Investors are bracing for the outcomes of Mexico’s presidential election in July and the renegotiation of the North American Free Trade Agreement (NAFTA).
According to Darin Batchman, a portfolio manager for emerging market corporate debt at Stone Harbor, investors are questioning how the two factors are going to interact. Three major candidates are running for president, and some people doubt that Andrés Manuel López Obrador can win the election, although he holds a lead in the polls.
“We do not know the outcome and we have no impact on that,” Batchman said at LatinFinance‘s Roundtable in Mexico City. “So we have to be very clear ahead of time and how corporates will react in the context [of the outcome of elections and NAFTA negotiations].”
NAFTA’s future remains unclear, but lately a lack of fiery rhetoric from the White House has given people feel confidence that the negotiations can come up with a revised agreement.
Frank Kelly, Deutsche Bank’s global coordinator and head of government and public affairs for North America and Latin America, said he was “bullish” that NAFTA would remain intact.
“Trump’s rhetoric has changed considerably,” he said. “I cannot remember the last time he tweeted something negative about NAFTA.”
Kelly’s optimism comes as the White House learns just how heavy the US trade volumes with Mexico are.
“There has been a concerted effort to present reports on how much trade the US does with Canada, and it is much more with Mexico,” Kelly said. “Suddenly, there is an awakening that the NAFTA relationship is more weighted to Mexico.”
Corporates bank on fundamentals
Mexican companies, by and large, stand on sound financial footing to hold up against the coming volatility, Batchman said.
Fibra Uno, for example, completed debt and equity sales in late 2017. Ahead of any coming volatility, the real estate investor termed out debt and sold shares, leaving it with just MXN1bn ($53.1m) in maturing debt between now and 2020.
CFO Gerardo Vargas said Mexican businesses have prepared for the election year and many have minimized their financing needs.
“I think this is something you see every six years,” Vargas said. “This time, however, maybe people were giving a higher weight to bad scenarios because of NAFTA negotiations.”
Jorge Sánchez, head of corporate and investment banking at Deutsche Bank in Mexico, attributed the behavior of Mexican companies in the capital markets to the overall maturity of the country’s financial sector. But companies, just like investors, are bracing for upcoming volatility, he added.
“Mexican corporates have acted responsibly,” he said. “They understand it is a volatile year and are well-positioned.”