After experiencing a drop in Foreign Direct Investment (FDI) in 2012, Mexico has started to experience a strong rebound in 2013 -led in part by the strength of lesser known states such as Queretaro. One of the smallest of the country’s 31 states and located in the center of Mexico, Querétaro has seen a 120% increase in infrastructure project volume during the first part of 2013. In fact, The capital city Santiago de Querétaro topped all other global cities by percent change in FDI – with a spectacular 233.3-percent increase annually. Other states, such as Aguascalientes and Hidalgo, only saw modest increases, but the six northern-border states to the US were able to rein in larger volumes of foreign capital.
With no border advantages, to what does Querétaro owe its recent success?
Mexico’s President Enrique Pena Nieto, whose six-year term began in December 2012, has taken on different political pacts to attract FDI, and has managed to improve some areas, including the country’s ongoing fight against drug-trafficking and organized crime. This served to instill more confidence into US investors.
Pena Nieto’s predecessor saw a period of strong growth after an economic rebound in 2010, but headwinds on the national political front and global uncertainties worried investors. This resulted in lower FDIs in 2012 and some investors switched to less risky locations. If national reform takes longer than expected then FDIs could again be lower than expected in 2014.
Querétaro has become one of Mexico’s strongest state economies. A combination of strong market access, an educated workforce and low costs increased investment rapidly, attracting aerospace, BPO, IT and telecom investors. By end of May, for example, Swedish telecom giant Ericsson began operating a Global Service Center. In mid-June French manufacturer Safran announced the construction of a fifth plant in Querétaro. Hitachi Automotive Systems and other Japanese auto part companies are also working on new projects there. (Tata Consultancy expanded its Queretaro facility at the end of last year.)
This could explain why in May, when the national employment figure dropped by 73% annually, Querétaro saw a 7% increase.
Firms like Ericsson prefer Mexico because of the easy access it offers to both North and South America, and in some cases, European markets. Querétaro was a logical choice as the local government is committed to reducing corruption and keeping settlement pricing low.
Living standards in Querétaro are higher than average for Mexico and internal migration has accelerated due to the state’s industrial progression, low crime rates and stable social-political situation.
Mexicans moving in feed universities but need jobs too. With the local economy comprised of three main sectors: agriculture, industry and services (the latter counting for more than half of the state’s GDP), Querétaro offers many opportunities.
It is just an hour’s drive from Mexico City, the country’s largest market, and other highways connect it with boarder states to the North. This makes the city an almost obligatory stop for business. Its geographical advantage has spurred industrial development in the state, although like Latin America in general, Querétaro has seen a decline in its agricultural output as manufacturing and commerce thrives.
Industrial reforms must eventually add to required economic growth to fulfill the expectations of investors, but this puts pressure on Mexico too. Plans to become a global leader in transparency and in economic terms, surpassing Brazil regionally, have not been on the national agenda that long.
The Mexican government has done little to control its currency and recent economic data has confirmed lower national expectations. Following strong signals in 2012, the first part of this year showed economic activity no longer accelerating but rising at the slowest pace in more than three years, despite low inflation levels.
Back in March, Banxico, the central bank of Mexico, surprised markets with a first rate cut since 2009. In the following monthly meetings, the bank adopted a more neutral tone.
In May economic growth slowed down, with inflation above the Central Bank’s target, although the expectation remains that inflation will fall in the second half of the year.
Weaker domestic demand and a subdued external sector caused this setback. In addition,consumer sentiment disappointed in Ma,y falling to its lowest level in six months.
Latin Focus panelists forecast the Mexican economy to increase 3.1% this year, which is down 0.2 percentage points from the previous month’s projection. For 2014, the panel sees growth accelerating to 4.0%.
For Mexico and Querétaro, it remains to be seen how the second half of 2013 will impact current and new FDI. Based on previous strong investment and trust, it looks like Querétaro is better positioned than the nation despite the latest reports again showing signs of deceleration.