Successfully investing in Mexico

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last updated on 2 May 2022 | reading time approx. 2 minutes

 

 

 

How do you assess the current economic situation in Mexico?

Mexico finished 2021 with GDP growth of 5 percent, which was even higher than expected, but in the last quar­ter there were already signs of a descent into recession, which was primarily characterised by supply diffi­culties in the automotive sector. Despite this development, 2022 started encouragingly with economic growth finally returning to 1.1 percent in the 1st quarter. Even before the Russian invasion of Ukraine, the Mexican government was forecasting economic growth of nearly 5 percent in 2022, but the number was revised to 3.4 percent by the Mexican Ministry of Finance in April. This development is mainly caused by the increase in pe­trol and food prices, which employers, who have been affected by the pandemic, supply difficulties and energy prices, are not able to compensate with corresponding wage increases. The Mexican economy is essen­tially dependent on the growth of the US economy. Accordingly, the moderate growth rates of the U.S. economy are helping, but the U.S. is still recovering from the Corona pandemic and is also facing the effects of the invasion, inflation and supply difficulties.

 

How would you describe the investment environment in Mexico? Which industries have high potential? 

Mexico remains the second most important importing country for the USA after China. All products, from agricultural products to consumer goods and vehicles, especially those with a high labor content, are manufac­tured in Mexico for the North American market. Mexico continues to be a suitable manufacturing base for this market, taking advantage of all the benefits of the USMCA and its regional value-added provisions. Mexico now offers lower wage levels than China and has been described as the world champion of free trade agreements. However, the country remains interesting as a market for capital goods, because every intensifi­cation of labor market policy leads to an increase in Mexico's level of industrialisation. The healthcare sector, which has now come into focus under the pandemic, also promises enormous potential. The government has launched a number of support programs, ranging from financial aid for the sector to easier purchasing condi­tions from abroad. Even before the Corona crisis, the government had launched several projects, such as the expansion of rail lines, the construction of new refineries and the expansion of Santa Lucia Airport, about 40 km north of Mexico City. The climate policy of the U.S. president with his re-entry to the Paris climate agree­ment is also advantageous for Mexico, because Mexico can profit from achieving the CO2 targets in the U.S., since impor­tant components for low-emission vehicles and equipment often come from Mexican produc­tion. The labor is performed by Mexican workers, but machinery and equipment must be sourced from abroad, primarily from Germany.


What challenges do German companies face during their business ventures into Mexico?

In addition to the domestic political lurching of the government under President Andrés Manuel López Obrador, which is difficult to predict, the lack of available qualified and trained labour and the volatile currency risks with a weak local currency, there are difficulties in Mexico above all with regard to corruption and crime. Overcoming these challenges is possible, but it is associated with additional costs. There are isolated sectoral risks, particularly in the renewable energy sector: In the course of the reform "Ley de la Industria Eléctrica," electricity generation is to be primarily nationalised and the state-owned oil company Pemex strengthened. This could have an impact on companies in the energy sector or even industries with high energy requirements.

 

US President Joe Biden spoke with Mexican President López Obrador about future joint cooperation. How will the US-Mexican relationship affect the economy?

Mexican relations with the United States were hanging by a thread after Donald Trump became president, but the left-leaning Mexican president Andrés Manuel López Obrador intensified contact with Trump and searched for similarities - which he found. On the one hand, the North American Free Trade Agreement (NAFTA) was extended (packaged in a new design, called USMCA), and on the other hand, the oil industry was jointly targeted. Trump had to leave, but American national pride was allowed to remain, as the new President Joe Biden is now continuing trade relations from a different angle - but not necessarily to the disadvantage of the Mexican economy. The new U.S. president's energy policy is completely at odds with the Mexican president's strategy of spending more than $24 billion to restructure the nation's ailing oil company PEMEX. Nevertheless, there are opportunities for the Mexican economy to support the change in the USA. The U.S. supplied Covid vaccines to Mexico, and the Mexican government sent more border guards to Mexico's northern border to reduce the flow of refugees to the United States. However, it is occasionally becoming visible how the relation­ship is hanging by a thread. For example, a U.S.-wide import ban on Mexican avocados was immediately im­posed after a U.S. animal and plant health inspector in the Mexican state of Michoacán received a threatening phone call. However, the U.S.-Mexican relationship can be expected to continue to strengthen as both coun­tries benefit from each other economically.


In your opinion, how will Mexico develop?

Mexico remains a strong market for production, investment and consumption. Wages are far from European or U.S. standards. Domestic policy has been rapid and questionable in parts, for example, in infrastructure pro­jects, reform of the energy law, and even the recent nationalisation of lithium production to prevent huge li­th­ium deposits from falling into Canadian and Chinese hands. Mexico's foreign policy was also neutral during the Russian invasion, but this should not be interpreted as pro-Russian, as Mexico is only trying to adopt an inter­nationally neutral position for economic reasons. Nevertheless, Mexico remains primarily dependent on the spending habits of the American consumer. The current moderate recovery of the U.S. economy despite infla­tion, supply problems and the effects of the invasion send optimistic signals.

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