Australian businesses with ties to Mexico need to be aware that the country is highly exposed to economic and policy developments in the United States.
High uncertainty surrounding North American Free Trade Agreement (NAFTA) negotiations and other US policy directions in international trade, and specifically targeting Mexico, could adversely affect sentiment and investment, according to Atradius, a leader in risk management and credit insurance.
The direct channels through which the Mexican economy could be affected by US policy are trade and investments and, to a lesser extent, remittances and immigration. Mexico is also indirectly vulnerable to the broader global effects of President Trump’s policies.
Peso movements have reflected these vulnerabilities and have already driven payment delays. Peso depreciation in 2016 has helped some exporters, particularly boosting the tourism sector. This stimulus has subsided as the peso has recovered some lost ground. The domestic slowdown will weigh heavily on the retail and construction sectors.
Domestic political woes
“Mexico’s economy has been performing sluggishly, well before the November 2016 US presidential elections,” said Mark Hoppe, managing director, Atradius.
“GDP grew only 2.3 per cent in 2016, mainly due to decreased oil prices, lower oil production, tighter fiscal policies, and low productivity growth. Ongoing domestic political woes, namely the unstable security situation and widespread corruption, continue to negatively affect business and consumer sentiment.
“On top of this, uncertainty over future US policies has added to Mexico’s challenges. GDP growth is forecast to slow further this year to 1.5 per cent.”
Atradius advises businesses to be aware of four key considerations when dealing with companies in Mexico:
1. US policy outlook is more confident but Mexico is still vulnerable to uncertainty. Exports directed to the US accounted for over 80 per cent of total exports and 26 per cent of GDP in 2015. As a result, Mexico’s economy is exposed to developments in the US.
2. Investment is likely to contract in 2017 but the medium-term outlook is still strong. Mexico benefits from significant foreign investment (FDI), which accounts for 44.3 per cent of GDP, with over 40 per cent of all inflows coming from the US.
3. The effect of lowered remittances would be limited. Remittances from Mexican workers in the US amount to about US$25 billion annually; the largest amount in the world. Impediments to these transfers, such as a potential US tax, would decrease the net value of remittances, hurting consumer confidence and private consumption. The effect on the total economy however would, however, be limited, as remittances account for just 2.2 per cent of Mexican GDP.
4. US policies are likely to bring some pain to Mexico but economic fundamentals are strong. Due to its proximity, close economic ties, and dependence on the US market, Mexico stands to lose more than most other countries from radical shifts in US foreign and trade policies.
The softening stance of the US administration toward Mexico ahead of NAFTA negotiations has eased concerns of financial destabilisation and/or a recession for now.
“Atradius’s outlook for the Mexican economy is one of slowing growth, largely driven by policy uncertainty in the US,” said Mr Hoppe.
“As a result, payment delays and insolvencies will increase in 2017.
“But in our baseline scenario, we do not expect the ‘Trump effect’ to be overly destabilising. Thanks to effective measures to reduce external vulnerability and diversify trade partners, GDP growth is expected to pick up in the medium term, driven by a recovery in investment.”