BBVA Research: Private investment in Mexico to drop 20.8% in 2020

Private investment in Mexico is in free fall this year with recent economic and regulatory policy actions further shaking investor confidence, say analysts, a headwind only compounded by the historic economic disruption caused by the COVID–19 pandemic.

BBVA Research, in its 3Q20 Mexico situation report, said private investment looks to decrease 20.8% in 2020, while experiencing outward capital flows related to foreign investment portfolios, remittances and tourism amounting to US$28bn this year.

“The lack of aggressive countercyclical fiscal and monetary policies and the effect on investor confidence stemming from recent economic policy decisions have worsened the already challenging environment for recovery,” wrote BBVA Research, citing BBVA México’s recent decision to lower its 2020 GDP growth estimate for Mexico to -10.0% from its -7.0% forecast in June.

The following BBVA Research graphic details the decline in investment year-over-year in Mexico and shows how investment was already in steep decline when the crisis hit. 

Source: BBVA Research

Multiple facets of the Mexican government’s handling of the pandemic and its economic impact have fallen under heavy criticism, particularly the country’s minimal fiscal response to the crisis that critics see as a failure to provide badly needed economic supports to individuals and the private sector – a policy stance largely guided by President Andrés Manuel López Obrador’s (AMLO) adamant refusal to take on additional debt and go into deficit spending. 

In addition, the government has taken several actions in recent months sparking outrage and ongoing legal battles in the private sector. 

These include the forced cancellation of the Constellation Brands brewery in March and regulatory actions on private solar and wind generators in May and June that opponents have attacked as a gambit for state control of the wholesale electricity market, and slow private solar and wind generation in particular. 

The situation has not escaped the attention of Mexico’s central bank with most members highlighting the need for policies that “provide certainty to private investment” in the latest minutes.

The minutes state that “most members” called for “public policies that provide certainty to private investment”, while “some members” specifically “expressed their concerns about the uncertain environment for investment. In particular, they mentioned the recent modifications in the rules for private sector participation in electricity generation using renewable sources.” 

The banks’ members also noted that capital outflows in government held debt had already decreased by 250bn pesos (US$11.2bn) since the crisis began, adding foreign debt holdings are currently near US$90bn. 

“Unfortunately, every bad decision the federal government makes, in any sector, immediately makes investors feel uncertain, and capital exits immediately,” said Jorge Martínez González, director de MG-RISK Consulting, cited by local daily Reforma.

USMCA opportunity wasted?

The troubled policy environment may also limit the potential benefits brought by the recently enacted USMCA trade agreement, according to Duncan Wood, director of the Wilson Center’s Mexico Institute.

Speaking on a podcast in an interview with Banorte, Wood said he believes that the USMCA will ultimately be a major win for Mexico with the recent US-China trade war and the pandemic's long-term impact on global supply chains refocusing trade and investment towards re-shoring and near-shoring opportunities.

“Mexico could benefit greatly from this phenomenon. Why? Because Mexico does have a trade agreement with the United States and Canada; China doesn't,” said Wood, adding that with the ongoing US-China trade tension, “I believe that there is a lot of interest from industries to invest in Mexico.” 

“But be careful here, because industries and many companies are telling me that they do recognize the opportunity in Mexico,” said Wood. “But they are very, very afraid of what is happening in Mexico: the lack of certainty on the part of the legislative and regulatory framework, the fact that the Mexican government is sending a very, very aggressive message to investors, and this is not helping the country's domestic market at all.”

“In my opinion, although Mexico may benefit [from USMCA] in the long term, in the short term I believe that Mexico will lose and waste this opportunity,” he added. 

“For me it is a great pity, not only for Mexico and the people of Mexico, but also for the competitiveness of the North American region,” said Wood. “Because we have to recognize that, for years, Mexico has been one of the most important factors in increasing the international competitiveness of the North American region and of the three countries individually.”