Thanks to its proximity to the US, Mexico is the emerging market best positioned to gain from so-called “nearshoring”, the trend that is supposedly seeing companies progressively transfer part of their production to other countries close to their markets.
To date, however, the trend has not resulted in Mexico seeing the greatest available benefits. Economies across Asia, as well as Canada, have grown their share of US imports faster than Mexico since the US-China trade decoupling began five years ago, wrote economic analytics firm BBVA Research in a note.
The note postulates that if Mexico had received all the trade flows that have left China since 2018, its economy would have grown 1.42% annually, instead of the reality in which it contracted by 0.40%. Manufacturing, too, would have grown – by around 7% annually, instead of by 0.69%.
Between January and March 2023, adjusting for atypical transactions, Mexico received 48% more foreign direct investment (FDI) than in the same period last year. However, new investments represent only 10% of FDI in the country, with the remaining 90% composed of reinvestment of profits, wrote Carlos Serrano, chief economist for Mexico at BBVA Research, in a note.
However, the disruptions to global supply chains following the Covid-19 pandemic have reignited ambitions and hopes for the central American country.
In March, Elon Musk, CEO of automotive and clean energy company Tesla, confirmed that the firm’s latest new electric vehicle (EV) factory, with an investment of $5bn, will be built in Mexico. This followed German carmaker BMW’s announcement in February that it will invest $872m to build EVs in the country.
we have seen increasing demand for credit from foreign companies recently establishing in Mexico
Grupo Financiero Banorte, Mexico’s largest locally owned bank, is also seeing some positive signs.
“In the last six months, we have seen increasing demand for credit from both foreign companies recently establishing in Mexico, as well as from companies already established but expanding their operations and production capacity,” says Carlos Hank González, chairman of the bank.
“We have been active in financing projects and companies involved in developing the required infrastructure, including renewable energy, roads, logistics and industrial parks,” he adds.
Nearshoring trials
“Nearshoring is having an impact on the entire supply chain – not only for large companies, but also for the SMEs [small and medium-sized enterprises] that support those companies,” explains David Poritz, co-CEO at Covalto, a Mexican digital and banking services platform.
Larger banks have been dealing with some other issues. “Nearshoring is something that they are focused on today and they are trying to understand which companies are moving to Mexico in order to provide financing to those industries,” says Patricio Diez de Bonilla, CEO of Compartamos Banco, Latin America’s largest microfinance bank.
Mr González of Banorte explains that: “During this year we have approved over $800m in loans related to industrial real estate, mainly in the north of Mexico and directly and indirectly tied to companies expanding their operations due to nearshoring opportunities.”
Banorte has been focusing on financing projects related to these needs, including renewable energy, transportation, roads, water, logistics and industrial real estate.
Although there are some multinational companies looking for local funding, most receive funding from their headquarters or from larger international banks, according to Mr González. However, there are still many opportunities for product offerings aside from loans.
“Once the installed plants are operational, there is potential not only in terms of credit, but in a comprehensive relationship of financial services, offering intelligent treasury products, cash management, insurance, among others, mainly to commercial segments, SMEs and retail,” says Mr González.
Mexico’s banks in the Top 1000
Companies involved with nearshoring require cash management and treasury services, from payment services, collections solutions, payroll services, international wire and foreign exchange, to more complex products such as trade and supply chain finance solutions and local guarantees, according to Banorte.
Some regions in Mexico might benefit more than others from an increase in FDI. Within the sectors with a greater propensity for relocation, fewer companies are able to obtain private bank credit in the south-southeast of Mexico. Part of this could be because in the south-southeast (and in those sectors) companies are associated with more credit risk, said Banxico, Mexico’s central bank, in a recent report.
Nearshoring in Mexico is underway but it may take time for its strongest effects to reflect in the economy.
