The US perceives greater uncertainty for its investors in Mexico under AMLO

In domestic customers it will reach 3.3%. Photo: (El Economista)

REPORT OF THE US STATE DEPARTMENT ON INVESTMENT CLIMATE IN MEXICO

Regulatory changes in energy, the financial health of Pemex, a weak fiscal response to the economic crisis unleashed by Covid-19, insecurity and corruption are some of the concerns of US businessmen, although they also highlighted the attractiveness of the T-MEC (USMCA) and macroeconomic stability as points in favor.

The United States government highlighted a number of uncertainties about the investment climate in Mexico, such as sudden regulatory changes (made by the AMLO administration), insecurity, informality, corruption, Pemex’s unstable financial health, and a weak fiscal response to the Covid-19 economic crisis.

On the contrary, the statement highlighted the austere fiscal policy in Mexico that resulted in a primary surplus of 0.1% in 2020, the independence of the Bank of Mexico, and the USMCA Agreement between Mexico, the United States, and Canada (T-MEC).

Both arms of the balance, the advantages, and disadvantages are described in the Report on the State of Investments in Mexico 2021, released by the US State Department this Wednesday, July 21, 2021.

“Mexico continues to be one of our most important investment partners,” the State Department said.

From 1999 to the first quarter of 2021, Mexico received 288. 2 billion US dollars of Direct Foreign Investment from the United States, which represented a share of 46.6% of all its flows received in that period.

“Investors report that sudden regulatory changes and policy reversals, the unstable financial health of state oil company Pemex, and a perceived weak fiscal response to the Covid-19 economic crisis have contributed to ongoing uncertainties,” said the Department of Condition. In the first and second quarters of 2020, the three main rating agencies (Fitch, Moody’s, and Standard and Poor’s) lowered Mexico’s sovereign credit rating (one notch to BBB-, Baa1 and BBB, respectively) and Pemex’s credit rating was lowered to junk grade.

In addition, the document adds, uncertainty about the fulfillment of contracts, insecurity, informality, and corruption continue to hamper Mexico’s sustained economic growth.

Recent efforts to reverse the 2014 energy reforms, including the March 2021 electricity reform law that prioritizes generation by state power company CFE, “further increases uncertainty.” For the US government, all of these factors raise the cost of doing business in Mexico.

In particular, he mentioned the case that the CFE forced several national and foreign companies to renegotiate gas supply contracts executed previously, which generated “important concerns” among investors about the inviolability of the contracts.

At the same time, according to the same source, trade representatives, including those of US companies, believe that public funds are often diverted to private companies and individuals due to corruption and perceive that favoritism is widespread among public procurement officials.

The GAN Business Anticorruption Portal establishes that compliance with procurement regulations by state agencies in Mexico is unreliable and that corruption is extensive, despite laws covering conflicts of interest, competitive bidding, and company blacklist procedures.

In 2020, Mexico became the United States’ third-largest trading partner in goods and services and the second-largest in goods alone.

Bilateral trade grew 482.2% between 1993 and 2020, and Mexico is the second-largest export market for the United States.

On another side, the AMLO administration maintained its commitment to reduce bureaucratic spending to finance “an ambitious agenda” of social spending and priority infrastructure projects, including the Dos Bocas Refinery and the Maya Train Project.

President Andrés Manuel López Obrador relied on these initiatives while designing a government response to the economic crisis caused by Covid-19.

Mexico approved the amended T-MEC protocol in December 2019, the United States in December 2019, and Canada in March 2020, “providing a boost to the confidence of investors who expect continuous and deep regional economic integration,” adds the document.

The T-MEC entered into force on July 1, 2020 and President López Obrador “has expressed optimism that it will boost the Mexican economy.”

US: pros and cons of the investment climate in Mexico

Cons

Uncertainty about contract enforcement, insecurity, informality, and corruption continue to hamper Mexico’s sustained economic growth.

The CFE forced several national and foreign companies to renegotiate previously executed gas supply contracts, which raised “significant concerns” among investors about the inviolability of the contracts.

Pros

Mexico approved the amended T-MEC protocol in December 2019, the United States in December 2019, and Canada in March 2020, “providing a boost to investor confidence who expect continued deep regional economic integration.”

Mexico had an austere fiscal policy that resulted in a primary surplus of 0.1% in 2020 and maintained the independence of the Bank of Mexico.

Source: El Economista

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