For the last two years Mexico’s image to the world has been portrayed in a very negative light by the international press. If you were to believe all that has been written, one would conclude that Mexico is in complete chaos and on the verge of collapse. It seems every call I receive these days addresses some level of safety concern that ultimately brings out what I now call “The Question”: is Mexico safe to invest because of the violence and drugs? After having personally witnessed and survived at least two major crises in Mexico, which in my opinion were much more rooted, serious and difficult than the current drug crisis, I wanted to share some positive thoughts on Mexico, its economic core and its brilliant future.
Winning the war on drugs
First, it is unfathomable to believe that Mexico will lose the drug war. Mexico does not hide that the situation is delicate and will require some time to properly solve and control. However, if no other argument will persuade you, consider that Mexico shares 1,979,000 miles of border with the US, a neighbour that has shown zero tolerance for foreign instability that directly or indirectly affects any of its interests. If the US was willing to help Colombia control its drug war, it will undoubtedly, sooner rather than later, assist Mexico, too. If you accept that under no circumstance Mexico will lose the war on drugs, then the remaining reasons as to why Mexico makes sense to investors are easy to understand and share.
Continued GDP growth
Second, Mexico’s GDP continues to grow.Today, even with the swine flu, the drug war and the worldwide recession, Mexico’s GDP makes it 11th in the word in accordance with index mundi, and the second largest in Latin America, behind Brazil. Mexico continues to be one of the largest oil producers in the world and is fortunate to have one of the largest networks of economic and tax treaties worldwide, including free trade agreements with the European Union and North America. Mexico has a moderate and conservative tax policy. Mexico’s corporate tax rate is 28%. Even in these challenging economic times, Mexico expects to grow its GDP by 4.5% in 2010 and 3.8% in 2011. In addition, the Mexican Government created the National Infrastructure Programme, which is a combination of government funds with private funds. It is expected that this programme will generate an annual investment of US$50bn. Standard & Poor’s gives Mexico an investment grade rating with a stable outlook.This year alone, the Mexican Development Banks have invested and lent more than US$6bn, and according to Standard and Poor’s, with the exception of Chile, Mexico has the lowest percentage of Problematic Assets (potential defaults on credit to the private sector and non-financial public enterprises) in Latin America in the range of 15% to 30%. All of these economic indicators clearly point to a Mexican economy that is strong despite the worldwide woes and that is fairing much better than other industrialised countries. According to Euromonitor International, Mexico will be the 10th largest economy in the world in 2020 and ProMexico (the governmental entity responsible for promoting Mexico abroad) places the Mexican economy fifth by 2050.
Where is the money being invested?
More than 60% of Mexico’s foreign investment concentrates on manufacturing, financial services and real estate related activities and is received mainly from the US (40%) and the European Union (36%). Other than Japan and Korea (less than 5% between both of them), Mexico has seen very limited investment from Asia. Asian countries have been actively investing in Latin America. It is logical and expected that these Asian countries will next concentrate on Mexico. First, Mexico’s proximity to the US makes it an ideal place to grow into the US with controlled costs. Second, Mexico has a population of approximately 106 million people with a growth rate of 0.82%, which makes Mexico a paradise for companies selling consumer goods.Third, Mexico is the only country in Latin America that has access to both the Atlantic and the Pacific Oceans and easy access to all of North America, the Caribbean and Latin America, making it an ideal destination to handle a worldwide logistics movement of merchandise. As a side note, in the next six years, Mexico will have to relax its energy restrictions, and when that happens, it will open the door to unprecedented foreign investment, expected to match the growth that Brazil has seen in the last five years.
Third, to solidify Mexico’s growth and to remain attractive to foreign investment, Mexico has adopted important new legislation in recent years. Right now in Mexico the hottest things are the Certificados de Capital de Desarollo (CKDs), which permit Mexican pension funds to invest their resources in Mexico in more aggressive investments. As an example, Prudential just recently announced the creation of an approximately US$300m CDK to develop industrial parks within Mexico. Further changes include new securities laws granting more flexibility to private equity firms to create investment structures that permit better governance and exit strategies, and making it easier to repack receivables and create more liquidity into the market. Finally, the Mexican banks, as opposed to the other banks of the world, were almost untouched by the subprime crisis. Mexican banks remain very stable and strong, continuing to lend based on the same criteria that existed prior to the worldwide economic meltdown.
