Emerging markets LatAm: ‘wait and see’ on Mexico investment

Investment into the US’s neighbour remains robust despite the threat to the trade agreement.

One of US President Donald Trump’s campaign promises was to renegotiate the North American Free Trade Agreement between Canada, Mexico and the US on terms that are more beneficial to American workers and businesses. In the event his country can’t get the deal it wants, Trump said he would terminate the treaty entirely.

A Fitch Ratings report predicts that if the US withdraws from NAFTA “the Mexican economy would likely face immediate risks from short-term market volatility and a confidence shock”.

“This would result in lower investment, potential disruptions and dislocations in trade and reduced growth,” the report reads. “Foreign direct investment flows would likely be affected.”

However, businesses with large operations in Mexico reliant on exports to the US are not rushing to model out what the cost would be to repatriate those operations, says Foster Finley, a managing director at AlixPartners.

“People are telling us they’re going to take a wait-and-see attitude because they’ve been faked out a couple of times in the recent past,” Finley says.

That is not to say people are not concerned. Cate Ambrose, president and executive director of the Latin American Private Equity & Venture Capital Association, says NAFTA negotiations are “definitely top of mind” for private markets investors.

“If I’m a private equity firm, I might slow down my acquisition process or my due diligence pipeline for businesses that may have substantial reliance on, say, Mexican-manufactured goods for the US market base,” Finley says.

Despite the concerns, in late May the Bank of Mexico raised its growth expectations for 2017 to between 1.5-2.5 percent from 1.3 -2.3 percent. The 2018 GDP growth forecast remained at 1.7 -2.7 percent.

LAVCA continues to see strong interest in Mexico.

“The very practical consideration here is the Mexican peso has depreciated. Clearly it’s been a favourable exchange rate environment for international investors,” Ambrose says.

“At the same time as you have the political uncertainty that could cause certain types of investors to be more cautious, you have other drivers that are making the market more interesting. Needless to say the FX effect is also favourable in terms of Mexico as an export market.”