Conjoncture

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Conjoncture // January 2019  
economic-research.bnpparibas.com  
The election of Mexico’s new president, Andres Manuel Lopez Obrador, raises numerous questions. Although the new president and his  
team enjoy strong popular support, investors are worried about the policies he is proposing for the next six years. Some of the  
proposals do not seem to be compatible with his promise to maintain fiscal discipline, central bank independence and economic  
pragmatism in general. Several existing reforms are being called into question, notably in the energy sector. Given Mexico’s strong  
economic fundamentals, these contradictions are unlikely to have much of a short-term impact. In the medium term, in contrast, the big  
risk is that they could jeopardise the government’s capacity to maintain fiscal discipline, keep the energy sector afloat and preserve  
investor confidence.  
Barely six months after his election as president of Mexico, Andrés  
Manuel López Obrador’s first actions are already raising numerous  
questions. AMLO, as he is commonly known, was elected on 1 July  
018, but even before he was sworn in on 1 December 2018, his  
On 1 July 2018, Andrés Manuel López Obrador, head of the left-wing  
Morena party (National Regeneration Movement), largely won Mexico’s  
presidential election with more than 53% of the vote. AMLO, as he is  
commonly known, was sworn in on 1 December 2018 for a 6-year non-  
renewable term.  
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administration made several radical decisions, including the launch of a  
vast anti-corruption campaign, a referendum on the construction of an  
airport near Mexico City, which resulted in the project being scrapped,  
and the cancellation of several initiatives introduced by the previous  
government, notably energy sector reform. He also raised the minimum  
wage and announced several measures to reduce inequality. While  
affirming his intentions to respect his campaign promises concerning  
economic policy, AMLO and his team also reiterated their commitment  
to maintaining the central bank’s independence, presented a budget  
that complies with the fiscal discipline seen in recent years and signed a  
new trade agreement with the United States and Canada.  
A coalition comprised of the Morena party and several small left-wing  
parties won the legislative elections held on the same day, winning  
majorities in both the House of Representatives and the Senate. When  
the parliamentary session opened in early September, the coalition had  
strengthened its position, with a total of 310 deputies and 69 senators  
(
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out of a total of 500 and 128, respectively). This is the first time since  
997 that a coalition has won absolute majorities in both houses.  
Moreover, the opposition is fragmented and the next elections  
provincial and local) will not be held until 2021, which leaves the ruling  
In general, Mexico benefits from solid macroeconomic and financial  
fundamentals, but the country is still vulnerable to a change of investor  
sentiment. The political upheaval triggered by AMLO’s election and the  
lack of clarity concerning his economic policy proposals have left  
investors dubious.  
(
coalition a lot of manoeuvring room to implement reforms.  
Mayor of Mexico City from 2000 to 2005, and then the anti-  
establishment candidate defeated in the presidential elections of 2006  
and 2012, the victories by AMLO and his Morena party were no small  
feat. The political alternative they proposed won strong popular support  
and reflects the clear rejection of Mexico’s two traditional parties, which  
have shared power for almost a century. The Institutional Revolutionary  
Party (PRI), which was created after the 1910 revolution and became  
the centre-right party in the mid-1980s, has governed the country from  
Although consumer stimulus packages and the anti-corruption fight will  
continue to ensure strong popular support for the government, investors’  
loss of confidence and the lack of clarity over economic policies is  
eroding short-term growth prospects. The government’s credibility has  
been eroded when it comes to meeting its commitments, notably in  
terms of fiscal discipline. Uncertainty also shrouds the future of energy  
sector reform, which has played a key role in the country’s political life  
in recent years. Fortunately, the country’s external vulnerability is  
relatively low.  
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929 to 2000, and then from 2012 to 1 December 2018. The  
conservative National Action Party (PAN) ruled Mexico from 2000 to  
012.  
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AMLO largely owes his electoral success to his promise to fight  
corruption and insecurity, even though similar promises have been  
made by all of the candidates elected since the mid-1980s. All of the  
reforms implemented so far have failed, and inequality has worsened.  
Felipe Calderon (PAN member elected in 2006) launched a drug war  
that flopped, while Enrique Peña Nieto (PRI member elected in 2012)  
transferred law enforcement to the military, which proved to be  
ineffective. Their mandates were marred by corruption scandals,  
collusion between law enforcement agencies and drug dealers, and  
repression of the press and opposition leaders, which fuelled the fierce  
rejection of the two traditional parties. On Transparency International’s  
Corruption perception index  
Score, out of 180  
160  
140  
120  
100  
80  
60  
40  
20  
0
1
corruption perception index (CPI) , Mexico’s ranking has deteriorated  
continuously since the early 2000s (chart 1).  
