Cautious

There's too much expectation behind foreign direct investment. Could it be slowing down?

Foreign direct investment (FDI) flows into Mexico surpassed USD $35 billion during the first three quarters of 2024, a figure 1.4% higher than the same period last year, keeping the indicator near record highs.

In recent years, FDI has been widely regarded by analysts and businesses as a clear signal of nearshoring trends taking shape in Mexico. It has also become a centerpiece in the government’s narrative of economic success, often touted as proof of the country’s growing attractiveness to international investors.

While it’s true that FDI into Mexico has been showing encouraging dynamics, we believe that recent datapoints reveal enough reasons to approach this optimism with caution.

According to data from Banxico, new investments — i.e. fresh capital into the country — accounted for just 5.7% of total FDI flows during the first three quarters of the year. A ratio, by far, the lowest ever seen since the central bank publishes it’s data.

On the other hand, reinvested earnings by foreign companies reached a record high of 86% — up 13 percentage points when compared to last year.

As with any economic indicator, relying too heavily on a specific component of FDI is not always ideal, especially if this dependence stretches over long periods of time.

In a healthy investment environment, you’d expect a good balance of FDI flows, with contributions from both new investments and reinvested earnings. This balance reflects the ability to attract fresh foreign capital while keeping previous investments sustainable.

According to Banxico data, Mexico has managed to maintain a fairly balanced distribution of FDI flows over the past 10 years. However, the significant drop in new investments over the last two years is worrying and could signal a potential shift, particularly given the current political uncertainty.

The recent slowdown in new investments could face additional pressure, as expected flows from public announcements collected by the Secretaría de Economía are projected to total USD $64 billion for 2024. While this is an impressive figure, it represents a 26% decline compared to the previous year.

Moreover, in 2024, aggregate investment figures from public announcements have surpassed the USD $10 billion threshold only twice in the first three quarters. By comparison, this milestone was reached four times during the first nine months of 2023.

Also, it’s important to keep in mind that public announcements are just expected investments which don’t always materialize; or may take years to come into fruition.

While this may seem like a pessimistic view, we believe the greatest risk of a slowdown in foreign capital injections isn’t the easing of FDI itself, but the failure to meet the high expectations that the country as a whole has assigned to this trend.

If those expectations fall short, could they leave some businesses in a vulnerable position?

For more on this, we recommend you revisit our deep dive into the trucking sector in Mexico and their role in the nearshoring boom.