Should British Investors Target Mexico?

In theory 2013 was Mexico’s year. Courted by global investors, and fêted by the international press, the new administration of Enrique Peña Nieto succeeded in making all the right noises. They weren’t just sound bites either. By the end of the year the government had succeeded in passing historic reforms in the fields of energy, telecommunications, labour law and fiscal structure. But despite all of the good news not everything went to plan. The economy grew by just 1.3%, against predictions of almost 4% at the start of the year, while the stockmarket also suffered. So will 2014 be the year when Mexico finally rewards investors?

One person who expects economic growth to pick up this year is HSBC Mexico’s Chief Economist, Sergio Martin. “Last year was bad but if you look around the world a lot of emerging markets disappointed”, said Martin in an interview with LatAm INVESTOR. “Global growth slowed and that is always going to have a knock-on effect in Mexico because it is such an open economy. In particular US-related events such as the government sequester really hit the Mexican GDP.” Moreover, there were some Mexico-specific factors that weighed on growth, said Martin. Politics played a big role. In the last 50 years the average growth in the first year of presidential cycle has been 0%. That’s partly because the outgoing administration slows spending right at the end of its term, while the new one takes time to allocate funding.”

Mexico- Oil
Investors have high hopes for Mexico’s energy sector

However, with none of these factors affecting growth this year Martin expects GDP to increase by at least 3.5%. That type of growth is not to be sniffed at – after all we’d certainly be happy to have some of the same here in the UK. But what’s really exciting investors is the prospect of the new government reforms turning Mexico into one of Latin America’s fastest growing economies. Martin estimates that the reforms could boost “Mexico’s annual rate of sustainable economic growth to 5% or 6%” over the next decade.

Yet, despite the optimistic headlines, firms will have to proceed with caution. For starters the reforms are still to be implemented. Last year politicians cleared the way in principal for international firms to participate in the energy and telecommunications industry but the all-important secondary legislation, which will decide the market rules, is due to be drawn up this spring. Until this happens investors can’t be sure of exactly what’s on offer.

Investors also need to have a realistic idea of the likely time frame of opportunities, says Britain’s Ambassador to Mexico, Duncan Taylor. “It is important to recognise that the lead-in times for [offshore oil and gas] projects are very long. We’re talking about developments that might not happen for 10 or 15 years. In the short-term British investors can look to the reforms in the telecommunications or power generation sector.”