2001 2003 2005 2007 2009 2011 2013 2015 2017  
Chart 1  
Source: Transparency International  
During the campaign, AMLO and his team proposed a “fourth  
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transformation , which has proved to be a large-scale project that goes  
far beyond the fight against corruption and insecurity. The idea behind  
this transformation is to complete the country’s modernisation through  
proposals to overhaul the State and the institutional framework. It  
promotes “equitable economic growth, which is essential for reducing  
inequality, extreme poverty and insecurity.” One key proposal, becarios  
si, sicarios no, would give scholarships to the 2.3 million Mexican youth  
who are neither students nor employed. The measure would be  
accompanied by a minimum wage increase, starting in 2019 for  
companies located along the US-Mexican border, and then for all  
companies by 2024. The transition team proposed to raise the minimum  
wage to 101 pesos (MXN) per day (USD 5.3). Currently, Mexico’s  
minimum wage is MXN 88 (USD 4.6) per day.  
The July-to-December transition period was marked by several  
contradictory signals. Immediately after his election, AMLO softened his  
positions and announced that he intended to adopt a “pragmatic”  
economic policy. He pledged to respect the central bank’s  
independence, fiscal discipline and the trade agreements signed by the  
country. To prove this point, AMLO and his transition team lent their  
support to Enrique Peña Nieto during trade negotiations, even though  
he previously opposed the North American Free Trade Agreement  
(
NAFTA) and the opening of Mexican trade. He approved the signing of  
the Canada-United States-Mexico Agreement (CUSMA) on 30  
November 2018, the new trade agreement that replaces NAFTA.  
Generally speaking, the transformation is built around several priorities,  
one of which is to reduce the country’s external dependence,  
particularly with the United States, by accelerating export diversification  
and supporting the agricultural sector, in order to increase food self-  
sufficiency. Guarantied prices would be set for certain farm products.  
At the same time, however, he began to push through several campaign  
promises. A referendum was held in late October on construction of  
Mexico City’s new airport, which resulted in the project being cancelled,  
even though the financing was already in place and nearly a third of the  
airport had already been built. According to AMLO, such projects are  
Although these measures have not been spelled out in detail yet, it will natural sources of corruption and embezzlement. He sees the  
be hard to meet all of their objectives simultaneously within the course cancelation of the airport project in its existing form as the first sign of  
of a single term, and without triggering budget overruns. This raises the country’s fight against corruption.  
questions about the social and economic policy that will actually be  
AMLO also announced that referendums would be held frequently over  
followed during the legislative session. A priori it will be hard to  
the course of his mandate. He wants to modify the constitution to  
reconcile all these different goals at the same time.  
expand the scope of referendums, notably to include fiscal issues,  
which raises fears about budget overruns and respecting fiscal  
discipline.  
1
The CPI index ranks 180 countries and territories according to their perceived level  
of corruption in the public sector based on the assessments of private and public  
sector experts.  
The “fourth transformation” is a term chosen by AMLO to designate the fourth  
Lastly, in early November, the Morena party presented a new measure  
to the Senate to provide a very strict framework for banking  
commissions. A week later, Morena withdrew the draft bill, and AMLO  
pledged not to reform the economic and financial sectors for at least the  
first 3 years of his presidential term.  
2
development phase of the Mexican Republic. The first three transformations were  
th  
Mexico’s independence in the early 19 century, the Madero presidency, which  
launched the country’s modernisation following the revolution of 1910, and the  
Lazaro Cardenas presidency from 1934 to 1940, which continued the country’s  
modernisation by developing infrastructure, industry, education and public healthcare.  
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During the transition period, investor sentiment towards the new  
administration eroded rapidly. Equity and bond indexes plunged at the  
end of October, and the Fitch rating agency gave Mexico’s sovereign  
rating a negative watch. These trends reflect growing fears about the  
risk of budget overruns, but also about the future of reforms adopted by  
the previous government, notably the energy sector reform.  
