HE'S GOT MEXICO'S FDI IN HIS HANDS

UNCLAS SECTION 01 OF 03 MEXICO 000574 SIPDIS SENSITIVE SIPDIS STATE FOR EB/IFD/OIA, WHA/EPSC AND WHA/MEX PARIS FOR USOECD DEPT PASS TO USTR E.O. 12958: N/A TAGS: EINV EFIN ETRD ELAB KTDB PGOV MX SUBJECT: HE'S GOT MEXICO'S FDI IN HIS HANDS Sensitive But Unclassified, Entire Text ¶1. (SBU) SUMMARY. Mexico received USD 17.6 billion in Foreign Direct Investment (FDI) in 2005 and is forecast to receive USD 18 billion in 2006 due to large investments in the automotive and auto parts, real estate, housing development, pharmaceutical, food processing and electronics sectors. 2006 FDI may be affected by Mexico's election. An incident free election and smooth transition of power should help keep FDI on track, while any major disagreements over the results could derail planned investment. Although both U.S. FDI in Mexico and Mexican competitiveness have declined, Mexico still remains a strong destination for FDI worldwide. END SUMMARY. 2005 NOT AS GOOD AS 2004 -------------- ¶2. (SBU) Econoff met on January 23 with Gregorio Canales Ramirez, Director General for FDI for the Secretariat of the Economy (Economia). According to Canales, Mexico received USD 17.9 billion of FDI investment in 2004. Through September of 2005 Mexico had received USD 12.9 billion. Figures are not yet final for the last quarter of 2005, but the government expects that FDI for 2005 will be USD 17.6 billion. Mexico typically receives 21 to 22 percent of its annual FDI in the first quarter, 23 to 24 percent in each of quarters two and three, and the remaining 27 percent in quarter four. Normally 15 to 20 percent of each quarter's FDI is reported later (see para. 9). Using this formula the government is confident that it will reach the USD 17.6 billion figure for ¶2005. FDI TO REBOUND IN 2006 -------------- ¶3. (SBU) Sergio Garcia de Alba, Mexico's Secretary of Economy, has publicly predicted FDI will reach USD 18 billion in 2006. Economia expects several large investments in the auto and auto parts sector because of Mexico's lower transportation costs to the U.S. market, logistical benefits from Mexico's proximity to the U.S. and rule of origin laws under NAFTA that encourage production in Mexico. Investments in real estate (such as Puerto Penasco, in northern Sonora on the Sea of Cortes. and other beach destinations in the states of Jalisco, Guerrero and Oaxaca),housing development, pharmaceuticals, food processing, and the electronics sector, particularly kitchen appliances, should also rise. While refusing to name specific projects, Economia expects at least three USD one billion projects in the automotive sector and between USD two and a half and five billion in investments in the auto parts sector. THE U.S. - THE BIG PLAYER IN MEXICAN FDI -------------- ¶4. (SBU) The U.S. has continually been the largest source country for FDI in Mexico. While the percentage of Mexican FDI that originates in the U.S. has remained quite high, the monetary value has dropped dramatically. USD 21.4 billion or 77 percent of Mexico's total FDI came from the U.S. in 2001. In 2005 (through September) although FDI of U.S. origin still accounted for 66 percent of total Mexican FDI, the value had shrunk to USD 5.9 billion. USD 53.3 billion or 63 percent of Mexico's FDI has come from the U.S. over the last five years. CHINA - THE NEW INVESTOR ON THE BLOCK -------------- ¶5. (SBU) China's FDI in Mexico has been relatively small accounting for less than one percent of the annual FDI for each of the last five years and less than one percent of the five year total. China had single digit (USD 2 million) FDI investment in 2001 and 2005 (through September),and double digit FDI in 2003 and 2004 (USD 16 and 12 million respectively). China had negative USD 2 million in FDI caused by sales of FDI stock that outweighed new FDI. Economia expects Chinese FDI to increase dramatically if the two countries eventually complete a trade and investment agreement. MEXICO IN THE WORLD FDI MARKET -------------- ¶6. (SBU) While Mexico's declining competitiveness and MEXICO 00000574 002 OF 003 upcoming elections may affect FDI in Mexico, fears that FDI may shift from Mexico to elsewhere may not necessarily be justified. Comparing Mexico to Brazil, Canada, South Korea, Poland, the Russian Federation, Spain, Thailand and Turkey reveals data that indicates Mexico is still viewed as a good FDI recipient. In 2004, according to the United Nations, Mexico received more FDI than any of the other nations except for Brazil. From 2000 to 2004, Mexico was always among the top four FDI recipients of the group (three of five years in 2nd place and twice in fourth). Mexico's purchasing power GDP for the years 2000 to 2003 was typically the fourth highest among the nations, yet FDI as a percentage of purchasing power parity GDP was higher in Mexico than any other country in 2004 (1.4 percent in Mexico versus 1.3 percent in Brazil and 1 percent in Canada). FDI'S REACTION TO ELECTIONS -------------- ¶7. (SBU) Canales does not expect changes to typical FDI levels during the first quarter of 2006. FDI in the second quarter may be affected by the presidential election campaign. If the results are uncontested, he foresees a rapid return to Mexico's normal FDI trend, while a contested election will reduce FDI in the second and third quarters. OUTSIDE ESTIMATES OF FDI -------------- ¶8. (SBU) Canales explained the varying FDI estimates for Mexico, (such as the International Institute of Finance's USD 13 billion estimate, and UNCTAD's USD 17 billion estimate), result from the other groups' lack of direct access to needed information. Economia takes its data directly from company books and represents official figures. Third party groups do not have access to this information and several organizations obtain FDI data by surveying companies. Canales said competing the data lacked integrity because other organizations did not verify who completed the survey, and no effort was made to ensure that all companies with FDI were included in the surveys. MODIFYING THE NUMBERS -------------- ¶9. (SBU) Canales noted that Economia's current 2004 and 2005 FDI totals show significant modifications. For example in 2004 Economia reported the 2003 FDI inflow was USD 11.0 billion and in 2005 the same figure was USD 12.75 billion. Canales explained that every trimester companies that have a certain level of FDI are required to provide documentation to his office. Economia has one month to compile statistics and present a report to the Congress. The report estimates that 15 to 22 percent of the FDI for a given period will be reported at a later date. Companies frequently present information late because federal and private accounting schedules differ. For tax purposes many companies modify their FDI reporting at the end of the year and are content to be fined. Canales estimates that the Ministry's numbers do not change after 18 months have passed from the quarter reported. SURVEYING THE TOP 500 INVESTORS -------------- ¶10. (SBU) The FDI office at Economia surveys the top 500 companies with FDI and the 32 state economic development offices to determine trends for the next year. Last year respondents noted fear of bureaucracy, high energy costs, tax complexity, lack of local financing and lack of qualified supplies as the top problems with investing in Mexico. Investors did not identify political unrest or economic stability as risks. ¶11. (SBU) COMMENT. Given these standards, Embassy Mexico will continue to use Economia's FDI figures when we report to Washington agencies. FDI figures are notoriously unstable as "big-ticket" items (e.g. Citigroup's takeover of Banamex) can cause big fluctuations year-to-year. Economia reports net FDI for the year causing one big ticket to tremendously impact its reporting particularly FDI by country. Mexico's macroeconomic stability, its large market, its natural attractions (beaches),and its proximity to the U.S. will continue to make it an attractive place to invest. However, its declining competitiveness may steer some potential MEXICO 00000574 003 OF 003 investors away. END COMMENT. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity GARZA