Citibanamex
can’t catch a break. It has been hammered by a fraud scandal, had its
management shaken up and weathered a lengthy period of uncertainty over whether
its parent would hang a for-sale sign above it. The Mexican lender looked to be
putting those worries behind it last year, when Citigroup in the
Then the
election changed things again. With the future of trade and foreign policy
towards
murky, Citi’s chief financial officer told investors the bank might adjust the speed of the
planned investment.
John
Gerspach said Citi was “broadly constructive” on
investment by 2020. Yet his suggestion that cash infusions will be slower at
the start of that period highlights the depth of concern across the emerging
markets concerning the policies of Donald Trump. The US president-elect
campaigned vigorously on an agenda of protectionism, vowing to rip up trade
agreements and slap tariffs on imports. His most extreme campaign-trail
promises would spell economic and political chaos for
whole.
Observers
don’t expect the administration that takes power on January 20 to push ahead with all of its campaign rhetoric.
But sifting which actions will be implemented and which won’t is difficult, especially given Trump’s unconventional communications style. The president-elect granted a smattering of interviews and no press conferences in
the two months after the election, preferring a one-way transmission through
Twitter and speeches to supporters. That left little opportunity to interrogate
the incoming leader on what might become substantive policy and what can be
ignored as bombast.
That
lack of clarity has immediate implications. Investors took fright in the days
after the election, dumping assets, pushing bond spreads wider for Latin
American issuers and forcing some, such as Argentine airport operator AA2000, to
postpone new deals.
Even as
Trump’s cabinet takes shape, many questions remain. Can the US’ free trade
agreement with
be replaced with a 35% import tariff? Even if it could be, would the new
administration take a punt on such a radical measure?
For
Latin America’s companies, banks, governments and investors, the answers to those
questions will shape the political, economic and financial course of the region
in the years ahead.
“The
knee-jerk reaction to the election result has been negative as markets try to
discern whether we’re going to get candidate Trump as president, or whether his
bark is worse than his actual bite,” says Sean Newman, emerging market senior portfolio
manager at Invesco. The asset management firm had $202 billion of fixed income assets under management at the end of November.
“What
is beginning to emerge is that the president-elect’s tweets are not going to be
his deeds. The negative ramifications on trade may be a bit more nuanced versus
broad-brushed. And the policies around fiscal spending may not be as big bang
as markets may have priced in.”
Jumping to conclusions
Financial
markets reacted quickly, with investors yanking some $6 billion of portfolio
cash from the eight biggest emerging markets in the days after the election,
according to the Institute for International Finance.
But the
trade relationships between the
and
economies have most at stake. Two-way trade in goods and services between the
is worth around a trillion dollars a year. With
according to the office of the US Trade Representative (USTR). In just a few months,
that trade flow could be entirely unraveled.
As president, Donald Trump could pull the
Trade Agreement (NAFTA). In the most extreme case, he could give notice of
doing so on January
20, and the treaty could dissolve six months later.
If that
unusual scenario unfolded, says Kelly Hardy, partner at law firm Hogan Lovells,
“the existing tariffs would stay in place for a year. That being said, a
president does have the ability to impose tariffs” up to 50% higher than those
in place in 1975. Further, the USTR would have broad
authority under presidential direction to introduce higher tariffs under
special circumstances, such as in retaliation to unfair trade practices.
In
early December, Trump reiterated his enthusiasm on a campaign trail promise of
a 35% tariff on companies that move production out of the
If
NAFTA is renegotiated — the more likely scenario — then all bets are off. Former
President Bill Clinton needed congressional approval to pass the treaty when it
was originally negotiated, and some observers believe President Trump would
need the same green light to reopen negotiations. Others believe that now that
the treaty is in force, different rules apply.
“My main concern is the uncertainty that will be generated, and the length of that
uncertainty,” says a Mexican trade specialist, regarding a potential
renegotiation. “Ideally, the parties can commit to saying, we won’t renegotiate
the whole of NAFTA, just certain chapters.”
