Mexico Behind the Numbers

Foreign direct investment (FDI) totals in Mexico so far this year have to be described as satisfactory. They certainly were not lackluster, in light of global economic and monetary uncertainties, the ongoing U.S. economic doldrums and the persistent hype surrounding Mexico’s Presidential elections.

In the fi rst six months of 2012, FDI amounted to $9.62 billion dollars, according to offi cial Banco de Mexico fi gures.
That represented something of a decline from the same 2011 period, when FDI had totaled $11.81 billion. The reasons were multifold, as listed summarily in paragraph one.

Said investment was lower in the second quarter –$4.62 billion, off from a January-March FDI total of $4.99 billion.
That fi gure was recently revised upwards by $627 million. As expected, the automotive sector was the pacesetter for new foreign direct investment inflows. But there was also a hefty representation from fi nancial services and retail trade.

First semester FDI in the all important manufacturing sector was $3.71 billion, of which apparently $3.15 billion was channeled to the OEM automotive and auto parts industries.

Most of the remaining manufacturing FDI was in aerospace projects and nonautomotive transportation.

The FDI statistics just mentioned come from two different sources. Manufacturing FDI (total) for the fi rst semester was issued by Banco de Mexico, whereas the automotive sector data comes from ProMexico, the government’s FDI promotion entity.
Perhaps disappointing was the decline in manufacturing FDI as a percentage of the fi rst semester total, just 38.6% vs. 44% in 2011. A strong second place in participation was fi nancial and insurance services (22.6%), buoyed by continuing expansion of commercial banking where there is an important FDI presence –Spain, U.K., Canada and the U.S. Also important: investment from abroad in non-commercial banking institutions and in the insurance fields.

The U.S. continued as the principal source of FDI in the fi rst semester, with a 36.9% share. That however was well below its 55% participation in 2011. A close second was Spain at 30.8%. Much of that was investment in the commercial banking system. Retail trade came in 3rd, with 9.6% of the total fi rst semester FDI pie. That is primarily from further expansion of existing supermarket, hypermarket and fast good chains.

Germany and Japan were 4th and 5th on the FDI country-of-origin list, thanks to their continuing strong investments in the OEM automotive and auto parts industries.

Somewhat negative at fi rst glance was the level of new FDI (fresh money) in the fi rst half FDI showing. That amounted to $2.7 billion dollars, down from $3.1 billion in the like 2011 period. And there was also a noticeable drop in reinvestment of profi ts fro FDI purposes, just $4.2 billion dollars vs. almost $6 billion in the fi rst semester last year.

Nevertheless the fi gures have to be labeled as satisfactory, given the global economic and fi nancial picture during the period plus domestic political and security uncertainties.

FDI via inter-company accounts amounted to just under one billion dollars, up $400 million from January-June 2011.
This category has traditionally covered Maquiladora Industry FDI. Maquiladoras seem to have enjoyed a good semester in terms of FDI for both new plants and plant expansion projects. Most investment in maquiladoras continues to be U.S. or Asian sourced.

New FDI in the mining sector continued having an important role in the period, primarily for gold and silver mining projects. According to Banco de Mexico, fi rst semester mining investment was $279 million dollars, almost all of that coming from Canada. Mining remains an important but often overlooked element in Mexico’s economy, employment and exports. And it is an important FDI source.

THE SHORT-TERM OUTLOOK

The latest monthly survey taken (late September) by Banco de Mexico indicates optimism as concerns FDI for next year.
The results also expect that for the full year 2012, FDI will come in at a higher level than 2011. Setting the pace to no one’s surprise will be the automotive industry sector.

The central bank consensus survey results are from a universe of 32 private domestic and international economic analysis and consulting groups. Expectations are that FDI for all of this year will reach $20.95 billion dollars, up $1.35 billion from 2011, and then will pick up still further in 2013 to $22.60 billion dollars.
Both estimates were at their highest monthly levels of the year.

The $20.95 billion dollar forecast just mentioned would mean that FDI in the second half of this year will total $11.3 billion, vs. the announced fi rst semester infl ow of $9.62 billion.

That obviously anticipates a solid continuing level of new direct investment in the automotive, aerospace, mining and retail trade sectors. These are seen as also the most likely FDI target areas for next year. Automotive sector foreign investment is seen by ProMexico as reaching close to $6 billion dollars this year, followed by a further infl ow of $4.2 billion in 2013, Those fi gures include new FDI in auto parts manufacturing facilities.

Once again in 2013, a number of very important economic areas will be off limits to any FDI, most noticeably petroleum and basic petrochemicals. There are a bevy of legal and constitutional barriers to any FDI participation. These are not likely to come down in the foreseeable future and will be a restraint on any more noticeable increase in FDI inflows.

In the automotive sector, several major and long-anticipated FDI projects still had not been formalized as of late October.
These are the manufacturing plant plans for BMW, Mercedes-Benz and Volvo, the latter for heavy-duty trailer tractors. Also still up in the air were the possible investment plans of Toyota, Tata and Infi niti. But at least a couple of these projects could land solidly before year’s end 2013.

Boosting the near-term investment total was fi nal confi rmation in late August of the new Audi plant in the state of Puebla, via an announced outlay of $1.1 billion dollars.

The new Audi plant, and the other projects when or if they land, will also mean substantial additional FDI (and domestic private investment as well) in the auto parts sector.

Thus further reason for the optimistic outlook.

FDI AND THE TPP

A new area of potential interest for FDI trend watchers is the 11-nation Trans- Pacifi c Strategic Economic Partnership Agreement (TPP), to which Mexico formally adhered in mid-October. The TPP, which is said to be even broader than most existing free trade agreements, is still in the negotiations phase. That may be concluded this year, so that the TPP comes into formal being as early as 2013.

Mexico already has free trade agreements with 5 of the 11 signatory nations.

Perhaps indicative of its possible scope, one observer has labeled the proposed TPP “a NAFTA on steroids”.

With or without steroids, the TPP does have a chapter covering direct foreign investment (Chapter 2), although formal approval of that chapter may not occur before next year. But anticipation of TPP and Chapter 2 approval could stir some additional FDI.

Just quickly, what does Chapter 2 cover? Remember that there is a foreign investment chapter in NAFTA and the TPP seems to be an expanded and beefedup NAFTA. Chapter 2, among many things, calls for modifi cation of numerous domestic laws dealing with investment and intellectual property. Foreign-owned companies for example would be able to sue sovereign host country governments if their investment interests are affected in some manner that violates the TPP charter.
But the TPP does not call for any automatic opening up to FDI of “strategic economic sectors” which are now closed to it.

A fi nal note: Banco de Mexico FDI statistics, as reported quarterly, are always subject to revision. Most often, the preliminary fi gures are upped, due to FDI reporting delays or reporting adjustments. One example: the preliminary fi rst quarter 2012 of $4.37 billion dollars was subsequently revised to the now offi cial $4.99 billion.
So, the second quarter preliminary fi gure could well be modifi ed upwards.