Sandra Beltrán
Vice President and Senior Analyst
Moody’s Investors Service
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View from the Top

Liquidity: The Most Important Asset During Global Uncertainty

By Sofía Hanna | Fri, 09/23/2022 - 11:49

Q: Given Mexico’s response to the uncertainty caused by inflation and global conflicts, how resilient is the country and how quickly will it recover from a downturn?

A: Due to the nature of globalization, many large businesses in the country are already diversified internationally. They are more resilient not necessarily due to the conditions created in Mexico but because of the country’s privileged geographical position.

 

Moody’s annual liquidity reports have consistently shown low risk in Mexico, especially since 2008. Even today, as the country deals with a complex economic situation, credit risk has not deteriorated as much as expected, at least among the companies we cover. These companies have become more adaptable to their environment.

 

Q: How does Mexico compare to its peers in the region?

A: Our report for the region shows that companies rated in Chile, Argentina, Brazil and Peru generally have low liquidity risk. We are currently evaluating Colombia and it is still too soon to make statements about this country. Risk is clearly low in Mexico, thanks to its diversified business lines. Businesses have positive momentum after the many challenges that came with the COVID-19 pandemic, but we expect a more challenging economic situation in 2023. Inflation keeps increasing, commodities prices are still high, supply chain issues continue and Mexico has limited economic growth. Under these circumstances, many companies will have to revamp their strategies to maintain their numbers.

 

Q: With the recent increase in fuel prices, how does the future of low-cost airlines look?

A: Airlines that emerged from the Covid-induced debt restructure reorganized their business model by incorporating more energy-efficient alternatives into their fleet. They also benefit from flexible contracts when acquiring aircraft. As a result, if they want to cut capacity, they will not be forced to continue paying for these leases.

 

Q: If the US enters a recession, forecasts say this could negatively affect the Mexican market. Could factors such as nearshoring limit such effects?

A: Nearshoring is a reality and it is clear that Mexico sits in a privileged position. However, the political uncertainty in the energy sector and the USMCA might dissuade some companies from investing. This unreliability has not let businesses take as much advantage of Mexico’s privileged geographical position.

 

There is definitely a large opportunity in nearshoring. But while the manufacturing sector is growing, global uncertainty does not allow us to know how it will unfold.

 

Q: Given the current circumstances in Latin America, how feasible is it to continue to pursue investments in ESG objectives?

A: From a corporate perspective, we will likely see more scrutiny regarding the actions companies are taking and how they are mitigating their ecological impact. We recently saw Coca-Cola Company’s bottlers' involvement during the drought in Monterrey, Nuevo Leon. Companies will most likely redefine their strategies regarding ESG. Companies will have to continue improving these measures while raising awareness of their actions and contribution to the communities in which they operate.

 

Q: Would this be a good time for Mexico to diversify its main exporting destinations given the global and regional geopolitical context?

A: Mexico has been successful in diversifying its revenue sources, not only through exports but by expanding its geographic footprint. This is a big step toward resilience. For major companies, diversification and liquidity can help them in the current global context.

 

Q: How has the importance of sustainability and the growth of various technology trends influenced Moody’s analysis?

A: One year ago, we started publishing a formal framework to analyze a company’s exposure to ESG risks, which are important for credit evaluation. We make an effort to make our framework very clear to all the actors involved. In times like these, our analyses focus on company liquidity, especially because these businesses can face one or two challenging years.

 

Moody’s Analytics provides financial intelligence and analytical tools to support client growth, efficiency and risk management objectives. The company’s expertise in risk, expansive information resources and innovative application of technology helps today’s business leaders to confidently navigate an evolving marketplace.

Sofía Hanna Sofía Hanna Journalist and Industry Analyst