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Investment drought in Mexico slows recovery from pandemic

When Mexican President Andrés Manuel López Obrador won a landslide victory in July 2018, his government pledged to push public and private investment to 25% of GDP with the aim of pulling the country’s economy out of a rut of long time.

Instead, investment fell, as a series of unfavorable investor moves deterred entry. López Obrador’s move last month to pass a law that change the electricity sector the rules are just the latest example, investors warned.

It also scrapped a partially built airport and brewery, canceled electricity auctions, rewrote pipeline contracts, upset processed food manufacturers with new labeling requirements, and pushed plans to to ban the subcontracting of jobs.

CEESP, a private sector think tank, said the recent decision to give priority to the national electricity company was the 15th move by López Obrador, his Morena party or the government to undermine investor confidence in the past two and a half years.

Mexico is fighting to get out of its deepest recession since 1932 with limited help from his government, which has refrained from launching the kind of ambitious budget support measures taken by other major regional economies like brazil.

As a result, growth should not return to its pre-pandemic level for five years, according to the IMF.

“They would have struggled to find a worse time to introduce this bill,” Carlos Salazar, head of Mexico’s largest trade lobby, the CCE, told the Financial Times. “There’s no doubt that will cause more problems. No investor will want to invest. “

López Obrador believes that playing hard with a private sector he accuses of corruption and unfair competition is working as part of his self-proclaimed mission to “transform” Mexico by eradicating bad practices.

He often dismisses suggestions that the economy is struggling by claiming to have “other data”. He points out that record remittances – $ 40.6 billion last year, some 3.8% of GDP – are essential aid to consumer spending.

López Obrador predicts the Mexican economy will grow 5% this year – more optimistic than any economist’s estimate – but even that would not offset the 8.5% contraction in 2020.

And sustaining growth will be difficult. “If someone tells you that you can grow 5% without 25% [of GDP] total investment, they lie ” Carlos urzua, Prime Minister of Finance López Obrador told the FT in 2018.

With millions of jobs lost and businesses closed in Latin America’s second-largest economy due to the pandemic, and 44 percent of workers unable to make ends meet on their wages, economists say the president needs to boost investment to keep millions more people out of poverty.

“Recovering lost ground will take a long time, the investment climate is very tense. The signals are not good, ”said Jessica Roldán, chief economist at brokerage firm Finamex. “In the medium and long term, it is impossible to grow without investment.”

Billion dollar line graph showing remittances to Mexico continued to grow despite pandemic

However, investment is declining more and more. Gross fixed investment – the sum of public and private expenditure on factories and machinery – was just over 19% of GDP in the third quarter of last year. He does not have fallen to such levels since 2009, during the global financial crisis.

Foreign direct investment fell by more than $ 10 billion during the pandemic and most of that is reinvesting profits rather than greenfield projects, official data shows.

Private investments now only represent 16.6% of GDP, up from nearly 20% in 2018, according to the Mexican Institute of Competitiveness (IMCO), a think tank.

And although López Obrador has touted a handful of major infrastructure projects, including a refinery, airport and train line, public investment has fallen to 2.5% of GDP – from 2.9% when he took office, said CEESP.

“It appears that the current federal government is determined to limit investment and, therefore, economic growth,” CEESP said.

Alonso Cervera, Managing Director of Emerging Markets Research at Credit Suisse, said: “Mexico does not appear to have a clear pattern of economic growth. It seems that the development model is to build some flagship projects like the refinery, train and airport and hope people will be happy with cash transfers.

López Obrador is proud of his social spending, including pensions for the elderly and scholarships.

But economists warn that the lack of investment will translate into weaker growth prospects in the future. Mexico has failed to grow well above an average of 2 percent per year for decades. Today, Cervera said potential growth is on track to reach just 1.5 to 2 percent.

“We are facing a very sharp drop in potential growth,” Roldán said.

The electricity bill, which has been accelerated and is expected to pass by far, has only made the bleak outlook worse.

The US Chamber of Commerce called it “the latest in a series of disturbing decisions taken by the Mexican government that have undermined the confidence of foreign investors in the country.”

And because of the pandemic, he said, now is “the precise moment when increased foreign direct investment in Mexico is needed more than ever.”

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