What is Missing from Investment Portfolios? Mexico

Mexico failed to capture significant foreign investment during June 2021, as half of the investment for emerging markets went to Asia, namely, China, Indonesia and Thailand, according to Institute of International Finance (IIF). These findings are supported by figures from the Bank of Mexico, which indicate that the country continues to underperform according to the standards of investment actors.

Other emerging economies attracted US$28.1 billion incentivized by the "high liquidity of the market, and the important contribution of the attractiveness of China" which remains the most popular emerging economy to FDI investors the IIF report explains. In June, China alone managed to seize US$6.42 billion in capital for a combined total of US$80.73 billion this year after its entry into the World Government Bond Index (WGBI).

In contrast, Mexico reported government debt divestments totaling US$497. These findings came after the Ministry of Finance (SHCP) announced it would review the auction process of government bonds months after Mexico’s antitrust watchdog, the Federal Economic Competition Commission (COFECE) fined seven international banks and traders for a total of US$1.75 million for collusion and market manipulation in the government bond market a decade ago.

In conjunction, last year, Mexico fell off Kearney’s Foreign Direct Investment Confidence Index as a result to low economic growth, the cancelation of development projects and uncertain energy sector climate. These factors, combined, sent poor market signals to potential investors.

The preliminary information from IIF shows that Mexico, Hungary, India, Vietnam and South Africa are the only emerging economies to register this negative trend. An ongoing pandemic, current political events compounded by high inflation in these respective countries can help explain this phenomenon.

Despite this, according to the UN Conference on Trade and Development (UNCTD), Mexico is the 9th largest recipient of Foreign Direct Investment (FDI) in the world, moving up five places since 2019. In 2020 the Ministry of Finance (SE) reported that the country had received more than US$29 billion in FDI, which was mainly directed to manufacturing. However, notably, it is 14.6 percent less than the US$34.1 billion it had received in 2019 as indicated by UNCTADs World Investment Report 2021.

At the moment, it is unclear if this trend is a direct result brought about by the COVID-19 pandemic, private sector animosity or if it is simply a market adjustment from COFECEs announcement in January. Most likely it’s a combination of all three factors. Nevertheless, as Mexico is ramping up vaccination efforts, expanding its manufacturing capabilities and signaling private energy a willingness to work with them, which may work to reverse the current momentum.