Michael
Shifter, president of the Inter-American Dialogue, says he expects the incoming
administration to stop short of completely walking away from NAFTA.
“We do
still have a Congress, and it’s in Republican hands. Although there is an
anti-trade faction, most of them — like [House Speaker] Paul Ryan and [Senate Majority
Leader] Mitch McConnell — are pro-free trade. There are limits to what Trump
can do from the executive branch and Congress is going to play an important
role.”
He
adds, though, that returning to the negotiating table may not be all bad for
way to look at it — at least potentially — is as an opportunity to address
problems that were neglected by both governments as they charged ahead with
this free-trade framework.”
has been a shrewd negotiator in the past. It slapped $2 billion of retaliatory
tariffs onto US imports in 2009, after the
into the country in contravention of NAFTA. The new duties, dropped once the
advance with the cross-border trucking program, were carefully targeted at
products important to the backers of the ban, according to Hogan Lovells.
“We
have very skilled and sophisticated negotiators on both sides of the border,”
says Hardy. “Just as our trade people understand the Mexican market, the
Mexican trade representatives understand our market and which industries really
count on trade with
Policy vs show
Yet the
question remains: of Trump’s rhetoric, what is going to become reality? How to
sift the bluster from an actual change in the prevailing wind?
“My
instinct is that we are likely to see a lot of symbolism and theater,” says
Shifter. He points to Carrier Corporation’s decision to continue production of
air conditioning units in the
The company reversed course on its plans to move a plant to Mexico after
discussions with the president-elect.
“It was
a way to show that he was serious about what he said in the campaign,” says
Shifter. “But a gesture is not a policy.
“Some underlying
policy issues will probably change at the margins. But there will be a heavy
dose of symbolism to show supporters that he’s carrying out his promises.”
Others
expect more substantial changes.
“I do
expect a policy shift,” says the trade specialist. ”I think they will realize
that these one-by-one interventions will show diminishing returns, and they
will want a policy shift. Some kind of revision or renegotiation of NAFTA is
unavoidable.”
Yet the
unpredictability of policy has real implications. Economists have already cut
their expectations for Mexico’s economy this year, saying a weaker peso, higher
funding costs and tough fiscal targets could constrain growth.
And it’s
not only
Despite the rise of
partner for the whole region,” says Ramón Aracena, chief economist for Latin
America at the IIF, which predicts weaker growth across
America
“The
systemic country. Whatever they do regarding policy has implications for
everyone — even if you are far away.”
He indicates
the Pacific Alliance countries in South America —
as a case in point. “They all have free-trade agreements with the
That’s been a main asset: if you invest in
you can export to the
If that’s not clear, it’s going to affect investment.”
Others
are less pessimistic.
“Colombia
is one country that could be on the periphery of being hurt by a more
aggressive protectionist policy in the
says Jim Barrineau, co-head of emerging markets debt at Schroders, which managed some $487 billion of assets at end-September.
“The
rest of the region, though, is tied more to global growth. One reason why Latin
America, aside from
has done pretty well is that the market expects that
from the protectionist fears, that is always a good thing for
America
Others
cite indications that the new administration will plow money into
infrastructure. That could spur demand for metals exported by Andean countries like
Diplomacy asunder
In the
months between the election and Trump’s inauguration, the uncertainty about the
US’ new relationship with emerging markets inched higher as the president-elect cast aside established rules of engagement.
Yet by
mid-December, some hope was emerging that Trump might act more benignly toward Mexico
than indicated during the campaign, after news broke that he had held a meeting
with telecom billionaire Carlos Slim.
“I
think it’s a sign that the worst kind of policy fears are not going to be
realized,” says Schroders’ Barrineau. “Carlos Slim certainly has a big stake in
the Mexican economy and keeping
integrated with the
Just the fact that Trump wants to meet him suggests there’s a dialogue there.
“When
people are speaking, generally you don’t get the most negative outcomes.”
