Mexico's private sector investors face contrasting forecasts — in one, global trends make Mexico a more attractive destination than ever for manufacturing and energy investment. And in the other, restrictive energy policies are pushing away that very investment.
Industry and development banks leaders have gushed about the country's unique opportunity to attract manufacturing firms that want to set up plants near the US market, particularly as US-China trade disputes and the Covid-19 pandemic have made it a priority for firms to limit supply-chain risks.
"Mexico has a major advantage with the restructuring of the value chain," said Irene Arias, chief executive of the Inter-American Development Bank's innovation laboratory.
Mexico's manufacturing sector is 30pc more competitive than Asian manufacturing in terms of production costs, said David O'Donnell, chief executive of industrial developer O'Donnell.
As a result, the industrial real estate sector is expecting "very strong tailwinds," said Enrique Lavin, managing director for PGIM Real Estate in the country.
Additionally, the US-Mexico-Canada free trade agreement (USMCA), which replaced Nafta last year, offers the prospect of increased investment, particularly as it boosts regional content requirements in sectors such as automotive and steel.
That in turn would boost domestic demand for energy sources such as natural gas. Mexico's high solar radiation levels and proximity to the US border also create opportunities for clean energy companies to build solar farms and generation plants.
Change is in the wind
Despite these advantages, Mexico could throw away its opportunity by enacting a series of recent energy reforms that are chasing out investment.
Companies in numerous industries are freezing planned investments and moving their money to more business-friendly parts of the world, said Albert Zapanta, president of the US-Mexico Chamber of Commerce.
"When you look at these changes in the regulatory environment, it does not take a rocket scientist to understand it has a dampening effect on the whole marketplace," Zapanta told Argus.
Mexico has recently passed a power sector reform that sidelines private renewable generators, a hydrocarbons law reform that makes it easier for the government to cancel operating permits along the fuel value chain and another bill that ends asymmetric limits on state-owned Pemex meant to open more space for competition.
Amid these changes, energy companies from the US, Canada, Europe and Asia have taken legal action against the reforms and frozen planned investments, energy attorney Mauricio Leon with Mexican firm Sanchez Devanny said.
One Chinese company recent halted plans to build a large wind energy project in Mexico. "The turbo generators were on their way when they said to take them to Europe instead," Leon said.
Mexican multinational Femsa and US retail chain 7-Eleven suspended a planned partnership to build a large fuel storage complex in northern Mexico.
A mighty reign
While touting Mexico's attractiveness, the financial sector is also clear about the potential for new regulations and worsening business climate to stamp out the country's advantages.
"The elephant in the room is certainty," said Ariel Fischman of 414 Capital, a middle market merger and acquisitions firm in Mexico. "Investors need to know the rules of the game."
Mexico's private-sector leaders have been calling for more regulatory and legal stability since President Andres Manuel Lopez Obrador cancelled plans to build a new Mexico City airport when he took office in 2018.
For now, the global trends favoring Mexico — as well as a strong US economic recovery — are helping prop up sectors such as manufacturing and energy despite the regulatory turbulence. But the question of which Mexico wins will likely depend on whether the current government continues to clamp down on business.
"There is a wait-and-see attitude," Zapanta said.
