Gregg Wassmansdorf

Political change, the ongoing uncertainty over US trade and falling commodity prices may well cloud Mexico’s immediate investment climate, leaving the outlook for FDI unclear well into 2018, writes Gregg Wassmansdorf. 

Whiplash is a relatively common car accident injury that occurs when the head and neck are rapidly and forcefully caused to move back and forth. It places tremendous stress on the body and can have long-lasting negative impacts. What will be the effects in Mexico, then, of the investment whiplash resulting from North American Free Trade Agreement (Nafta) renegotiations and other factors that are dampening foreign investment?

In the complex mix of macroeconomic, investment and trade statistics it can be difficult to clearly identify causal factors but several things we know for sure. Growth in total trade between Mexico and the US has averaged nearly 9% annually for the past 25 years. For the first time in a quarter century, the past two years showed back-to-back declines in Mexican/US trade. 

Also, there has been a persistent imbalance in this trade arrangement since 1995 whereby the US has imported on average 26% more than it exports each year, though this deficit has steadily declined for the past decade and now sits at 20% per annum. This is the trade imbalance US president Donald Trump seeks to rectify through either renegotiating – or abandoning – Nafta. 

The US trade imbalance with Mexico is largely a result of the dramatic increase in FDI that has arrived there since the early 2000s. Depending on the specific reference year, the number of FDI projects in Mexico has roughly tripled in a decade; the value of capital investment, which is always volatile, has doubled or tripled; and jobs created from FDI quintupled in both 2015 and 2016 compared with 2003.

According to fDi Markets, out of a total of 59 source countries responsible for these impressive FDI growth trends, the US has been the leader, accounting for more than one-third of Mexican inbound projects tracked. Mr Trump wants this activity curtailed.

Five sectors of the economy account for 40% of FDI projects in Mexico, led by automotive components, and followed by software and IT services; metals; industrial machinery, equipment and tools; and transportation. These sectors are deeply implicated in the current Nafta drama, and all but software and IT services have seen a marked decline in project activity in 2017. 

An uncertain trade future is not the only factor challenging Mexico’s investment climate right now. Low oil prices have substantially reduced the Mexican government’s revenue and spending on income supports, slowing the economy overall and making it less attractive to new investment. Meanwhile, political uncertainty is rife in advance of a presidential and federal election on July 1, 2018, in which current polls suggest the country could turn towards a left-wing activist party. 

Trade policy, macroeconomics and domestic politics all suggest that it may not be until 2019 that a clearer path for FDI can be seen in Mexico.

Gregg Wassmansdorf is senior managing director, consulting, at Newmark Knight Frank, a global real estate services firm. He is a member of the Site Selectors Guild.

This article is sourced from fDi Magazine
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