Wednesday, June 19, 2024

Mexico’s investment climate a worry for investors, US State Department warns

The United States Department of State (DOS) has warned that 2019 ratification prospects for the new North American trade agreement and the “historic change” in government last December “remain key sources of investment uncertainty” for the Mexican economy.

In its 2019 Investment Climate Statement for Mexico, the DOS said the new government had indicated it was committed “to prudent fiscal and monetary policies since taking office,” but added:

“. . . conflicting policies, programs and communication from the new administration have contributed to ongoing uncertainties, especially related to energy sector reforms” and the financial health of Pemex, the state oil company.

The DOS noted that the federal government followed through on its campaign promises to cancel the new airport project, cut government employees’ salaries, suspend all energy auctions and weaken autonomous institutions.

The July 11 statement said that “uncertainty about contract enforcement, insecurity and corruption also continue to hinder Mexican economic growth,” asserting that those factors raise the cost of doing business in Mexico “significantly.”

The DOS said that “investors are increasingly concerned” that the federal government is undermining confidence in the “rules of the game,” particularly in the energy sector, by weakening the political autonomy of the Federal Commission for Economic Competition, Mexico’s antitrust agency, as well as the Energy Regulatory Commission (CRE) and the National Hydrocarbon Commission.

“The administration appointed four of seven CRE commissioners over the Senate’s objections, which voted twice to reject the nominees in part due to concerns their appointments would erode the CRE’s political autonomy,” the DOS said.

The administration’s budget cuts resulted in significant layoffs, it said, which has reportedly hampered the agencies’ ability to carry out their work, “a key factor in investment decisions.”

The DOS acknowledged that a key pillar of President López Obrador’s presidential campaign was combatting corruption at all levels.

However, it charged that the complicity of government and law enforcement officials with criminal elements is still “a significant concern.”

“While public and private sector corruption is found in many countries, the collaboration of government actors (often due to intimidation and threats) with criminal organizations poses serious challenges for the rule of law in Mexico.”

The DOS also said that insecurity remains a concern for companies considering investing in Mexico.

“The American Chamber of Commerce in Mexico estimates in a biannual report that security costs business as much as 5% of operating budgets. Many companies choose to take extra precautions for the protection of their executives. They also report increasing security costs for shipments of goods,” it said.

On a positive note, the DOS said that bilateral trade between Mexico and the United States grew 650% between 1993 and 2018 and noted that inflation at the end of 2018 was 4.8% compared to 6.6% at the end of 2017.

However, the State Department said the inflation rate was still above the Bank of México’s target of 3% due to the depreciation of the peso against the U.S. dollar and “higher retail fuel prices caused by government efforts to stimulate competition in that sector.”

Mexico is the United States’ second largest export market and third largest trading partner, the DOS said.

The U.S. is Mexico’s leading source country for foreign direct investment, contributing US $12.3 billion or 39% of all inflows in 2018.

The leaders of Mexico, the United States and Canada signed a new trade pact in November but only Mexico has so far ratified the agreement.

At its June board meeting, the Bank of México recognized that the possibility that the ratification process for the USMCA will encounter difficulties in the United States and Canada poses a threat to the Mexican economy.

Source: Milenio (sp) 

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