EMTA SPECIAL SEMINAR: OUTLOOK FOR MEXICO
Monday, February 12, 2018
One Bryant Park, 2nd Floor Auditorium
(42nd St. and 6th Ave.)
New York City
2:45 p.m. Registration
3:00 p.m. Keynote Address
“NAFTA, the Mexican Presidential Election, and US-Mexico Relations”
Albright Stonebridge Group
Former member, Mexican NAFTA Negotiation Office
4:00 p.m. – Panel Discussion
Carlos Capistran (Bank of America Merrill Lynch) – Moderator
Gerardo Rodriguez (BlackRock)
Alberto Ramos (Goldman Sachs)
John H. Welch (HSBC Securities (USA) Inc.)
Chris Kelly (OppenheimerFunds)
5:00 p.m. – Cocktail Reception
Additional support provided by Goldman Sachs and HSBC Securities (USA) Inc.
Registration fee for EMTA Members: US$95 / US$695 for Non-members.
We regret that this event is not open to members of the press.
Former Mexican NAFTA Negotiations Team Member Discusses Trade and Elections at EMTA Seminar
NAFTA renegotiations, the upcoming Mexican elections, Banxico rate hikes and the MXN exchange rate were among the main discussions at EMTA’s Special Seminar on the Outlook for Mexico. The event was hosted by Bank of America Merrill Lynch on Monday, February 12, 2018. Goldman Sachs and HSBC provided additional support.
Antonio Ortiz-Mena, Senior Vice President at Albright Stonebridge Group and formerly a member of the Mexican NAFTA negotiation team, delivered keynote remarks. Ortiz-Mena noted that, at this point, it was unclear who would win the Mexican presidential elections. In mid-February, Andres Manuel Lopez Obrador (AMLO) had a ten-point lead in many polls, almost exactly where he stood before losing the last two elections. Corruption and violence will be issues in the election, with the unequal distribution of wealth also a factor; the center and North of Mexico are wealthier than they were at the onset of NAFTA, while the Southeast has stagnated.
Ortiz-Mena discussed the party platforms. Each of the major parties has adopted an anti-corruption stance. “AMLO seems to be saying that because of his personal credibility in fighting corruption, voters should trust his administration; but “there is no real public policy strategy to address it,” Ortiz-Mena stated. As for PRI candidate Jose Antonio Meade, he has a “very difficult—if not impossible—balancing act,” trying to adhere closely to the PRI to garner the full support of its base, while needing to expand his support to those put off by the widely held perception that the PRI is a corrupt party. Finally, it was not really clear what the PAN/PRD candidate Ricardo Anaya stood for, having at first proposed a guaranteed minimum income, but lately focusing on the fight against corruption. He is regarded by some as too self-assured and ambitious, and could thus be unreliable in terms of policies and political alliances. All three major candidates had similar policies vis-à-vis NAFTA, and despite press speculation, if AMLO wins, “the risk [of an end to the accord] is not with AMLO, it is with Trump.”
Ortiz-Mena feared that AMLO could adopt misguided economic policies, including a new version of import substitution and illogical infrastructure projects. He cautioned that energy reform could be affected, noting the occasional unscripted AMLO comment suggesting even more slowdown of the energy reforms than previously feared. However, Ortiz-Mena expressed greater concern over political factors such as governability, as no party will have a majority in either house. There was also possible political unrest if AMLO were to lose by a small margin.
The end result of the NAFTA talks also remained opaque, and such uncertainty had hindered investment into Mexico. Ortiz-Mena dismissed rumors that, following US-Canadian tensions during the 6th round of talks, the US and Mexico would conclude a bilateral deal first. He stated that such a scenario is highly unlikely and Mexico will strive to maintain trilateral focus.
On US-Mexican relations, two-thirds of Mexicans now have a negative view of the US, with “President Trump uniting Mexicans in a way that we rarely see.” Any significant deportation of “Dreamers” from the US would make it difficult for a Mexican president to maintain a “business as usual approach” towards its northern neighbor, and could affect areas such as intelligence sharing, or cooperation on immigration issues from Central America.
