Foreign Firms Signal Confidence in Mexico

While much of Latin America simmers with financial worries, Mexican President Ernesto Zedillo is celebrating pledges by foreign business executives to increase their direct investments in Mexico by 8% this year.

At a festive breakfast at Zedillo’s official residence Tuesday, the government announced that the largest foreign corporations in Mexico would invest $10 billion this year, opening 238 new factories and creating 41,000 new jobs.

The projection is the latest sign of confidence in the Mexican economy, including a surge in the peso’s value to a seven-month high, a 45% jump in the stock market since Brazil’s currency devaluation in mid-January and a welcome rise in oil prices.

Those factors make economists confident Mexico will achieve its forecast 3% growth this year, even as the International Monetary Fund on Tuesday trimmed its overall growth forecast for Latin America this year to zero.

An unusually ebullient Zedillo declared that the foreign investment pledges were an endorsement of Mexico’s decision at the depth of the 1994-95 peso crisis to opt for the headlong internationalization of its economy.

Addressing more than 200 foreign investors, Zedillo said Mexican negotiators were on schedule to complete a free-trade agreement with Europe that would complement the 5-year-old North American Free Trade Agreement. Mexico has in place several bilateral trade pacts with Latin American countries and is negotiating more.

“I dare to affirm categorically that in the first years of the 21st century, the Mexican economy will have a unique situation in one basic sense,” he said. “Ours will be the only economy in the world with the links we will have with three fundamental markets--those of North America, Latin America and the European market.”

Nearly 90% of Mexico’s foreign trade is with the booming United States, which has helped shield Mexico from the stagnation and crisis that has hurt many Latin economies in recent months. Mexico’s combined foreign trade rose to $242 billion last year, 10th in the world. But government officials have stressed the importance of the European trade deal as a way to reduce Mexico’s reliance on the U.S. economy.

Of this year’s pledged foreign investment, 59% is from U.S. and Canadian companies and 28% is from Europe, according to figures issued by the Mexican Investment Board, a government-funded body that coordinates the investment program.

The pledges only cover investments by the largest 250 companies, an increase over last year’s $9.2 billion. So total foreign investment in 1999 will likely be considerably higher than the $10 billion cited Tuesday.

Last year, total foreign investment was $10.24 billion, down from the record $12.8 billion of 1997, apparently because of nervousness over emerging markets around the world. An 8% average increase by all foreign investors would put total outlays this year at $11.1 billion.

The 34 largest Mexican companies, meanwhile, have announced investment plans of $7 billion for this year, below their pledged $7.3 billion last year. Still, the domestic firms projected an increase in their exports this year to $10.3 billion from $9.2 billion.

Commerce Minister Herminio Blanco said Mexico has received $55 billion in direct foreign investment in the last five years, three times as much as in the five years before NAFTA took effect in 1994. He said foreign companies had created one of every four new jobs generated since 1994.

Bernd Leissner, president of Volkswagen Mexico, said VW had invested more than $1 billion since 1995 to produce the new Beetle and new Jetta at its huge plant in Puebla and had encouraged 21 suppliers to open plants nearby. He said VW hopes to raise car production this year to 400,000, which would be 55% more than in 1997.

“We see with optimism that Mexico has been able to resist the recent crises and that new opportunities are visible, such as the free trade treaty with Europe,” Leissner said.

Landon H. Rowland, chairman of Kansas City Southern Railway Co. which is co-owner of the privatized Mexican railroad company TFM, said many had doubted the wisdom of the firm’s original joint $1.6-billion investment. Rowland now proposes a further $800-million investment over three years.

“Many of our colleagues in the United States . . . did not understand the extent to which Mexico had become a primary player not only in the Western Hemisphere but in all of the global marketplace.

“Certainly no privatized railroad arrangement has worked this well, with the possible exception of New Zealand,” he said.

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Investing in Mexico

Foreign investors have pledged an 8% increase in direct investment in Mexico this year, even as the rest of Latin America suffers. Direct foreign investment in Mexico, in billions of dollars:

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1990: $2.6

1999*: $11.1

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*Estimate

Source: Bank of Mexico