Investment in Mexico Fell Sharply in 2020: BBVA

Mexico’s private investment contracted sharply during 2020, explains a report by BBVA Research. If the damage to investment is not reversed, the country’s economic growth will be much smaller than it was in the last two decades.

In the face of uncertainty, companies often reduce investment before spending, explains the report. For that reason, private investment is usually the component of GDP that shows the greatest volatility. During recessions, investment often contracts more strongly than consumption or government spending.

In 2020, as Mexico’s economy contracted by 8.5 percent, private investment fell by 20 percent. This is Mexico’s sharpest stagnation since 2016 when former President Donald Trump won the US election.

There are significant investment opportunities in the country, both for Mexicans and foreigners. Some of these opportunities are expected to arise thanks to the forecasted growth of the US economy. Other factors supporting this optimistic view are “the loss of investment that China will see as a result of trade conflicts with the US and the nearshoring movement, in which companies seek to reduce risks of disruption in their supply chains by having suppliers closer to sales centers,” reads the report.

During 1Q2021, the Mexican economy attracted the highest amount of FDI since 1999 for the first quarter, reported Mexico’s government. However, it also predicted that by 2021 there will be a decline of 5 percent to 10 percent in FDI flows and that FDI will not begin to recover until 2022.

Investor’s behavior has also changed, reports BBVA. Mexico’s overall investment figures, those between 1999 and March 2021, indicate that 42.4 percent went to new investments, 33.2 percent to reinvestment and 23.4 percent to intercompany accounts. However, 1Q2021 shows a sharply different investor profile, as during that period 59.2 percent of FDI went to reinvestment, 22.2 percent to intercompany accounts and only 18.6 to new investments.

This year’s accumulated FDI flows come mainly from the US with 42.5 percent, Spain with 12.1 percent, Luxembourg with 8.2 percent, the UK with 5.5 percent and Canada with 4.8 percent.

Despite the opportunities, countries might be reluctant to invest if the country does not make substantial improvements in its rule of law. To invest, companies need an environment of institutional certainty, explains BBVA.