22 July 2019
The Mexican peso has depreciated against the greenback by about 3 percent over the past month. Photo: Reuters
The Mexican peso has depreciated against the greenback by about 3 percent over the past month. Photo: Reuters

Mexican dance to the tune of NAFTA and elections

US House Speaker Paul Ryan set May 17 as the deadline for the new NAFTA proposal to be submitted to congress under the trade promotion authority (TPA), the law covering congressional approval of such deals. TPA says the president must give congress and the International Trade Commission (ITC) 90 calendar days’ notice prior to signing an agreement. It also must give the ITC 105 days to assess the deal.

No agreement has been reached. While the US, Canadian and Mexican negotiating teams have pointed out that some wiggle room probably exists to submit NAFTA 2.0 to the current US congress, there is currently no official calendar of upcoming negotiations. Rather it seems involved parties have established an ongoing dialogue.

The US seems also willing to compromise on the depth of changes. Treasury Secretary Steven Mnuchin announced a few days ago that President Donald Trump is considering approving a “skinny” version of NAFTA, ie, one without major structural changes, that does not require congressional approval. The term “skinny” might also imply that sensitive topics such as automotive sector rules would not be subject to a major overhaul.

An agreement in the coming weeks, even if it is a watered-down version of the text under negotiations, would underpin our long-standing positive outlook for NAFTA. So as long as the deal reached resembles the ongoing trade agreement and its cancellation is no longer a factor, investors should react positively to trade relationships normalizing. However, the risk remains that NAFTA negotiations stay inconclusive through the end of the year, extending uncertainty, hurting investment and making the deal vulnerable to the whims of a new Mexican government and a new US congress.

But even if NAFTA 2.0 is finalized soon, risk aversion will probably remain high in light of Mexico’s intensifying political environment. Poll results – which could still change as candidates try to capture the support of 20 percent of voters we call the “no-respondents” – suggest a likely victory for Andrés Manuel López Obrador (AMLO). Trends in social media coincide with these results. Surveys also show AMLO’s party Morena leading gubernatorial preferences in Mexico City, Morelos, and Chiapas.

Morena’s strong network of partnerships nationwide could also translate into a new federal congress with significant AMLO representation – perhaps even control with the help of its allies. On this, a poll published by newspaper El Economista and Consulta Mitofsky on 24 May showed a Morena at the forefront for federal congress. According to this survey, the Morena-led coalition would hold 236-298 lower house seats out of 500 to be disputed. As for the senate, Morena could secure 51-73 out of 128 seats.

Polls gauging the effects of the second presidential debate, which took place on 20 May, should be available in the next few days. The market will look for evidence of narrowing gaps between AMLO and the current second place, Ricardo Anaya. It will also assess the probability of Morena controlling congress.

While not yet our base case, an AMLO presidency without congressional checks and balances is not priced in by financial and currency markets. If the AMLO-Morena dominance were to prevail, past reforms could be rolled back or blocked and the status quo could be shaken.

In the above uncertain outlook, we believe Mexico will remain volatile. However given the recent weakness in Mexican assets and the peso, we recommend a neutral exposure to Mexican equities and the MXN in our emerging market (EM) dedicated portfolios. We remain underweight Mexican bonds in US dollars in our EM credit model portfolio as we could see a gradual fiscal deterioration under an AMLO presidency.

– Contact us at [email protected]


Regional Chief Investment Officer, Emerging Markets, UBS

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