Doing Business In: Mexico

González Calvillo, SC

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Recession, market uncertainty and increasing concerns for investors have characterized 2020 in Mexico for several politic and economic reasons, as well as for the COVID 19 pandemic. Examples of this political and economic reasons include the implementation of policies against energy projects, which had been generating significant direct investment in Mexico lately; the cancellation of major infrastructure projects such as the new Mexico City Airport, which was well underway; several landmark energy projects and manufacturing plants; and the commencement of projects, the viability and utility of which have, at best, been heavily questioned, such as the Santa Lucía Airport, the Tren Maya, the Dos Bocas Refinery, and the Banco del Bienestar.

Here we are, then, facing what is now clearly the most severe local economic debacle in Mexico´s modern history. Expectations are, and reality is starting to show, that there will be an incalculable number of bankruptcies and layoffs in Mexico as a consequence of the Pandemic, exponentiated by the l poor economic and political context created by the current administration. Furthermore, Mexico has failed to implement effective measures to boost its economy, while developed countries across Asia, Europe and North America have already installed rescue and recovery plans of inconceivable dimensions -mostly aimed at saving small business who are primary sources of employment-. Due to the foregoing, experts have already pointed to the potential loss of Mexico’s investment grade by 2021, likely depending on the results of the midterm legislative elections coming next summer.

On the positive side, as the fifteenth largest economy worldwide and the second largest economy in Latin America, Mexico has positioned itself as a competitive jurisdiction for investment opportunities. Among other advantages, it offers a strategic geographical position, highly committed human capital -characterised by the OECD and the WTO as one of the hardest-working workforces globally- to generate economic growth. Among other sectors that have accredited success rates in Mexico, various real estate investments have been yielding high annual returns on investment for the past several years; exports have been running steadily at about 30% of overall GDP. Moreover, Mexico is a manufacturing-centric economy geared towards exporting, which experts believe positions it as being as attractive as China but with an enhanced geographic location for international trade. There have also been some positive notes in AMLO’s government that deserve mention, such as some prosecution cases against allegedly corrupt officers from prior administrations, and the entry into force of the United States, Mexico and Canada Agreement (USMCA) in July 2020, which is expected to create a significant amount of economic activity over the years.

In the foregoing context, we believe that the current economic and geopolitical conditions are likely to afford opportunities to certain investors. Therefore, we believe Mexico will remain a target for foreign investment, though perhaps of a different nature. Foreign direct investment is projected to reach around USD6.9 billion in 2021 and around USD7.8 billion in 2022 according to some econometric models.

In fact, during the first quarter of 2020, foreign direct investment in Mexico grew 1.7% with respect to the first quarter of 2019 for an aggregate amount of approximately USD10.3 billion, 76% of which derived from the reinvestment of profits (an atypical behaviour), while according to the Ministry of Economy, new investments amounted to 22% of the total foreign direct investment in Mexico. The foregoing investments were made in manufacturing (44.1%), insurance and financial services (25%), commerce (8.3%), power generation, gas and water (5.1%), mining (4.8%) and construction (4.4%).

Among the sectors that are likely to represent some interesting business opportunities for local and foreign investors, we highlight the following: manufacturing and exports, long-term infrastructure, restructurings and insolvency, banking, and finance (including fintech), and consumer goods and retail. Specifically, we believe that the technology sector, including fintech, is likely to remain particularly active, and will continue to create a waterfall effect in transactions in Mexico and worldwide.

In a nut shell, there will be some investment opportunities in Mexico but they will come with relevant challenges, such as changes to the existing legal framework, the long-term effects of COVID-19 and the worldwide economic turmoil, as well as the local political environment in general. We are looking forward to navigating through this new test.