Trump’s
approach towards other parts of
is similarly unclear. He had a reportedly amicable call with Argentine
President Mauricio Macri in mid-November. Both parties denied rumors that the
pair had discussed a Trump business development in
Whether
the new administration will continue the rapprochement towards
that was launched by outgoing President Barack Obama is unclear — although
Trump all but broke out the champagne when Fidel Castro passed away. “Today, the
world marks the passing of a brutal dictator who oppressed his own people for
nearly six decades,” Trump said in a statement on the transition team’s
website.
Studying the tea leaves
With
much of the cabinet nominated by mid-December, analysts were able to get
greater clarity on the policy direction of the new administration. Many were
private sector executives.
“He
was supposed to be the big anti-banks guy, the big anti-markets guy. And what
has he done? He’s hiring hedge fund managers and Goldman Sachs bankers,” says
Jan Dehn, head of research at Ashmore Group, a specialist emerging markets firm managing some $55 billion of assets at end-September.
Dehn says
he expects only small tweaks to NAFTA as a result. “The truth is, he’s going to
ease financial conditions. He’s going to repeal parts of Dodd Frank. He’s going
to make it easier for banks to lend money.”
The USTR was one important nomination that remained pending in
mid-December. One name circulating as a possible nominee was Dan DiMicco, Trump’s
trade adviser on the campaign and part of the USTR transition team. A staunch
opponent of free trade, the possibility of DiMicco’s appointment had some
Mexican officials worried.
At the
same time, the commerce secretary nominee, private equity investor Wilbur Ross,
suggests that the new administration will advance on Trump’s campaign trail
pledge. Ross, as reported by US media, described NAFTA as a “logical starting point”
on the roster of the new administration’s priorities.
Markets
will be looking closely at further signposts in the weeks ahead. Trump’s
inauguration speech on January 20 is
top of the list, followed by any pronouncements that may come in the days
after. The State of the Union address in March should fill in any remaining
gaps.
Going to extremes
The financial
markets’ immediate reaction to the election was to bet hard on US growth —
spurred by fiscal stimulus — and against the fortunes of developing economies.
The $6 billion pulled from emerging market portfolios in the days after the
several times greater than the investor flight during the 2013 taper tantrum
and the shock from Chinese currency moves in mid-2015, according to the IIF.
Spreads
on Latin American bonds widened around 30 to 60 basis points. New equity and
bond issues alike were put on hold.
For contrary
investors, the exaggerated market reaction offered a buying opportunity.
“I
think Mexico has been oversold,” says
Dehn, who suggests that
region has been “beaten up” more than other emerging markets. “I don’t think
that we will see really draconian policies toward
election rhetoric.”
Dehn
expects the incoming administration to focus overwhelmingly on the domestic
economy in its first two years, in the hope of growing its majority in the
Senate in mid-term elections to get through other policy changes, such as
ending Obamacare.
“We’ve
probably already seen the extent of the foreign policy initiatives, which was basically
to end the Trans-Pacific Partnership. There was no surprise in that.”
Others
are more cautious. Invesco’s Newman agrees that US policy towards emerging markets
is unlikely to be as negative as Trump indicated during the campaign, but reserves
judgment until he sees how events will unfold.
“We
still have to go through a period of price discovery and, on a day-to-day basis,
evaluate who the policy nominees are for various key roles,” he says
Upside
and downside risks exist, says Schroders’ Barrineau. An aggressive stance on
protectionism or weaker-than-expected US growth would both be bad for Latin American investors, he says.
“If we
get a more reasonable Trump administration,
will outperform the rest of emerging markets, just because we’ve had this fear about it.”
Access to capital tightens
On the
other side, Latin Americans wanting to raise capital internationally “should
fasten their seatbelts,” says one head of debt capital markets for
the first window that comes available and to have a plan B.”
