With so much money accumulated on the sidelines of the highly volatile markets in America and Europe, international investors are having a tough time selecting a destination for their next investment. According to the 2011 report by the National Commission of Foreign Investment, Brazil rated 5th and Mexico 19th in the list of country recipients of Direct Foreign Investment (DFI) during 2010; with the U.S. placing 1st, China 2nd and Hong Kong 3rd.
Amidst an unstable economy with interest rates drastically low, investors who prefer placing their funds in America face the following alternatives: a) investing in the U.S. or Canada, with lower risks but also lower yields or b) investing in Brazil or Mexico, which have a higher risk level, but provide a much higher initial return on investment. At first sight, Brazil may appear to be a better choice given that it is already a part of the BRIC group of leading emerging economies, while Mexico is a step away from being included in this group. However, after an in-depth analysis of these two prominent Latin-American economies and the collateral key factors that influence their performance and future opportunities, Mexico may be the better choice.
Though Brazil’s GDP in 2010 was estimated at $2.172 billion, the world’s 8th largest economy, and Mexico’s at $1.567 billion, the world’s 12th largest economy, one has to consider Brazil’s population of 194.946 million compared to Mexico’s population of 113.423 million. Mexico’s economic performance during the past decade has been remarkable. Its GDP grew 170.32% from $920 billion in 2001 to $1.567 billion in 2010, while Brazil’s GDP growth during the same period was 162.08%.
An important factor is Brazil’s economy is not as heavily dependent on the U.S. economy as Mexico’s. 25% of Brazil’s exports go to the U.S., compared to 78% of Mexico’s. Thus, when the U.S. economy declines it has a much greater impact on Mexico than it does on Brazil. During the 2009 recession, Mexico’s GDP had a -6.5% change, compared to Brazil’s -0.2%. Both countries had extraordinary GDP performances in 2010 but Mexico impressed the world posting a +5.5% growth, an 11% total advance from its contraction point the previous year.
Strategic Location, Logistics & Trade
Mexico is the envy of most other countries, due to its strategic location next to the world’s largest economy. It is no surprise to find that Mexico is the world’s No. 1 television screen manufacturer and the world’s 9th largest auto manufacturer. Mexico exports more cars to the U.S. than Japan, Korea, Germany or the UK. In addition, Mexico has free trade agreements with 43 countries, including the U.S., Canada, the UE and several countries of Latin-America, which makes it an ideal country to manufacture and export. This gives Mexico a substantial edge over Brazil, who does not yet have free trade agreements with U.S., Canada, or many of the other countries with whom Mexico has trade treaties. Brazil and the U.S. approach trade policy quite differently, whereas Mexico, the U.S., and Canada have similar approaches which were conducive to the signing of the NAFTA agreement. Brazil is the 15th largest U.S. export market; a distant second to Mexico as the United States’ No. 1 trading partner in Latin America.
Brazil and the U.S. look at trade liberalization from different perspectives. The U.S.’s view is characterized as “competitive liberalization,” while Brazil is characterized as taking a narrower, more cautious track. Although the United States is Brazil’s largest single-country trading partner, Brazil has resisted increasing trade liberalization with the U.S. Brazil’s trade preferences are with Mercosul, which is more important to the economic and political life of Brazil, as expressed in the CRS Congress Report on Brazilian Trade Policy with the U.S.
In addition to Mexico’s strategic location, existing auto parts suppliers, competitiveness and high quality labor, another key factor of Mexico’s success in attracting major automobile and aerospace manufacturing firms has been the openness of its trade policies. The latest example of a major project landing in Mexico, instead of competing China or Brazil, is the new Mazda manufacturing facility, which will be built in Salamanca, Guanajuato, with an investment of $500 million and a potential capacity to produce 140,000 units per year.
Currency, Monetary Policy and Rate of Inflation
Brazil’s currency policies are strongly based in the Real (Reais in English). Most international contracts are made based in the local Real currency. Lease contracts (for office, retail or industrial space) are made in Reals, leaving open an exchange risk in the event of major currency devaluation. Brazil has been trying to contain inflation for the past decade. Inflation in 2011 stands at 6.52% and the expected inflation for 2012 is 5.53%. The Reais-US Dollar rate of exchange has been quite unstable as shown below, currently standing around 1.7 in 2011.
In contrast, Mexico’s inflation has been kept under control since 2003. According to INEGI, in August of 2011, Mexico’s annual inflation was set at 3.42 %.( 3.1% lower than Brazil’s).
In comparison to Brazil, Mexico’s economy is highly dollarized. Most international transactions are US-dollar based and for the most part large business transactions and especially real estate sale or lease contracts are made in US Dollars; a business practice that is much preferred by the international investors community.
Mexico’s commercial real estate, especially the office and industrial market segments have experienced remarkable growth during the past five years. Investments in these sectors have consistently seen two-digit yields. Visitors in Mexico City are impressed by the number and quality of trophy high raise buildings under construction or recently completed that are changing the City’s skyline from Reforma-Polanco to Santa Fe.
Country Risk Factor
Mexico’s Country Risk Factor (J.P. MORGAN) has been and is lower than Brazil’s. In October 9, 2011 Mexico’s EMBI+ was 223 bp while Brazil’s was set at 257 bp. Furthermore, the IMF estimate of an economic crisis probability assigned a 0.56% index to Mexico and 3.34% to Brazil.
Crime and Image
Although according to UNESCO’s 2011 study on homicide rates Brazil has a homicide rate of 22 per 100,000 people and Mexico’s rate is only 18, Brazil has a much better public image of safety worldwide. Brazil has been much more effective in handling its public image than Mexico. As a point of comparison, USA’s homicide rate is 5 per 100,000 inhabitants. No one questions that one of Mexico’s top priorities should be finding and enforcing a successful formula to get organized crime under control as well as to launch an effective campaign to improve its image to the world.
The most recent “Doing Business” economy rankings by the World Bank and the International Finance Corporation, benchmarked in June 2011, ranked Mexico as the 53rd out of the 183 economies rated on the ease of doing business, while Brazil ranked 126th, India 132nd and China 91st.Thus, doing business with Mexico is rated considerably higher than the three economies that integrate the BRIC group.
Investors narrowing choice
Investors analyzing Mexico’s comparative performance, open market policies, trends and unique opportunities this country offers in the manufacturing, real estate and tourism industries, may find difficult making a selection between Brazil and Mexico. All matters considered, they might be inclined, as many already have, in selecting Mexico as the most desirable place to invest in comparison to Brazil. Provided that Mexico adheres to its strong commitment to fiscal consolidation, continues to move forward with infrastructure expansion and institutions improvement, and works toward improving its public image, Mexico appears to be on the threshold of a new era of extraordinary expansion that could place its economy among the world’s top ten.