.7%), Germany (9%), Israel (7.5%) and Canada (6.3%). The US as well held fast as Mexico’s major export market, making up about 80% of sales abroad.

Mexico’s manufacturing sector continued to draw the bulk of investment , accounting for additional than 60% of all FDI in 2016, or about $16bn.
Steady outlook

FDI levels are expected to remain steady this year, according to Ildefonso Guajardo Villarreal, minister of economy. “Given the investment flows I have observed, I would expect that an investment level of around $25bn could be maintained in 2017,” he told local media in mid-January.

Higher inflows in telecoms and energy should help offset declines in other sectors and the cancellation of some headline projects, such as a $1.6bn plant by automobile manufacturer Ford, he said.

Any US moves to restrict trade – such as a 20%border tax on Mexican imports or companies that move certain operations outside the US, a policy shift proposed by President Donald Trump at the start of the time– would be countered, the minister said.

“It is clear we need to be prepared to instantly neutralise the impact of such a measure,” he added. “And it is very clear how: take a fiscal action that clearly neutralises it.”

Despite potential tariff barriers from Mexico’s major trading and investment partner, Guajardo is confident that FDI would rebound in 2018, lifting average annual inflows to $30bn over the six-year term of President Enrique Peña Nieto.

To reach this target, Mexico would need 2018 to be one of its best years on record: FDI over the initial four years of the president’s term totalled $119.79bn, an average of about $30bn a year.

Less optimistic was Marco Oviedo, chief Mexico economist for UK financial services firm Barclays, who in mid-February estimate a further dip in FDI in 2017, of up to $4bn.
Open doors to FDI

While adverse policy measures could stymie investment flows from the US, nations further afield have shown interest in a variety of sectors of the Mexican economy.

At the beginning of February the Mexican government announced a joint venture with Chinese car manufacturer JAC to build a plant in the national of Hidalgo for the assembly of SUVs. Initial annual production at the $212m facility – a partnership between JAC and Mexico’s Giant Motors – will be 11,000 units, potentially rising to 40,000.

China is as well raising its profile in Mexico’s energy sector, following an easing of restrictions on overseas investments in the oil and gas industry that began in 2013.

National-owned China Offshore Oil Corporation was one of 10 successful bidders in an auction of deepwater drilling concessions last December. Combined investment in the fields is expected to add an average of $1bn annually to Mexico’s FDI over the next 35 years.

As well in early February, the EU and Mexico agreed to fast-track negotiations to update their free trade agreement in two separate rounds in April and June. Annual bilateral trade has nearly doubled in the decade to 2015, from $27.4bn to $55.8bn.

While China and other markets are unlikely to supplant the US as Mexico’s leading source of FDI, new sources of foreign investment should help mitigate the downside risks of new trade restrictions from Washington.