Those
back-up strategies might include setting up lines of credit with banks, looking
to local markets for funding and, for sovereigns, seeking contingent support
from organizations such as the IMF. Asset sales and operational efficiencies
might be another strategy, says the banker, who did not want to be quoted
suggesting clients look beyond debt capital markets for funding.
Mexico’s
Pemex heeded the advice in December, when it stepped into the bond market with
a triple-tranche bond
issue. The state-owned oil company has been a regular issuer of such
deals in Januaries past. Its decision to get in sooner suggests it wanted to
avoid any further bad news that might hit the market around the inauguration.
The
timing — which also came days after OPEC opted to limit oil production — paid
off nicely for Pemex. The borrower raised slightly more and paid a lower yield
than it had in its $5 billion January 2016 bond sale.
Chief
financial officer Juan Pablo Newman says the change in administration in the
have any negative impact on the oil company. “The hydrocarbon sector isn’t included
in NAFTA. It wasn’t included from the start, so it avoids any volatility.”
Recent participation by
oil companies in Mexico’s deepwater oil and gas auction is a sign of continued
interest from the northern neighbor, he adds.
Manufacturing
is more likely to be hurt by changes to US trade policy, says Thomas
Mueller-Gastell, a partner at law firm Ritch Mueller in Mexico City.
International
capital markets activity by Mexican companies may slow down because of the
volatility of the peso and rising interest rates, he says. “I suspect local
capital markets will perhaps become more active.”
As for
direct investment, both foreign and domestic, plans that are already in place will
likely continue, says the chief executive of Mexico’s export-import lender,
Bancomext.
“What we
have gauged from our clients is that they continue with their plans,” says
Alejandro Díaz de León. “As you can imagine, some of these investments are
really long-term investments that take time to execute. Of course the
uncertainty may have an effect on some of the early versions of new projects. To
a large extent, on the ongoing projects, we continue to see a lot of interest
and a lot of appetite for our financing.”
Cheerleading for NAFTA
Mexican
President Enrique Peña Nieto was heard in late 2016 to be planning a meeting
with the US president-elect ahead of the January 20 inauguration,
as drumming up support for bilateral trade on both sides of the border looked
to be more important than ever.
“There’s
a lot of incomplete information about NAFTA for the
Peña Nieto could mobilize American businesses that are clear winners of NAFTA
to give the administration a more balanced view of what’s going on.”
Bancomext’s
Díaz de León is already on message. “Global value chains in North America are
very much intertwined,” he says. “Going forward, even in a world where
globalization per se is downplayed and where the local agenda regains some resonance,
I do believe that regions matter. And I do believe that North America is going
to continue to be a strategic region for all its members. It’s a region where
we produce things together and we can sustain strong competitiveness levels and
compete with other regions.”
At the
same time, investors expect Mexican policymakers to be in crisis mode in 2017,
especially with last year’s disappointing growth numbers.
“We
believe the country needs a catalyst,” says Invesco’s Newman. December’s energy
auctions may kick-start some activity, he says, but overall it will be tougher
for consumption-led growth to continue. Slower economic expansion will make
Mexico’s debt load look heavier and raise concerns over ratings downgrades. “We
believe Mexico needs some additional policy measures for a broad-based growth
plan so that the economy can continue to grow,” says Newman.
Adding
to the external uncertainty for
is a change of leadership in two key positions. Finance Minister Luis Videgaray stepped down —
ironically, after receiving criticism for having orchestrated a meeting between
Peña Nieto and candidate Trump — and was replaced by José Antonio Meade, who had
previously held the job. In December, Central Bank Governor Agustín Carstens announced his
departure after six years, to lead the Swiss-based Bank for International
Settlements. A replacement has not been named.
Investors
are broadly relaxed about the changes. Invesco’s Newman says the two
institutions are filled with astute policymakers — and that anyway it may be
time for a new hand on the wheel.
“Mexico
has a deep policy bench,” he says. “The changes are certainly not negative but
they do open the door for a fresh approach and a different set of perspectives
on the challenges the country faces.” LF