Foreign Investment

Mexico or Brazil?

Investors may be surprised at the comparison of these two countries.

With so much money accumulated on the sidelines, rising prices for U.S. trophy properties, and highly volatile European markets, international real estate investors are looking for new markets to conquer. According to the 2011 report by the National Commission of Foreign Investment, Brazil rated No. 4 and Mexico No. 15 for direct foreign investment during 2011.

Compared to the U.S. or Canada, investing in Brazil or Mexico provides a higher risk level, but also a much higher return. At first sight, Brazil may appear to be a better choice given that it is already a part of the BRIC, or Brazil, Russia, India and China, group of leading emerging economies. However, after a more in-depth analysis of these two prominent Latin-American countries and the collateral key factors that influence their performance and future opportunities, investors might be more inclined to choose Mexico.

GDP Performance

Brazil’s 2011 gross domestic product was estimated at $2.2 billion, making it the world’s sixth largest economy. Mexico’s 2011 GDP of $1.2 billion made it the world’s 14th largest economy. However, one has to consider Brazil’s population of about 195 million, compared to Mexico’s 113 million, which is 58 percent smaller.

Mexico’s economic performance during the past 15 years has been remarkable, spurred by the exports of energetics and products covered under the North American Free Trade Agreement that came into effect in 1994, and under a fertile environment of economic stability and fiscal responsibility.

Brazil’s economy is not as heavily dependent on the U.S. economy: only 25 percent of its exports go to the U.S., compared to Mexico’s 78 percent. Thus, when the U.S. economy takes a downturn, it has a much greater impact on Mexico. During the 2009 recession, Mexico’s GDP fell 6.5 percent, compared to Brazil’s 0.2 percent decline. Both countries had extraordinary GDP performances in 2010 but Mexico impressed the world by posting a 5.5 percent growth, an 11 percent total increase from its contraction point the previous year. Moreover, in 2011 Mexico’s economic growth was 3.9 percent, while Brazil’s was 3.0 percent. The January 24, 2012, World Economic Outlook projects the Mexican economy to grow 3.5 percent during the present year, while the projection for Brazil is 3.0 percent. Mexico’s Central Bank Governor, Agustin Carstens, has indicated that the economy could grow 4 percent in 2012 if the U.S. economy continues improving.

Logistics and Trade

Mexico’s strategic location next to the world’s largest economy is the envy of most other countries. Mexico is the world’s No.1 TV screen manufacturer and the world’s ninth largest auto manufacturer, exporting more cars to the U.S. than Japan, Korea, Germany, and the U.K.

Mexico has free trade agreements with 43 countries, including the U.S., Canada, the European Union, and several Latin American countries, giving it a substantial edge over Brazil, which does not have free trade agreements with U.S. or Canada.

Whereas Brazil is the 15th largest U.S. export market; Mexico is the United States’ No. 1 trade partner in Latin America. 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, an economic and political agreement among several South American countries.

Besides Mexico’s strategic location, the other key factor determining 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 China or Brazil (which were in competition) is the new Mazda manufacturing facility to be built in Salamanca, Guanajuato, with an investment of $500 million and a potential capacity to produce 140,000 units per year. Nissan, which already manufactures autos in Mexico, recently announced the building of a new plant in Aguascalientes with an estimated investment of $2 billion. Mexico´s auto production reached 2.5 million units in 2011, exporting 2.1 million. Mexico is already the world´s sixth largest automobile exporter and likely to take fifth place in 2012.

Currency Issues

The real is the Brazilian currency and most of its contracts and monetary policies are based on the real. Brazil has been trying to contain inflation for the past decade. Inflation in 2011 stood at 6.5 percent and expectation for 2012 is 5.5 percent. The real-U.S. dollar rate of exchange has been quite volatile, standing around 1.7 in late 2011.

Mexico’s inflation has been kept under control since 2003. In August 2011, Mexico’s annual inflation rate was set at 3.4 percent, 3.1 percent lower than Brazil’s annual inflation rate.

In comparison to Brazil, Mexico’s economy is highly dollarized. Most international transactions are U.S.-dollar based and for the most part large business transactions -- especially real estate sales or lease contracts -- are made in U.S. dollars.

Crime and Image

According to UNESCO’s 2011 study on homicide rates by country, Brazil has a homicide rate of 22 per 100,000 inhabitants and Mexico’s rate is 18 per 100,000. (As a point of comparison, the U.S. homicide rate is five per 100,000 inhabitants.) Obviously Brazil has been much more effective handling its public image than Mexico. One of Mexico’s top priorities should be developing and enforcing a successful formula to get organized crime under control and to launch an effective campaign to improve its public image to the world.

Ease of Business

The most recent Doing Business Economy Rankings by the World Bank and the International Finance Corp., benchmarked to June 2011, ranked Mexico as No.53 out of the 183 economies rated on the ease of doing business. It outranks not only Brazil at 126, but also India (132) and China (91). Thus, Mexico’s ease to do business is rated considerably higher than three of the four countries comprising BRIC.

Investors’ Choice

Brazil has had an extraordinary performance as one of the world’s leading emerging economies. However investors analyzing Mexico’s comparative performance, open market policies, trends and unique opportunities in manufacturing, real estate, and tourism industries may find it a worthy competitor for investment. Providing the country adheres to the strong commitment to fiscal consolidation that has characterized its past, continues moving forward in its infrastructure expansion, and betters 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 group. Sandy Flockhart, HSBC´S managing director, estimates that Mexico will rank 10th among the leading global economies by 2050.

Oscar J. Franck Terrazas, FRICS, is managing director of Integra Realty Resources de Mexico. Contact him at ofranck@irr.com. An earlier version of this article appeared in the publication Inmobiliare.

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