mexico country report

FDI inflows to Latin America spike

  • The global economic outlook is increasingly bleak, but data from early 2022 suggest that Latin America is at least moving into a difficult second half of 2022 from a strong position. Several economic indicators have highlighted the strength of activity in the region’s major economies in the first half of the year: private-sector credit has recovered and is growing robustly; wage growth is in many countries still positive in real terms; and job growth has gathered pace. However, the strength of activity early this year is shown particularly clearly in the latest foreign direct investment (FDI) data. In the first quarter of 2022 there was a dramatic increase in FDI into the region, with several countries posting their highest inflows in more than a decade. 
  • It is possible that some of the spike in FDI can be attributed to one-off transactions or a pile-up of investments delayed by covid-19. However, EIU believes that there are two key economic drivers that help to account for the increase in inflows into Latin America: high commodity prices and moves by US firms to bring some of their production closer to home. Commodity prices were high even before the spike caused by the war in Ukraine, and this will certainly have been a factor in the first-quarter FDI boom. For example, Colombia—a major oil producer—received its highest inflows since 2005. 
  • Based on anecdotal evidence from investment announcements by various companies, nearshoring also appears to be playing a role, particularly in Mexico. There are other data that support this assumption. For example, for the past few years Mexico has been taking US market share from China and the rest of Asia. In May 2022 the ratio of Mexico’s exports to the US versus Asian (including Chinese) exports to the US stood at 44%, up from 41% a year earlier and from 37% in 2018, just before the US-China trade war began.
  • This is a solid share, although we believe that Mexico is far from living up to its nearshoring potential, owing to business concerns about the policy environment under the president, Andrés Manuel López Obrador. More broadly, we think that perceived weaknesses in the business environment will constrain Latin America’s prospects for FDI going forward, amid a high level of political risk in the region (reflecting dramatic political shifts at the ballot box over the past two years). Although the first-quarter data clearly show Latin America’s potential, we assume that FDI flows will taper off for the next few quarters as the supply of funds dries up, commodity prices ease from their recent peaks and concerns about political risk in Latin America come to the fore.  

The analysis featured in this article can be found in EIU Viewpoint, our new country analysis solution. EIU Viewpoint provides unmatched global insights covering the political and economic outlook for nearly 200 countries.