Real estate opportunities
Finally, real estate presents an excellent opportunity to grant investors good performance yields. As you can expect, Mexico’s main real estate focus is in hospitality. According to the World Tourism Organisation, Mexico is the 10th most popular worldwide destination. Even with the outbreak of swine flu and the worldwide rescission, Mexico fell only one place as a destination in the last year, and it is expected that it will regain that position this year.The tourism sector represents the third largest GDP revenue producer, just behind oil and money being sent by Mexicans living outside of the country. It is true that Mexico is in its third year of limited foreign investment in this area and that right now there are many high profile projects that are in trouble. However, it is also true that Mexico’s tourism sector must grow to maintain pace with future demand once the world economies recover. In fact, most of the troubled projects have not been abandoned; they have either been restructured or sold to guaranty their continuance. It is also evident that because of the real estate price adjustments driven by the rescission, right now strategic investments may yield greater returns. If there is any doubt of this, you need to look no further than to what the main Mexican players are doing and the new projects that the Mexican Government is promoting. In November of last year, Fonatur, the state agency in charge of developing new resorts, announced a new development in the Gulf of Mexico close to the US border, Costa Lora, with an initial expected investment of US$400m.
Residential development is also key and necessary to keep up with the population growth and the migration of foreign retirees into Mexico. Mexico’s cost of living is relatively low compared to other industrialised countries, and is a prime destination to serve as a retirement country. For three years in a row, Mexico has been voted number one by the International Living’s annual Global Retirement Index.The residential market is currently controlled by Mexican players, such as Grupo Homex, but it remains an industry that permits new players and interesting alliances.The boom of the micro-credits in Mexico and the use of housing taxes has made it possible to see an increase in housing projects in Mexico, particularly in low and middle income housing.The influx of retirees will also create new opportunities, particularly in the area known as health tourism, which is the creation of hospitals and medical facilities in Mexico to either cater to retirees or to provide safe options for medical treatments at a cost lower than the patient’s country of origin.The Mexican Government has made a significant push to bring this new health tourism industry into Mexico by facilitating such hospital’s accreditation and operation.
Industrial real estate will also continue to be strong.This strength originates from three factors which are not expected to change. First, the fact that Mexico has a lower labour cost but has a highly skilled and competitive workforce continues to solidify the move south by US companies looking for cost reducing alternatives without compromising distribution distance or quality of product. Second, there are very important infrastructure projects in Mexico that are making Mexico an ideal country to handle logistical distributions worldwide.Two of these projects include the port of Manzanillo and the new network of super highways that will connect the south, north, west and east of Mexico with each other, bypassing Mexico City, and thus making distribution much easier. Finally, Mexico is welcoming back many companies who have returned after a failed attempt to move their business to China and the East.These companies realised that the apparent lower production cost was overcome by the unpredictability associated with of the distance and the cost of the logistics involved in the distribution.
According to data from Cushman & Wakefield, the commercial/office space market in the main Mexico cities has suffered a slight rent decrease, but the occupancy rate continues to be well above 90%. For many of the reasons stated in other parts of the article, the commercial market will have to meet future demands of the growing population and the move by international companies into Mexico.The current inventories will not be adequate to meet this demand. Further, Mexico is growing outside the three major cities into cities that do not have the inventory or the infrastructure to currently meet these demands.
It appears that as a society we want to hear only the bad news and never the good or positive news, so I will leave you with these observations. If you compare the per capita violence rates in certain major US cities to causalities in Mexico attributable to the drug violence, you may be surprised to find that Mexico is not too far from, and in many cases is safer than these cities. If you look at places like Colombia that waged a war against drugs, survived and became stronger, then you have to at least acknowledge that Mexico, which historically has had a much stronger economy, will survive the drug war and come out stronger. If you ask what the Mexican businessmen are doing right now, none of them are selling their businesses.They are staying, and aggressively solidifying their position.There is a reason why the richest man in the world, according to Forbes, makes Mexico his home. All of these factors, plus the unquestionable economic data, the political stability, and the reality that right now there are many reasonably priced opportunities in Mexico, make it clear that Mexico is far from the lawlessness image portrayed by the front page of international press. Rather, Mexico remains a very solid investment opportunity that is suffering the same woes as the rest of the world, but that is not materially worse off than any other industrialised country. In many aspects Mexico is ahead in the economic recovery and will probably sky-rocket into its next economic boom once the world economies recover, particularly the US economy. Mexico is in a position to give investors extraordinary future yield that may end in windfalls of opportunities. So the answer is yes, in my opinion, Mexico is a wise and safe long-term investment for the businessman that has a mind to accept flexibility and take advantage of all the existing opportunities in hospitality, infrastructure, energy, health tourism, housing and real estate.