Thursday, May 23, 2024

Analysts foresee more foreign investment following ratification of trade deal

Ratification of the new North American free trade agreement and the ongoing trade war between the United States and China will help attract greater foreign investment to Mexico, according to two experts.

Raúl Feliz, an academic at the Center for Research and Teaching in Economics (CIDE), a Mexico City university, and José Luis de la Cruz, director of the Institute for Industrial Development and Economic Growth, a think tank, told the newspaper El Economista that they expect foreign direct investment (FDI) to be higher in 2020 than last year.

According to preliminary figures from the Economy Ministry, Mexico attracted US $32.92 billion pesos in FDI last year, a 4.2% increase compared to 2018.

Feliz predicted that ratification of the United States-Mexico-Canada Agreement, or USMCA (only Canada has not yet approved the new pact), and a global manufacturing recovery will help Mexico see a moderate increase in FDI in 2020.

He said that the contrast between growth in FDI last year and an expected 5% contraction of overall investment can be explained, in part, by the fact that local investors’ spending is more dependent on publicly funded projects, and the new federal government cut expenditures during its first year in office.

For his part, de la Cruz described last year’s FDI figure as “modest” and highlighted that just over half the total came from reinvestment of profits rather than new investment. He said that the stagnant economy in 2019 was a hindrance to investment.

In 2020, however, Mexico has the opportunity to attract manufacturing companies that are seeking to relocate their factories as a result of the trade war between Washington and Beijing.

To take advantage of the opportunity, de la Cruz said, Mexico must be able to provide effective logistics, cheap energy and a qualified workforce. He also said that tax concessions would help to attract new foreign-owned production plants.

The think tank chief said that the benefits of the ratification of the USMCA will be seen more in 2021 than this year because most large companies would have already made their 2020 investment plans before Mexico, the United States and Canada signed a modified version of the pact in December.

However, 38 economic analysis and consultancy firms surveyed by the central bank in late January just days after the U.S. Senate approved the USMCA appeared to indicate that the new trade pact will help FDI this year.

The consensus among analysts was that Mexico will attract $29.34 billion in direct foreign investment this year. While that figure is lower than the FDI attracted last year, it is 23.6% higher than the prediction for 2020 made by analysts whose opinions were canvassed by the Bank of México a year ago.

If their start-of-year prediction is exceeded by the same amount in 2020 as it was in 2019 – 32.7% – FDI will be just under $39 billion this year. The president’s chief of staff, Alfonso Romo, has said that Mexico should target $35 to $40 billion in foreign investment in order to stimulate GDP growth.

Bank chiefs and other business leaders who met with President López Obrador on Tuesday appear prepared to continue to invest in Mexico and consequently help the government achieve its investment goals.

Speaking at his morning press conference on Wednesday, López Obrador said that the bankers and directors of companies such as Walmart, Chevron, Cisco and Amazon made a commitment to maintain and increase their investments in Mexico.

“They all spoke about [different] amounts but I don’t remember, I didn’t add them up; but it’s billions of dollars of investment,” he said.

“In general, they’re very optimistic about the economic future of the country. It was a very good meeting.”

Source: El Economista (sp), El Financiero (sp) 

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