Because of its proximity and economic integration with the United States, Mexico will be the largest Latin American country to benefit from foreign investment aimed at relocating operations from China to friendlier destinations with the world's leading economy. However, analysts at credit risk firm Moody's warned in a report on Wednesday that infrastructure constraints, risks related to climate change and government policies continue to hinder corporate entry into the country.
“Many companies continue to announce the relocation of their operations and the construction of plants in Mexico, and the flow of investments will increase in the next two to three years,” says the report signed by specialists Martina Gallardo, Marcos Schmidt and Marianna Waltz . , “While the change brings concrete benefits for certain sectors and states in Mexico, nearshoring alone will not increase the country's medium-term growth prospects above 2% without some structural changes.” “Infrastructure constraints, political obstacles and the physical risks of climate change pose the key structural deficiencies that will limit the benefits of nearshoring in Mexico.”
The context for the Latin American region as a whole is negative. According to Moody's, Latin American non-financial companies will face credit impacts in 2024 due to four main issues: higher interest rates for extended periods, adjustment to structural changes, reforms and regulations, and polarization. “Geopolitical tensions and social pressures will strongly influence industry strategic priorities and public policy in emerging markets in 2024,” the report said.
High costs of living, food security and climate disasters would exacerbate social tensions, complicate the implementation of domestic policies and create incentives for government intervention. Experts say this will slow investment and impact business conditions, margins and tax revenues. In this context, Mexico stands out among its competitors as a “safe destination in the face of worsening social risks in Latin America.”
They warn that the risk in Mexico is regulatory, since the government under the presidency of Andrés Manuel López Obrador has intervened in various sectors by canceling concessions to private parties and handing over productive activities to the armed forces. According to Moody's, the mining industry is most at risk from possible government intervention. “These risks will weaken business confidence in Mexico, although we hope that Congress and the Mexican judiciary will use their powers to verify the compliance of the government's actions with the current legal and regulatory framework, ultimately limiting the actions would go beyond the legal framework,” says the report.
“Decisions that lead to an uncertain operating environment and infrastructure limitations will reduce the benefits of nearshoring,” say the company’s specialists. “The 2024 elections, including the presidential election in Mexico, could change public policy priorities with a change of government and would provide the opportunity to pursue more favorable policies for investments in sectors such as electricity and renewable energy.”
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