On 30 November 2022 we detailed the guiding principles for nearshoring in our note: Nearshoring, a positive tailwind, but hardly a quantum leap for Mexico. Six months later, we are making a first assessment on how nearshoring is doing in Mexico, and we end on a bittersweet note, as we have identified mixed signals from the most supportive (strong momentum in new investment announcements and the red-hot industrial real estate sector), neutral indicators (such as FDI flows and export data), to negative flags (imminent infrastructure needs for electricity and water), in an environment of prevailing volatility and increasing risk aversion.
Background: We acknowledge that nearshoring represents a unique opportunity for Mexico. Notwithstanding this, we can see notable challenges and structural drags that may limit the country’s ability to take advantage of these opportunities.
The sweet: Increasing traction in new investment announcements and the red-hot industrial real estate segment. We have identified a remarkable trend in unceasing announcements of new investments, which amount to c.USD40bn YtD. Moreover, nearshoring-preferred markets in northern Mexico are still almost sold-out and the increase in rents has accelerated.
The neutral: Mixed signals in FDI, exports and banking system data. While we have identified some early signs of nearshoring activity, they are not entirely clear yet. FDI data show positive growth, with an increasing share from new investments, although this is still far from being a shift in trend or comparable with the explosive growth seen after the NAFTA agreement back in 1994. As for exports, we see an accelerating trend, but it is hard to tell whether it is explained by nearshoring or a mere rebound in the industries affected during the pandemic. As for banking system data, we see incipient signs of financing for new activities but, once again, the trend is far from clear. Lastly, the political news flow is still erratic, in our view.
The bittersweet: The need to improve infrastructure (mainly electricity and water) has become clearer in the last few months and we believe risk aversion may increase as the presidential election nears.
In short, we still regard nearshoring as a relevant tailwind, but hardly a quantum leap for the Mexican economy. Despite the current momentum, we believe that new investment announcements and the dynamics of the industrial real estate sector may eventually slow down if infrastructure bottlenecks are not addressed. This is particularly significant when we include the fact that presidential election is just around the corner.