Inflation and Nearshoring: Threats and Opportunities for SMEsBy Enrique Suárez | Tue, 07/26/2022 - 12:00
I am part of a generation that grew up with stories of how our parents, uncles, bosses, etc., lived and dealt with the high rates of inflation, higher than 100 percent at times, that prevailed in the Mexican economy, especially in the 1980s. Given this context, we must recognize that the new generations have grown up in an environment with more controlled inflation and certainly, although today we are not even close to reaching the inflation rates of 30 years ago, it is opportune to remember the destructive effects of inflation on the economy and identify opportunities that can help mitigate the impact on our country today.
The obvious impact of inflation, and I am referring to the productive sphere, is the increase in the cost of inputs for companies, and the consequent destabilization that it can produce in their liquidity. The most vulnerable segment to these effects are SMEs, since they do not have the access to financing that large companies have to face a rise in prices.
In this sense, I believe that a current advantage of the Mexican financial ecosystem is the presence of numerous new players (fintechs) that are willing to help SMEs in a more understandable, flexible and personalized way than traditional banking. The challenge for fintechs at this juncture is to guarantee adequate funding rates in a context of rising interest rates, since, if lines with low rates are not secured, they will soon lose profitability and, therefore, they can put at risk not only their competitiveness but their very operations.
It is also in this order of ideas that SMEs have to be careful of their level of indebtedness. The financing they acquire has to help them breathe in order to once again be able to recover their usual operating margins in the face of inflation that, according to experts, will take time to stabilize due to the fact that central bank monetary policy may not be completely effective due to the structural causes of this wave of inflation: a generalized increase in supplies at the international level due to the logistical chaos caused by COVID and the war in Ukraine, among other factors.
In this board game of high inflation and little economic growth, what remains for the Mexican private sector to do? I believe that an important opportunity lies in the phenomenon known as "nearshoring," which implies the relocation of supply chains, especially of US companies, to closer destinations like Mexico. Finance Minister Rogelio Ramírez de la O said a few days ago that a policy is required that allows Mexico to make as much as possible of this phenomenon. I would also add that the government could thus attack one of the main problems that this administration has generated in relation to the previous ones, which is the significant drop in investment, which is currently at 2011 levels.
In addition to the public policies that are developed in relation to nearshoring, the private sector can do a lot in this regard. The business chambers, the financial sector, large companies, marketplaces — all can play a fundamental role in encouraging new companies to settle and trade in Mexico and create jobs here, in addition to demanding the services of many SMEs that are ready and eager to participate in new value chains. In an environment of stagflation, investment and trust in companies, along with opportunities that come from abroad, can get us ahead.