Mexico on a Roll With New Foreign Investment

Fueling Mexico’s longest period of growth since the 1970s, direct foreign investment is expected to rise 24% this year in the clearest sign yet that the nation’s global trade alliances have begun to pay off.

President Ernesto Zedillo estimated Monday that by the end of this year, Mexico will have received about $12.4 billion in foreign direct investment. Many analysts expect the final total to exceed the record of nearly $13 billion set in 1997.

Pointing to that vote of global investor confidence, Zedillo noted that Mexico will formally sign a free-trade agreement Thursday with the European Community. That pact will complement the North American Free Trade Agreement, or NAFTA, which has generated 1 million jobs in Mexico since 1994. Mexico also has separate trade pacts with Israel and eight Latin American countries.

These trade treaties “place Mexico in a unique position in the commercial world for the 21st century,” Zedillo said. “The growing openness of Mexico reaffirms our belief in a world that is better integrated by the opportunities that free commerce offers nations and their peoples.”

Mexico’s economic growth is expected to reach a target of 4.5% this year, which will mean the country’s GDP has averaged 5% growth over the five years from 1996 to 2000--the first time since the ‘70s that Mexico has achieved such a sustained stretch of growth.

The steady growth followed a series of painful reforms imposed on Mexicans in 1995 after the devaluation of the peso. The decline in buying power in Mexico remains the weak link in the Mexican recovery, with real wages rising only since 1998.

However, Zedillo noted that the jobs created by direct foreign investment pay 48% better than the average Mexican job, which makes them exactly the kind of employment that Mexico wants to encourage. Unemployment was 2.4% in February, the government reported Monday. While the measure is widely considered to understate joblessness, the trend is in the right direction.

The surge in direct foreign investment is the latest in a series of positive macroeconomic signals in Mexico that have raised hopes that the nation will get through the end of a six-year presidential term without a financial crisis for the first time in 30 years.

Earlier this month, Moody’s Investor Service raised its foreign-debt rating for Mexico to investment grade for the first time, and Standard & Poor’s followed by raising its rating to one notch below investment grade.

Inflation and interest rates are down, while exports and private investment are up. The free-floating peso also has risen in value and foreign reserves are at record levels.

“I believe the investor has much more confidence in Mexico these days,” said Julio Quesada, head of Citibank in Mexico and architect of a $200-million takeover by Citibank of a troubled Mexican bank called Confia. “What we have seen in the last six years is a total improvement of the economy. The foundations are very solidly in place for a real takeoff in the next six years.”

The projected foreign investment shows a significant rise from Europe, accounting for 36% of the total, compared with 29% last year. North American investment, most of it from the United States, accounts for an unchanged 58% of the total.

Hermann von Bertrab, president of the Mexican Investment Board, said the Mexico-European Union treaty negotiations, completed earlier this year, had prompted European firms to make provisions for new investment opportunities in Mexico.

One example: Charles Dehelly, head of the French firm Thomson Multimedia in Mexico, said his company is building a $280-million plant in Mexicali, which will make Thomson the world’s biggest producer of large television tubes. The plant, to employ 500, will bring Thomson’s total investment in Mexico to nearly $600 million in the past decade.

“We selected Mexico for this plant because the new European-Mexico trade agreement will greatly help in balancing our worldwide production,” Dehelly said. He added that the company’s 17,500 employees in Mexico already account for a third of the firm’s global work force.

That foreign investment is rising in a presidential election year suggests that Zedillo’s economic team has been persuasive in arguing that Mexico will avoid a financial crisis this election year. Mexico’s presidential election is July 2 and an opposition candidate, Vicente Fox of the center-right National Action Party, has the best chance in decades to defeat the ruling Institutional Revolutionary Party, which has ruled Mexico since 1929.

Citibank’s Quesada said: “We don’t see any danger of a sexenio [six-year-term] crisis. The political process is developing openly. We are very optimistic.”

He added that Mexico has succeeded in differentiating itself from other Latin American and developing countries, some of which suffered sharp drops in investment during the financial turmoil of 1998 and early 1999.

The investment projection is based on a survey of the 353 largest foreign companies in Mexico, which Von Bertrab said account for about 90% of all foreign investment. Typically, the annual foreign investment projection understates the actual total by about 10% because it excludes about 7,000 small companies that invest lesser amounts.

For 1999, the early projection was for direct foreign investment of $10.01 billion. In fact, the amount grew faster than expected to finish the year at $11.57 billion, according to the Mexican Central Bank.

So the projection of $12.4 billion announced Monday will likely be augmented by smaller investments during the year, and will almost certainly surpass the record $12.83 billion invested in 1997.

Direct foreign investment in the first five years of his administration, from 1995 through 1999, totaled $54.5 billion, Zedillo said--twice as much as in the previous five years. Direct investment is long term, in plants and machinery, and does not include volatile short-term stock market investments.

Direct foreign investment is usually oriented toward export production, which in turn earns Mexico dollars and eases its current account deficit. Exports were up 14% last year and now represent a greater share of the nation’s gross domestic product than ever.

According to the Economic Commission for Latin America and the Caribbean, the U.N. regional think tank, Mexico ranked third in direct foreign investment in the region last year, after Brazil and Argentina.

But the commission noted that Argentina’s foreign investment included huge sums paid for the privatized state oil company.

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Foreign Investment in Mexico, 1994-98

Major Foreign Investors in Mexico

Sources of foreign investment in Mexico between 1994 and 1998, ranked by percentage of total investment contributed by each.

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United States: 60%

Netherlands: 7%

Britain: 7%

Financial centers: 5%

Developing countries: 5%

Canada: 4%

Germany: 4%

Japan: 3%

Spain: 2%

Other: EU 2%

Other developed countries: 1%

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Source: United Nations Economic Commission for Latin America and the Caribbean

Researched by NONA YATES / Los Angeles Times