FDI in Mexico increased 8.7 percent in 2021

Investment levels in Mexico are beginning to recover after the COVID-19 pandemic. From January to December 2021, Mexico captured US$31.6 billion in Foreign Direct Investment (FDI), representing an 8.7 percent FDI increase from 2020, reported the Ministry of Economy (SE).

The composition of investment flows reveals the strengths and weaknesses of the Mexican economy. Of the US$31.6 billion captured, 44 percent was allocated to new investments, 38 percent to reinvestment, and 18 percent to intercompany transfers. In 2020, new investment represented only 24 percent.

Origin of investment:

In regards to the origin of investment, SE reports that the US contributed to 47.5 percent of total capital, followed by Spain, substituting Canada as the second-largest investor in Mexico. Spain invested 13.7 percent of total FDI, equivalent to US$4.3 billion in 2021. Spanish companies have been a frequent target of criticism by President Andrés Manuel López Obrador, who in early February proposed to "pause" diplomatic relations with Spain as a way of protest against Spanish oil companies. Canada invested 6.5 percent of total FDI. The participation of the UK represented 5.7 percent of the investment, Germany 5.2 percent, and Japan 5 percent.

Investment by sector:

When evaluating the distribution of FDI by sector, the manufacturing sector stands out, concentrating 39.7 percent of foreign capital. However, this percentage remained below its historical average of 47.9 percent since 1999. The mining industry placed second with 15.2 percent, exceeding its historical average of 5.8 percent since 1999.

Financial and insurance services represented 15 percent, the transportation industry 8.8 percent, and temporary housing services with 5.2 percent of annual capital invested. The remaining sectors captured only 7.6 percent of the investment.

On the other hand, investment in generation, transmission and distribution of electricity the has plummeted. In 2021, this industry managed to capture just 1.4 percent of FDI, equivalent to US$452 million. This figure represents the lowest volume invested in the sector since 2011 in addition to representing a steep drop from 2018 record of US$5 billion, captured during the last year of President Enrique Peña Nieto's administration.

The lack of investment in the electricity sector is related to the regulatory uncertainty prompted by President López Obrador's electricity reform initiative. The lack of investment not only translates into lower economic growth but also reduces Mexico's competitiveness in the global transition to clean energy and commitments to fight climate change.

The Executive Council of Global Enterprises (CEEG) reports that Mexico needs to invest at least US$6 billion between now and 2024 to meet its clean energy targets. This amount requires strong private sector participation. With regulatory uncertainty and the government´s pro-fossil fuel line discourse, the private sector will most likely not bet on clean energy projects.

On the other hand, FDI associated with oil and gas extraction reached an all-time high during 2021, closing at US$1.39 billion. As opposed to the electricity sector, President López Obrador promised to respect previous administration´s oil contracts. As a result, the market has remained fairly attractive and the sector will most likely achieve its production goal of 280,000 BPD by the end of 2024.

FDI Outlook for 2022:

Despite having an 8.7 percent recovery over 2020, FDI in Mexico remains 3.95 percent below 2019 pre-pandemic figures. FDI in 2021 is very similar to 2016 figures, making a rapid recovery look increasingly distant and with little prospect of improvement.

Jonathan Heath, Deputy Director of Mexico’s Central Bank (Banxico), sees a pessimistic scenario for the country´s FDI throughout 2022.  "Investment ends 2021 well below the levels it had before the pandemic, and what is worse, is that there is a lack of dynamism. Therefore, we have no growth engine for 2022.  The lack of investment is mostly due to the problem generated by the government's narrative against the private sector, which portrays investors as public enemies,” said Heath.

In addition, a recent report by French credit insurer Coface projected that private investment in Mexico, both domestic and foreign, will continue to underperform due to political uncertainty generated by the government. Regulatory instability has been felt in the electricity, mining, and infrastructure industries, and this has discouraged greater private sector investment, particularly in these key sectors, hampering any economic reactivation. The main uncertainty is coming from the president´s electricity reform, which aims to consolidate CFE against private generators.

In January, the International Monetary Fund (IMF) lowered its economic growth projection for 2022 for Latin America and the Caribbean, with sharp cuts to Brazil and Mexico. When updating its World Economic Outlook, the IMF reduced Mexico's GDP growth by 1.2 percentage points to 2.8 percent. This implies that the Mexican economy will not return to its pre-pandemic levels until the second half of 2023. However, if investment remains depressed, recovery may extend until 2024.

Meanwhile, the Organization for Economic Cooperation and Development (OECD) also cut this week its forecast for Mexico´s GDP in 2022 from 3.3 percent to 2.3 percent. Mathias Cormann, Secretary-General of the OECD, said that restarting investment and boosting productivity is Mexico's main challenge, considering that the levels of investments have remained flat since 2015 and low since 2019. Cormann highlighted the relevance of legal certainty to achieve the much-needed investment promotion. "Domestic and foreign investors must be given certainty on existing contracts and regulatory stability. That would help restart and boost investment."