Successfully investing in Mexico

The Mexican economy has been able to withstand the current global crises thanks to the continued favorable economic situation in the USA, rising national private consumption and a solid political framework. Prudent fiscal policy has kept government debt in check and a proactive approach by the central bank (Banxico) has counteracted inflationary pressure. In April 2024, inflation stood at 4.63 percent with Banxico's current policy rate at 11.00 percent. After all, Banxico expects the inflation target of 3 percent to be reached again in 2025. In the fight against inflation, the Mexican central bank had always raised the interest rate level earlier and more severely than the FED in the USA, which led to the strengthening of the Peso against the US dollar, with the result that Mexican exports and tourism were slowed down, but imports were boosted.

  

In 2023, foreign direct investment (FDI) was the highest ever recorded at around 36.1 billion US dollars. Despite the Mexican Ministry of Economics presenting this figure as a great success and points out the economic stability, competitiveness and good business environment in Mexico, it must be critically noted that around 74 percent of foreign direct investment is accounted for by the reinvestment of companies already established in the country. In turn, 13 percent of investments are intercompany loans and only meagre 13 percent are actual new investments. Nevertheless, Mexico was able to generate economic growth of over 3 percent for the second year in a row at 3.2 percent in 2023. This has partly ensured that the official relative unemployment rate has levelled off at the vanishingly low figure of 2.7 percent, meaning that the economy is macroeconomically at full employment. Other factors for this are the low wage level with a minimum wage of around 14 euros per day, the lack of unemployment insurance and the fact that more than half of the Mexican labour force is employed in the informal sector. The Mexican Ministry of Finance's current draft budget assumes economic growth of up to 3.5 percent in 2024.

According to a proclamation made by the Mexican Minister of Economics Raquel Buenrostro to industry representatives in March 2024, Mexico has become the world's biggest centre of attraction for investment. Although such superlative statements should always be questioned in this year's election year, the Mexican authorities also stated that the country received investment pledges totalling 31 billion US dollar in the first quarter. Of these investment pledges, 57 percent came from American, 17 percent from German, 14 percent from Argentinian and 6 percent from Chinese companies, mainly in the manufacturing (54 percent), communi­cations (16 percent), trade (15 percent) and logistics (14 percent) sectors.

  

The automotive industry especially offers extremely high potential for continued growth and as a centre of attraction for foreign investment. Reasons for this can be found particularly in the free trade agreement USMCA and its regulations on the minimum of 75 percent of regional value content. Alongside car manufacturer Tesla, which serves as a good example and which is planning to build a gigafactory in the northern state of Nuevo Léon, BMW and Kia are likewise planning to expand their production capacities in Mexico by investing in e-mobility. 

  

Furthermore, the renegotiated free trade agreement between Mexico and the European Union is still awaiting ratification and entry into force. The modernized form provides for the exemption from customs duties of numerous agricultural goods and foodstuffs from the European Union, on which customs duties of more than 20 percent are sometimes levied. This offers an enormous opportunity for the producers concerned.

Foreign investors and entrepreneurs report particular stumbling blocks in business operations due to regulatory unpredictability, legal uncertainties and the state-centred economic policy of the current government. For example, there are far-reaching efforts by the current government to reverse reforms that have already been implemented, particularly in the energy sector, in order to favour both the state-owned fossil fuels company PEMEX and the state-owned electricity supplier CFE over the private sector.

  

Moreover, there is an enormous investment backlog in Mexico's infrastructure. For instance, exports at national level have risen sharply in recent years, but the public infrastructure for transporting goods and border crossings has not changed, resulting in traffic congestion in the system. The supply of electricity is another issue, as entrepreneurs are often tied to CFE, the electricity supply is regularly unreliable and there is often no access to electricity from renewable energy sources. To some extent, there can also be problems with the water supply, as more and more federal states are suffering from water stress due to infrastructural problems.

  

Another challenge for a German entrepreneur can be the limited availability of industrial space. According to the Mexican Association of Industrial Parks under Private Law (AMPIP), there was 2.2 percent available space in industrial parks nationwide in 2023. However, in particularly economically strong regions, availability was only 1 percent and an initial high lease term must be expected when renting. In addition, the high demand for skilled workers in the largest industrial centres is leading to a shortage of labour, with the result that wages are rising enormously and employee loyalty is declining.

  

Finally, the widespread high crime rate in connection with the challenges of doing business in the country ought not to go unmentioned. Among other things, this affects the internal operation of companies and the transport of goods. The negative economic impact of crime and violence has been estimated at over 200 billion US dollar annually in several studies over the past few years.

On 2 June 2024, the entire legislature in Mexico will be re-elected. This means that almost 99 million Mexicans will be called upon to cast their votes to appoint more than 20,000 local, state and federal officials and the presidential office for a six-year term. In addition, the new president will have the right to appoint a new judge to the Supreme Court, which until now has been seen as a counterweight to the current administration of the highly popular incumbent president Andrés Manuel López Obrador (AMLO). The constitution prohibits the current President AMLO from being re-elected, so Claudia Sheinbaum, the former mayor of Mexico City, is to serve as his successor. AMLO had already announced that he would honour the constitution and not make any changes to it that would benefit him personally.

 

It is highly likely that the presidential three-way contest between Miss Claudia Sheinbaum (candidate of the current left-wing governing coalition and party member of the current presidential party “MORENA”) and her rivals Miss Xóchitl Gálvez (candidate of the largest opposition coalition and party member of the conservative, right-wing party “PAN”) and Mister Jorge Álvarez Máynez (candidate of the centre-right party “Movimiento Ciudadano”) will result in her being elected, as all polls at the end of April see her as the most probable winner with a lead of around 25 percentage points over the next candidate.

  

If Claudia Sheinbaum, who has a degree in physics, becomes president, she will largely continue the policies of the current government, only in a more consensus-based way. She also emphasized the importance of the USMCA trade agreement and the opportunities associated with nearshoring. However, the biggest discrepancy with AMLO is probably her vow to expand renewable energies instead of relying exclusively on the state oil company PEMEX and the electricity supplier CFE.

The economy has reached pre-pandemic levels of employment and gross domestic product (GDP). Mexico's stable macroeconomic framework, the economic dynamism of the USA and the solid production base will support economic growth.

  

Nearshoring offers enormous opportunities for the country to become an even more important economic power. As a result, the current government under AMLO also created immediate tax incentives for companies from eleven different sectors with a decree at the end of last year, which applies until the end of 2024. Further preparations are also being made in Mexico to cope with this expected wave of new foreign companies moving to the country. According to the Mexican Association of Industrial Parks under Private Law (AMPIP), more than 50 additional industrial parks are expected to be built by the end of 2025, which would provide eight million square meters of new space for economic activities.

  

These estimates are also in line with the Mexican Ministry of Economics´ report that 363 major investments with a volume of over 106 billion US dollars have been announced for the coming years. According to the Ministry's estimates, this would lead to the creation of almost 227,000 new jobs. As can already be seen from this year's investment announcements mentioned above, more companies will use Mexico as a location for nearshoring.

  

However, the US elections in November 2024 will have an impact on the Mexican economy. Although the North American trade agreement USMCA was negotiated under then President Donald Trump, it remains to be seen how the USA might react to the establishment of numerous Chinese companies in Mexico.

In terms of domestic policy, the new president will face the difficult task of further expanding Mexico's economy, improving the security situation, levelling out social disparities, combating corruption and making the transition to renewable energies.

Mexico will continue to be a strong production location and gain increasing interest in the domestic market.​