Mexico emerges as a magnet for foreign investors
In the dynamic global investment arena, Mexico emerges as a magnet for foreign investors due to its robust incentives, challenges, and transformative policies. As the second-largest trading partner of the United States, Mexico consistently attracts Foreign Direct Investment (FDI) with its strategic location, stable macroeconomy, and market access. This article delves into Mexico's investment climate, navigating a spectrum of opportunities and recent shifts shaping the nation's economic path. From enticing incentives like land grants and tax deductions to navigating reimbursement challenges in a complex regulatory landscape, we unravel the layers comprising Mexico's investment environment. As we navigate Mexico's evolving investment landscape, this exploration goes beyond opportunities, delving into the challenges investors may face. Join us in unraveling a nation that beckons investors with promise, potential, and the practicality needed to thrive in a dynamic global economy.
According to Deloitte's economic outlook report, Mexico's GDP is anticipated to experience a 3.5% growth in 2023 and a subsequent 2.5% growth in 2024. However, the report highlights that certain growth-driving factors will diminish by 2025, leading to a revised forecast of 1.3% for that year. The current economic vigor in Mexico is attributed to factors such as nearshoring, public investment, and private consumption, although there is a need for improvements in productivity and public policies.
Source: Deloitte Insights 2023
Regarding foreign direct investment (FDI), the United Nations Conference on Trade and Development (UNCTAD) indicates a 13% increase in FDI inflows to USD 31.6 billion in 2022, with notable contributions from new equity investments in the mining and extractive industries. Projections for FDI in Mexico for 2021 suggest a recovery, but it is crucial to recognize that, out of the total of US$29,041 million recorded in the first half of 2023, only 7% (slightly over US$2 billion) represents new investments, while nearly 80% constitutes reinvestments. In summary, Mexico's economic growth is anticipated, driven by factors such as nearshoring and robust public and private sector activities. Nevertheless, it is noteworthy that the majority of foreign investment comprises of reinvestments, with new investments being relatively modest.
Source: Deloitte Insights 2023
To attract new investments, the Mexican government is undertaking changes in fiscal,monetary, and financial policies, along with structural reforms. These measures aim to curb inflation by tightening fiscal and monetary policies while simultaneously enhancing transparency in transactions. For instance, the Mexican government intends to increase transparency by reporting their financial support to Pemex, the state-owned petroleum company, divulging both tax expenditures and direct transfers. On a similar note, to prevent misuse of legal entities for criminal purposes in Mexican financial institutions, the Mexican government plans to create an ownership registration. This will be developed under the Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) framework. This enhanced transparency present across transactions not only prevents regulatory oversight but also enables a better understanding of potential risks when reallocating public resources.
Beyond governmental policies, structural reforms are key to economic stability in Mexico. Despite being the 2nd largest economy and the largest exporter in Latin America after Brazil, Mexico is lagging in growth compared to its peers. Supply-side reforms, increased female labor force participation, improved public infrastructure, and strengthened governance, and are essential to encourage growth.
With respect to female labor force participation, the gender gap concerning labor participation rate in Mexico is the highest in the OECD despite governmental efforts. To combat this, Mexico has made plans to increase female participation through ensuring equal pay rates, improving maternity leave, investing more in maternal healthcare and children, ensuring equal education opportunities, and more. Additionally, in line with its AML framework, the government has worked towards reducing corruption through its decision to participate in the IMF’s voluntary assessment of transnational aspects of corruption. Moreover, there are plans to improve infrastructure (transportation, water, energy) and reduce governmental red tape. This includes easing restrictions for foreign investments and procedures and ensuring a welcoming business climate. Lastly, the Mexican government has introduced multiple initiatives to address climate change. Along with implementing a carbon tax, outlining a deforestation combat plan, and establishing an Emission Trading Scheme, the government has announced its goal of increasing the market share of electric vehicles to 50% by 2030. These initiatives are key to enabling a streamlined business landscape in Mexico while aligning with the global shift towards sustainability efforts.
Mexico offers numerous opportunities for investors interested in the market. Most prominently, recent changes in the global supply chain have made nearshoring favorable for foreign businesses. Mexico, with its proximity to big consumer markets like the US, is advantageous for foreign companies to reduce production costs while mitigating logistic disruptions (Deloitte Insights 2023). In 2022, new investments alone represented 48% of the total foreign direct investments in Mexico. According to Deloitte Insights, Mexico has mainly been considered an attractive destination due to its closeness to the US, its manageable salaries, as well as its qualified labor force. Foreign investors can consider the prior factors to determine if Mexico could be the ideal business environment for them.
Source: Deloitte Insights 2023
Additionally, with an increasing focus on global sustainability in the face of climate change, investors would have plenty of opportunities to delve into the sustainability sector. As formerly mentioned, Mexico’s friendly attitude to environmental initiatives enables green businesses to thrive. Investors can look to Mexico as an ideal place to expand their eco-friendly businesses.
Mexico's investment landscape presents a dynamic terrain rich with opportunities and challenges. While the nation's economic forecast shows promise, bolstered by nearshoring trends and robust public-private initiatives, there are critical areas requiring attention. Structural reforms, policy adjustments, a focus on gender parity, anti-corruption measures, infrastructure, and sustainability will be instrumental in propelling Mexico's economy forward. As investors explore Mexico's market, these factors merit consideration. Mexico's strategic location, skilled labor force, and supportive environmental stance create an inviting atmosphere for businesses aiming to thrive in a changing global economy. With proactive reforms and a commitment to sustainable growth, Mexico stands poised to attract and retain investors seeking a promising and sustainable business environment.
References:
Mexico economic outlook, 2023. (2023, October 3). Deloitte Insights. https://www2.deloitte.com/us/en/insights/economy/americas/mexico-economic-outlook.html
Mexico Economic Snapshot. (n.d.). OECD. https://www.oecd.org/economy/mexico-economic-snapshot/
Mexico overview. (2023, 4). World Bank. https://www.worldbank.org/en/country/mexico/overview
Mexico. (2023, July 26). United States Department of State. https://www.state.gov/reports/2023-investment-climate-statements/mexico/
Mexico: Staff Concluding Statement of the 2023 Article IV Mission. (2023, October 3). International Monetary Fund. https://www.imf.org/en/News/Articles/2023/10/03/mexico-staff-concluding-statement-of-the-2023-article-iv-mission
Mexico's economy grows 0.9% in third quarter, exceeding forecasts. (2023, October 31). Reuters. https://www.reuters.com/markets/mexicos-economy-grows-09-third-quarter-exceeding-forecasts-2023-10-31/
Nearshoring in Mexico. (2023, July 13). Deloitte Insights. https://www2.deloitte.com/us/en/insights/economy/issues-by-the-numbers/advantages-of-nearshoring-mexico.html
Overview of the Mexican economy. (n.d.). Inicio. https://embamex.sre.gob.mx/filipinas/index.php/negocios-y-comercio/overviewmexicaneconomy
