Nearshoring: How We’re Doing Month by Month | Monthly Newsletter | #06

2024 Investment Announcements – Ministry of Economy

The Ministry of Economy reported that from January 1^st to April 15^th, 2024, 93 investment announcements were made, totaling an estimated $36.153 billion dollars. Additionally, the Ministry pointed out that said amount is expected to enter the country in the next two or three years and would lead to the creation of around 47,702 new jobs. Around 48% of these new jobs would be created in the automotive industry (approximately 23,079).

In comparison with the previous report, between March 15^th and April 15^th, we highlight the potential entry of investments from: Tango Solar (Spain), $1.172 billion dollars; Sempra Infrastructure (USA), $550 million; and Sailun Group (Germany), $427 million. In total, for these 3 investments, $2.149 billion dollars are expected to be financed in the energy (generation), transportation (gas pipelines) and manufacturing (auto parts) sectors.

How´s the Trade Balance Doing? – March

In March 2024, Mexico’s trade balance (exports minus imports of goods) recorded a surplus worth $2.098 billion dollars, compared to a $1.195 billion dollar surplus logged in the same month of 2023. In the first three months of 2024, the trade balance recorded a deficit worth $2.801 billion dollars. In the 1Q23, the deficit was worth $4.799 billion dollars.

In March, exports decreased an annual -4.5%, as there was a -4.5% decline in non-oil exports and a -21.4% drop in oil exports. Within non-oil exports, those destined for the US decreased by -2.8% annually, and those directed to the rest of the world decreased by -13.1%. By type of good, manufactured exports declined by -4.5% due to decreases in the mining and metallurgy industry (-22.6%), household metal products (-20.6%), electronics (-6.8%), and automotive products (-2.4%). The decrease in automotive product exports is attributed to a 0.9% increase in sales to the US and a -20% decline in sales made to other markets. In the first quarter of 2024, the value of total exports amounted to $143.430 billion dollars, logging an annual 1.7% increase compared to the same period of 2023.

Simultaneously, imports decreased -7.1% y/y in March 2024, totaling $48.654 billion dollars. The decline recorded in March is mainly explained by a -8.1% drop in intermediate goods imports, which suggests that the manufacturing industry started the first quarter of 2024 with weakness. Additionally, consumer goods imports decreased by -3.9%, while capital goods imports decreased -4.4%. In 1Q24, imports were made up as follows: Intermediate goods 75%, consumer goods 15%, and capital goods 10%.

How Does International Trade Affect Us?

This time we include the World Trade Monitor´s (WTM) indicator from the Netherlands Bureau for Economic Policy Analysis (CPB). The WTM´s sample covers just over 80 countries and is equivalent to 99% of international trade, which allows us to track global trade on a monthly basis. Between 2017 and 2024, we found that the correlation between global trade volumes and Mexican foreign trade (imports + exports in real terms) is slightly higher than 70%. Thus, we can highlight that the slowdown in Mexican trade observed for much of 2023 and the beginning of 2024 appears to stem from reduced global trade.

In its most recent publication, the WTM indicates that international trade increased by 1.0% m/m in February, according to seasonally adjusted figures, reversing January´s -0.9% m/m decline. Thus, there was improvement in global trade trends in February. A similar trend was seen in Mexico as better results in foreign trade were recorded after a weak start to the year. However, on an annual basis, international trade seems to have bottomed out, and the future outlook seems to be more optimistic, especially due to forecasts that estimate greater growth in the US. In this regard, identifying global trade trends will be crucial in order to provide a more accurate interpretation of Mexican trade.

Mexico´s “Super Peso” Effect on Imports: Price or Quantity?

International trade theory suggests that an appreciation in the exchange rate would accelerate imports because it “relatively cheapens” their value in dollars; now, the value of a certain product we would want to import requires fewer pesos for its purchase. So, holding all other things constant, we should see an increase in imports. In support of this theory, the International Monetary Fund has found evidence that in the short term, the effect of an exchange rate appreciation is first observed in imports, and over time, in exports. At the end of 2023, the Mexican peso stood at 16.72 pesos per dollar, 2.53 pesos below its 2022 year-end level (a +13.0% appreciation rate). Additionally, non-oil imports expressed in dollars grew by 3.0% in 2023, and when separating them by type of goods into intermediate, non-oil consumption, and capital, they recorded annual changes of -1.8%, +25.1%, and +20.0%, respectively. However, with the previously mentioned figures, it is impossible to distinguish the effect of the exchange rate appreciation on: i) The volume of imports and ii) The effect on price. For this analysis, we aim to solve this mystery using unit value figures (which we will now call price) and implicit volume (which will be volume) published by the Central Bank of Mexico on a quarterly basis, and which are available for the fourth quarter of 2023. To eliminate the effect of oil prices, we decided to focus the analysis on non-oil imports.

Regarding intermediate goods imports, volumes remained virtually stagnant during 2023, as they increased 1.1% compared to 2022, even though prices decreased -2.8%. This suggests that intermediate goods imports – which are subsequently exported – are less influenced by the exchange rate and respond more to foreign demand. However, this is different for non-oil consumer goods and capital goods imports; as shown in the graphs below, the volume of goods increased by 15.7% and 14.7% in 2023, respectively, despite prices also rising by 8.2% and 4.9%, in the same order. This suggests that there is initial evidence that imports of non-oil consumer goods and capital goods seem to be volume-sensitive to exchange rate appreciation.

At first glance, the evidence suggests that the peso´s appreciation was related to the increase in demand for imported goods, especially capital goods. It´s  possible to assume that importers have increased demand for these products because they believe that over time, their prices may rise as the peso is overvalued.

Mexico´s Relevance

According to data published by the Ministry of Economy, and based on information made known by the OECD, Mexico has become one of the main recipients of Foreign Direct Investment at a worldwide level. This suggests that the relocation of production chains is becoming a reality, although data on new investments in our country has only changed slightly in terms of the total amount. Mexico went from being the fourteenth country on the list in 2019 to being the fourth in the third quarter of 2023. This trend could accelerate if the most urgent infrastructure-related challenges are addressed. It´s worth noting that during this period, the United States maintained its leadership in foreign direct investment.