Based on all this uncertainty, “we’ve been advising clients not to make any hasty decisions.there is a risk that the political situation could change dramatically.” However, Ortiz-Mena declared that, regardless of who wins the next election, “we need infrastructure.” He added that existing infrastructure has been developed to promote trade with the US, but that there was a great need to invest in Mexico’s southern states.
Bank of America Merrill Lynch’s Carlos Capistran moderated a panel of Mexico experts following Ortiz-Mena’s remarks. In setting the scene, Capistran observed that NAFTA adds sort of an unofficial seal of approval to Mexico, and that such “investment security” is a comparative advantage Mexico has over other LatAm countries.
John Welch (HSBC Securities USA Inc.) reminisced that, in the 1980 election, discussions had been focused on, “opening markets, not closing them.” He reviewed several possible end results, and noted that, while President Trump can end NAFTA by himself, he cannot rescind the implementing legislation passed by Congress. The debate over the local content requirement was “raw protectionism in my view…and will lead to a lot more bureaucracy.” Welch highlighted Mexico’s natural advantage of two ocean coasts, so it could pursue trade routes other than those focusing on the North.
“It will be impossible for them to finish the discussions on time because of the complexity of the negotiations,” affirmed BlackRock’s Gerardo Rodriguez (previously Mexico’s Undersecretary of Finance and Public Credit). Concurring, Alberto Ramos (Goldman Sachs) noted that trade agreements usually take “years, not months.” He added that the US trade deficit with Mexico was not the result of nefarious industrial dumping or currency manipulation, “rather, it is the natural and expected trade equilibrium given market-driven supply-chain integration and the structural US savings-investment imbalance.” He cautioned that a US withdrawal from NAFTA could, in fact, exacerbate the US trade deficit with Mexico, arguing it could lower Mexican unit labor costs in dollar terms because of lower local wages and the expected depreciation of the MXN. Chris Kelly (OppenheimerFunds) emphasized that Trump was unlikely to withdraw from NAFTA and that negotiations would likely continue into 2019.
The panel also reviewed the Mexican presidential race. Rodriguez agreed with Ortiz-Mena that AMLO remained the candidate to beat, although he has a “high base and low ceiling.” He criticized the candidate as having “bad ideas and a bad team,” and that he was personally “authoritarian and impulsive….which will make him a less powerful candidate.” As for Meade, he would face the headwinds of an anti-PRI sentiment that, “was hard to overestimate.” Anaya remained the biggest question mark, “we have no real idea of his economic team or his ideas.”
Because of Mexico’s one-round election, Ramos believed that AMLO had a good chance of winning the presidency; his opponent Meade might be, “the right candidate in the wrong party given the significant erosion of the PRI political brand in the eyes of voters and AMLO was unlikely to immediately adopt broad anti-market policies, “but he could do some microeconomic mismanagement that would lead to macroeconomic imbalances, as in Brazil under Lula.” Welch would not rule out an Anaya victory, despite little being known about the candidate.
Monetary policy was also a panel topic. In Kelly’s view, Banxico had built credibility during the difficulties of 2017, which included inflationary pressures caused by the hurricane’s effects on food and energy prices. “We had thought they could be reaching the end of the hiking cycle—perhaps one more pre-election hike….but now with the US [tax cut] stimulus, they could remain in defense mode.” Ramos concurred, and with a house call of 7 additional US rate hikes in 2018-19, Mexico’s Central Bank will have little room to cut rates. Rodriguez criticized former Banxico leadership for mismanaging their communication, and for being too loose when the economy was growing above potential, and then tightening too much when the economy was already decelerating
The panel concluded with a discussion of MXN fair value. Ramos believed that the peso could rally to 17 per USD if the outcome s of the NAFTA talks and the presidential race were market-friendly, or overshoot to as low as 23-24 the case of worst-case results, before stabilizing to 20/21. Rodriguez believed the peso was “very, very cheap…but it is hard to have conviction with the NAFTA overhang.” In contrast, Kelly acknowledged he was short the currency, and moderator Capistran also maintained a bearish view, “Mexico is now a net oil importer, and the country is poorer, so they need to have a lower real FX rate.”