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Mexican Corporates Credit Implications Depend on NAFTA Outcome

Amid the ongoing North American Free Trade Agreement (NAFTA) negotiations, Mexican corporates are finding ways to adapt to the current economic climate. So far, credit impacts are minimal but could take a negative turn if NAFTA talks end with its discontinuation.

According to a Fitch Ratings report on May 16, corporates have spent the past decade distributing capital through acquisitions—an effort that protects their credit quality and proved effective last year. NAFTA negotiations began in 2017 at a time when borrowing was "robust" but "competitive" in Mexico. If NAFTA dwindles, Fitch said, the sectors most at risk are retail, real estate, transportation and energy. 


"The effect on individual issuers, however, will vary on factors, including what portion of their production facilities are overseas, particularly those that are in the U.S., and the effectiveness of their debt and cash flow currency hedging," Fitch noted. 


NACM Economist Chris Kuehl, Ph.D., said some kind of NAFTA deal is close, citing four possible outcomes for the agreement between the U.S., Canada and Mexico. The first "quick but partial" option would focus on the automotive sector, while the second option would include extending the deadline beyond May 17 into late summer. Kuehl described the third option as a continuation of "hyperbole and drama." 


A "total rewrite" is yet another option but probably the least likely since it's not supported by Canada or Mexico, he said. 


"It has been the stated goal of the Trump administration that a new deal be in place by the end of the year and there needs to be time for Congress to get in the game," Kuehl said. "The odds right now seem to favor option two, with the assertion that deals on automotive and agriculture be promulgated." 


-Andrew Michaels, editorial associate

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Wednesday, 29 June 2022