The below is a look at the strengths, weaknesses, opportunities and threats present in Mexico at the moment, as the new administration comes into office, and over the coming 12 months.
Strengths
- The participation of foreign investors and multi-national companies in the Mexican markets is growing despite increased volatility
- The economy is showing strong fundamentals with low levels of FX denominated debt and historically high levels of FX and stabilisation fund reserves
- International investors are using the Mexican peso as a hedge against increasing volatility across other Latin American currencies
- Strong fundamentals and credit growth amongst Mexican corporates have kept credit spreads from drastically widening despite increased macroeconomic risks
- Mexican corporates have been refinancing liabilities and securing new capital over 2017 & Q1 2018, leaving them in a strong position to face incoming volatility in the H2 2018
- Any drastic policy reversals under the new President will be limited by Congress
Weaknesses
- Liquidity and regulatory constraints are restricting the development of the local capital markets
- Mexican issuers don’t have unrestrained access to the international bond markets, having to wait for windows of opportunity to open up to access better rates and pricing
- The buy and hold investment strategy adopted by local fund managers is preventing the improvement of a liquid secondary market
- Weak rule of law and lack of good governance remain key challenges for Mexican corporates seeking better conditions from foreign lenders and investors
Opportunities
- The government’s strategy of selling Credit Default Swaps to help foreign investors hedge against volatility has been an effective tool and will sustain investor demand in the long-term
- Mexico’s automotive and affiliate industries are expected to rebound in Q4 once the NAFTA renegotiation is finalised (as US Midterms approach)
- The Mexican real estate and property markets are heating up, with strong supply driven by lower prices and demand for expansion
- Asian investors and banks, looking for asset and geo diversification, are becoming increasingly interested in Mexican credit and have already participated in transactions
- Project finance activity is expected to resume once the uncertainty of the Presidential elections fades, with rates improving and new projects coming online, especially on the energy side
- Following the success of recent issuers, the increasing popularity of the green bond market is opening access to new liquidity for Mexico’s projects
Threats
- With recent yield curve trends suggesting the US Fed will accelerate the pace of monetary tightening, capital outfl ows and a lower peso are likely to push pricing up for Mexican issuers in the near term
- The newly elected president plans to drastically change Mexico’s economic policy and put an end to strategic projects, creating uncertainty and aversion to new investment
- Rising geo-political tensions and the threat of a global trade war are negatively impacting credit flows, depressing investor appetite and increasing risk premiums
- Prolonged global political economic volatility is raising the possibility of rate increases on long-term securities
