S&P Analyzes Nearshoring in Mexico

According to S&P, the benefits that nearshoring brings to Mexico are manyfold, as are the challenges associated with the phenomenon. S&P flags safety concerns and an inadequate water and energy supply as the main obstacles to taking advantage of nearshoring.

S&P estimates that 1% of the sizeable manufacturing production in China could gradually relocate to Mexico over the next five years. Also, Mexico’s GDP could average approximately 2.6% compared to 2% as the base reference. “We could raise Mexico's sovereign ratings if we see the government demonstrating effective political and economic management that drives the trajectory of weak growth, for example, toward a more dynamic investment outlook,” reported S&P.

Additionally, the analysis states that nearshoring has the potential to generate growth opportunities for corporate entities with significant operations in industrial regions that participate in the real estate, housing, and construction materials sectors.

Experts have said that as much as nearshoring activities could benefit Mexico, energy policy is a major concern to further attract FDI. What is more, the USMCA energy dispute has escalated with US companies urging President Joe Biden to pressure Mexico regarding fair competition in the Mexican electricity market.

Nationalization of Industries in Mexico Affects Investment Certainty

As the government acquired Iberdrola’s Mexican assets, Mexico now controls a strong majority of the country’s electricity production. With the acquisition, state utility CFE now controls around 56% of Mexico’s electricity production, up from the previous 40%, according to Quartz.

Mexico's current administration is facing an energy dispute with its USMCA  partners due to allegations of unfair competition in the Mexican energy market. Despite the announcement of commitments from the government and some advances with certain players, the dispute has escalated to the presidential level.

The recent acquisition of Iberdrola's assets raises concerns about investing in Mexico and hinders the country's ability to attract new investments in light of nearshoring intentions Juan Padila, Managing Director, IPD Latinoamérica, said this acquisition sends a negative message to the private energy sector. “This agreement is a complex network with high political profitability on one side, very high commercial profitability on Iberdrola's side, and low profitability for the energy sector in Mexico,” he said.