Donald Trump’s victory in the US presidential elections could lead to higher funding costs for corporate borrowers in Latin America, particularly in Mexico, but the impact may not last long.
“The election has important implications for dollar-based borrowers, such as Pemex and its subsidiaries, but at first blush it doesn’t seem to have hurt them substantially,” a banker in New York told LatinFinance.
With the Mexican peso approaching its lowest levels since the currency crisis in 1994, payment risks will likely rise for local borrowers with dollar-denominated loans, while some lenders may stop granting credit, the banker said. “Financing will become more expensive, and we’ll maybe even lose some banks along the way, but I don’t think it will have the same effect as 1994,” he said.
The Mexican peso sank as low as MXN20.78 to the dollar after Trump clinched the US presidential race but it recovered to roughly MXN19.75 by midday on Wednesday, still down around 8% on the day.
The payment risks for Mexico’s state-owned utility company CFE may go up, but not enough to jeopardize the financing of natural gas pipelines that are under development between Texas and northern Mexico, the banker said. “Those pipelines really make a lot of sense. The economics are very strong and people want to do them,” he said.
Howard Energy Partners (HEP) and Grupo Clisa recently financed the Nueva Era pipeline system, with five international banks – MUFG, Santander, SMBC and Société Générale – supplying $353m in credit. Another developer, Fermaca, got a $622m loan from nine banks in October to finance the construction of a pipeline. Now it is aiming to close another $500m loan from the same group of lenders by the end of November.
A second banker said it was still too early to measure the impact of Trump’s victory and added that he was not sure if funding costs would rise over the long term for Latin American borrowers. “We can take lessons from the post-Brexit markets. There was an initial negative reaction and then everything smoothed over,” he said. “I think cooler heads will prevail.”
He also said that Trump’s policies may involve less regulations for the oil and gas industry, which could lead to more pipeline projects between Texas and Mexico. “If you have projects that make sense for both nations, they’ll still go through and they’ll still need financing,” he said.
A project finance banker in New York said lenders will likely be more cautious in the short term, especially in Mexico, but he added that the US presidential results will probably have a minimal impact in the long run. “We’re relatively confident that things won’t change that much,” he said.
The number of projects that need financing might fall, the cost of capital might rise and some banks could stop providing dollar-denominated loans to infrastructure projects in Latin America, but the market will not come to a halt, he said. “It won’t be positive, but it won’t be majorly negative either.”