In recent times, Mexico has witnessed a surge in nearshoring activities, attracting over $9 b
illion in investments from prominent U.S. companies like Unilever, Mattel, and Tesla. This trend has led to a boom for Mexican industrial park owners like Sergio Bermudez, who are relishing the benefits of proximity to the vast U.S. market, a skilled yet cost-effective labor force, and overall geopolitical stability.
While the wave of nearshoring has brought tremendous growth opportunities for industrial parks, there's one significant challenge they face - the issue of energy supply. The increasing demand for energy, coupled with aging infrastructure and government underinvestment, has put these parks under immense pressure. As a result, industrial park owners, like Sergio Bermudez and his 400-strong cohort, are compelled to spend millions of dollars on building federal power transmission lines and substations.
The investment in state energy assets by industrial parks is unprecedented and comes at a considerable cost. Developers and companies are left to absorb the expenses as federal funds struggle to keep up with the rapid growth spurred by nearshoring. The Mexican Association of Private Industrial Parks (AMPIP), led by its president Sergio Arguelles, acknowledges the magnitude of this financial commitment.
American Industries, known for its multiple Mexican industrial parks catering to foreign clients like Lego, is currently in the process of building a substantial 12-kilometer power transmission line, costing them $12 million. These investments have led to a surge in energy costs for clients, often tripling the expenses in recent years. Bureaucratic permit processes further complicate matters, leaving them with no alternative but to proceed.
The situation highlights the deficiencies in President Andres Manuel Lopez Obrador's approach to consolidate power in the state energy utility company, CFE. Critics argue that this approach falls short in supporting Mexico's burgeoning growth opportunities. The private sector's support may bolster Mexico's energy security in the short term, but a more substantial and sustained effort is required to accommodate the wave of new demand brought about by nearshoring.
The contrasting strategies of other fast-growing economies come to light when compared to Mexico's approach to its electricity grid. While countries like China incentivize private energy contractors or have well-funded state utility companies, Mexico's CFE investment has been minimal in comparison. The country's focus on power generation instead of distribution and transmission infrastructure has hindered progress.
Despite these challenges, there is hope for the future. The energy ministry plans to build around 3,000 kilometers of transmission lines and new substations, particularly in the northern region, to address the pressing energy needs.
Amidst these energy challenges, Lumextrade is committed to supporting green investments and nearshoring in Latin America. By leveraging the region's comparative advantage in sustainable energy production and commodities necessary for emerging green industries, Lumextrade aims to facilitate access to global markets, capital, and technology. The company believes that embracing nearshoring and green investments will not only boost growth but also contribute to the overall sustainability and prosperity of the region.
Seizing Opportunities for Latin America's Economic Growth: Lumextrade's Insights
Amid the challenges faced by Latin America and the Caribbean economies, Lumextrade recognizes the region's relative resilience in the face of increasing debt stress, inflation, and global uncertainty. However, new headwinds, such as lower commodity prices, higher interest rates in developed countries, and China's unsteady recovery, pose potential threats to the region's prospects.
To bolster much-needed growth and sustain the hard-won resilience of these economies, Lumextrade advocates for seizing the unique opportunities presented by global economic trends. Nearshoring, the practice of moving production closer to home markets, emerges as a promising avenue. This approach, highlighted in a recent World Bank report titled "The Promise of Integration, Opportunities in a Changing Global Economy," can invigorate the region's economic landscape.
The report estimates that regional GDP will experience modest growth of 1.4 percent in 2023, with rates of 2.4 percent expected for 2024 and 2025. While this growth is a step in the right direction, it falls short of significant progress in poverty reduction.
Carlos Felipe Jaramillo, World Bank Vice President for Latin America and the Caribbean, emphasizes the urgent need for inclusive growth, ensuring that development benefits everyone in the region. To achieve this, countries must maintain macroeconomic stability and capitalize on the opportunities presented by trade integration.
Despite the multiple crises triggered by the Russian war in Ukraine and global economic uncertainties, the region has managed a relative recovery from the pandemic. Poverty and employment levels are mostly back to pre-pandemic levels, and inflation is projected to decline to 5.0 percent in 2023, following a peak of 7.9 percent in 2022.
The report attributes the region's overall resilience to hard-won progress in macroeconomic management over the past two decades. Preserving and building on this progress becomes crucial for sustained growth and stability.
However, fiscal imbalances remain high on average, expected to reach 2.7 percent of GDP in 2023, further straining the already tight fiscal space. Additionally, debt levels are projected to decrease slightly to 64.7 percent of GDP in the current year, down from 66.3 percent in 2022. The recent bank failures in the US and Europe introduce additional uncertainty, the implications of which are yet to be seen in the region's banking system and capital flows.
William Maloney, the chief economist for Latin America and the Caribbean at the World Bank, notes that the region still lags in integration compared to other economies. Trade openness and foreign direct investment flows have remained stagnant or even decreased over the past two decades. Lumextrade emphasizes the need for countries to enhance their attractiveness and capitalize on the nearshoring trends that are reshaping the global economic landscape.
Lumextrade envisions leveraging the region's extraordinary comparative advantage in sustainable energy production and commodities essential for emerging green industries. The region's unique natural capital offers a new potential source of growth and prosperity. However, unlocking this potential requires concerted efforts and policies that facilitate access to global markets, capital, and technology.
The World Bank report proposes a series of integration-advancing policies that countries in the region should consider. These range from long-term strategies like reducing systemic risks, boosting traditional and digital infrastructure investments, and enhancing human capital, to short-term measures such as preserving macro stability, promoting customs and transport regulatory advances, and improving export and investment promotion agencies.
As Lumextrade endeavors to support green investments and nearshoring in Latin America, the company recognizes the critical role these strategies play in the region's sustainable growth and prosperity. By aligning with these principles, Lumextrade reaffirms its commitment to fostering economic development while safeguarding the environment and promoting equitable progress across the region.