Mexican Economy Strong Despite NAFTA Uncertainty

With Canada, Mexico and the US in the middle of some of the most important trade talks of the century, there is a great deal of economic uncertainty in Mexico at the moment, Alexis Milo, Chief Economist for Mexico at HSBC, said during the Mexico Automotive Summit 2017 at the Sheraton Maria Isabel Hotel in Mexico City on Thursday.

Since Mexico’s manufacturing and automotive industries depend a great deal on US trade, Milo said that, at the moment, “there are more questions than answers.”

Discussing the country’s economic outlook and scenarios for the Mexican automotive industry, he said that there was a significant drop in confidence caused by the results of the US elections at the end of 2016. Still, there are many encouraging indicators for the Mexican economy. “In 2Q17, there was a lot of optimism due to the limitations of the Trump Effect,” he said. “In fact, 2Q17 and 3Q17 were characterized by the strong entrance of capital to Mexico.”

As exports have risen, Mexico’s trade balance has recovered and the country’s deficit has decreased. In the last two years, the most important manufacturing exports were seen in the automotive sector. Milo said that contained inflation expectations mean no more interest rate hikes and that fiscal policies to consolidate public finances means the debt-to-GDP ratio is expected to drop to 28 percent by the end of 2017.

Although wage remittances have dropped this year, Milo said this was largely expected since December 2016 was a record month for remittances from the US to Mexico. But unemployment rates in the country have dropped, from 4 percent in July 2016 to 3.4 percent in July 2017.

He added that a renegotiation of the treaty could bring a great deal of benefits to Mexico, and provided a comparison with the Chinese manufacturing industry. “Manufacturing salaries in China are double that in Mexico, meaning in terms of human capital, Mexico is much more attractive for investment,” he said. But many of the manufacturing sectors in China are vertically integrated, which gives the country a greater advantage. “If Mexico were to follow this model, there would be much higher production levels.”

The NAFTA renegotiations revolve around three main topics: new industries that were not included in the original treaty; labor conditions, wages and competitiveness; and rules of origin and local content.

And even though the threat of a NAFTA cancellation provoked a negative effect in exchange rates, over the long term Milo expects interest rates to remain stable. Moreover, more than 60 percent of Mexican government bonds are invested internationally, therefore diversifying risk.

According to Milo, Mexico’s role in the US trade deficit is highly exaggerated, and renegotiation or cancellation of NAFTA would actually provide little benefit to the US. “Only 8 percent of the US trade deficit is related with Mexico. The deficit with Japan and China is much larger,” he said. “Mexico could disappear and the US would not solve its