THE BLOG

Thinking Growth Markets? Think Mexico, Again.

01/29/2014 05:14 EST | Updated 03/31/2014 05:59 EDT

One brief look at Mexico's GDP numbers for 2013, and you'd likely say, "What happened?" At the outset of the year, forecasts were calling for between 3-to-4 per cent growth. Instead, the final tally is looking more like 1.2 per cent. That's a pretty sizeable miss. If lots went wrong in the year, foreign investment in Mexico wasn't on that list; in fact, it had a banner year. What's behind this success?

Let's check the facts. First, economic performance in 2013 wasn't all Mexico's fault. The US economy didn't perform as expected either, and this affected its demand for Mexican goods and services. However, Mexico shares the blame, thanks to the crisis in its construction sector, and public spending that was far weaker than expected. Thankfully, prospects for 2014 are much better. US demand is expected to be a lot healthier, and substantial public funds are being allocated to transportation and communications infrastructure over the next five years. Last year's flop should soon be forgotten.

Foreign investors barely seemed to notice. Halfway through the year, it was clear that Mexico was having a banner year. Estimates suggest that foreign investment inflows topped $30 billion, close to an all-time record and the first year over the $30 billion mark since 2007. Auto sector investments by Mazda, Chrysler and Honda, and plans for a new $1.3 billion Audi plant contributed significantly to last year's success, and Mexico's growing reputation as a solid base for global manufacturing operations. Currently, manufactured goods make up 80 per cent of Mexico's exports.

There are a number of good reasons for Mexico's current success. First, the rising cost of labour in China has resulted in a wave of investment back to North America. Second, supply-chain vulnerability has increased the need for near-shore production facilities. Third, there is an ample supply of labour with a range of skill sets, in contrast with tightening labour conditions elsewhere. But a fourth and critical factor is Mexico's attention to key industrial reforms, which are setting the stage structurally for investments well into the future. So far, the reform process seems to be proceeding well.

Reforms that were put in place during 2013 included measures to increase competition in the telecom sector, and changes to financial regulations that are expected to result in increased extension of credit to the private sector. The reform process has also taken on more controversial educational, political, labour and fiscal issues, welcome moves that so far have met with surprising success.

Perhaps the most eye-opening of all are Mexico's proposed energy reforms. New laws will allow greater external access to oil and gas exploration and development, and while state-owned companies will retain their privileged status, they will be required to operate on more commercial terms. The measures are expected to generate $15 billion of new oil sector investment over the coming six years, and increase oil production by 1 million barrels per day by 2025. The reform measures could add as much as a full percentage point to Mexico's potential output over this period.

Small wonder it is generating excitement on the investment front. In fact, it is arguable that in spite of last year's success, the best is yet to come. And this in spite of Mexico's poor reputation on security and corruption. Mexico ranks among the lowest nations on business costs of crime and violence, the cost of organized crime and the reliability of police services. Reforms in these areas are in the works, but moving slowly. One can only imagine the additional boost that successful passage would bring.

The bottom line? Mexico has become a foreign investment magnet. The current reform process suggests that Mexico will be a go-to zone for the foreseeable future. Its vibrant auto sector and up-coming oil patch reforms suggest a multitude of medium-term Canadian investment opportunities.