Exchange rate & equity market trends since 2018  
Exchange rate (inverted scale)  
Equity index  
1
5
6
30 September:  
NAFTA 2.0  
28 October :  
52 000  
1 July: election of AMLO  
Mexico City airport  
referundum  
1
50 000  
48 000  
46 000  
44 000  
42 000  
40 000  
38 000  
17  
18  
19  
20  
21  
Since his inauguration on 1 December, AMLO has begun making  
contradictory signals again. He first affirmed that his goal was to end  
MXN/USD  
Equity index  
neo-liberalism” and “cronyism, which for him were synonymous with  
22  
Jan 2, 2018  
Apr 2, 2018  
Jul 2, 2018  
Oct 2, 2018  
Jan 2, 2019  
corruption, of confusing economic and political power, and in the end,  
greater inequality. He also pointed out the failure of the previous  
administration’s reforms, particularly in fighting corruption and the  
energy sector reform.  
Chart 2  
Source: Mexican Stock Exchange, Central Bank of Mexico  
At the same time, however, AMLO announced that he would not  
prosecute former leaders for corruption. In terms of security, he plans to  
make the militarisation of public security forces part of the constitution, Mexico’s strong economic fundamentals will facilitate the  
which counters his claims to give priority to defending human rights.  
implementation of the president’s programme. The vast reforms  
launched in 2014 have bolstered the economy’s resilience to external  
shocks. The IMF now estimates Mexico’s potential growth rate at 3-4%  
a year, compared to average growth of only 2.3% a year between 2003  
and 2013.  
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AMLO says he will carry out a “peaceful transformation, ordered, but  
profound and even radical”. Yet his project presentation suggests a  
presidency characterised by a significant increase in federal power, and  
especially in the role of the president.  
Since 2015, inflation and the unemployment rate have held at low levels  
and real wages have risen, despite falling commodity prices, tense  
relations with the United States and a series of natural disasters (see  
table 1).  
The government presented a list of 100 economic proposals. These  
closely follow his campaign promises, including overhauling the  
healthcare system (which is to resemble “a Scandinavian healthcare  
system” by the end of his presidency), constructing 100 new universities,  
doubling the amount of retirement pensions, and the announcement of  
several large-scale infrastructure projects to improve the country’s  
attractiveness and competitiveness (construction of two new refineries,  
the upgrading of existing refineries, and the construction of the Maya  
train to promote tourism). He also presented a new proposal to reform  
the energy sector. All these proposals are to be financed by a  
Real GDP  
y/y, %  
4.0  
3.5  
3.0  
2.5  
2.0  
1.5  
1.0  
0.5  
0.0  
government austerity” programme, symbolised by the sale of the  
presidential aircraft on inauguration day, and by the savings generated  
from fighting corruption.  
At the same time, AMLO also renewed his pledge to respect the central  
bank’s independence and to maintain a sufficiently high primary surplus  
to stabilise the public debt at current levels (47.6% of GDP in 2017).  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
Chart 3  
Source: EIA, IMF, Fed, INEGI  
In early January, AMLO changed course again, this time closing several  
pipelines (to prevent the theft of fuel) and ensuring direct distribution of  
petrol by the State. Despite broad popular support, this measure  
triggered petrol supply shortages in several regions. Worse, it further  
eroded investor sentiment.  
3
Reforms were launched in energy, competition, telecommunications, taxation, the labour  
market, education and financial services, with the goal of boosting growth to 5% a year.  
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Greater resilience to external shocks  
Change (%)  
Q2 2000 Q3 2002  
Q2 2008 Q2 2009  
Q2 2014 Q1 2016  
Oil prices (WTI)  
-17.7  
-4.8  
-9.5  
1.7  
-42.9  
-15.5  
-10.6  
-0.6  
-65.6  
-2.9  
0.3  
US industrial output  
Mexican industrial output  
Employment in Mexico  
3.0  
Table 1  
Source: EIA, IMF, Fed, INEGI  
Monetary policy is deemed to be credible. The public deficit and debt External conditions will also be less favourable. The trade deficit will  
have been reduced in recent years and fiscal revenues are less probably widen slightly further, mainly due to the sluggish US  
dependent on the oil business. The strong performance of non-oil manufacturing sector and ongoing trade tensions with the United States,  
exports (combined with the inflow of remittances from workers abroad) despite the signing of CUSMA. The new trade agreement still has to be  
has helped reduce the current account deficit to a moderate level. ratified by each of the three member countries, which will take some  
Despite major portfolio investment flows, the country still has a solid time, straining investment and FDI in 2019, at least during the first half  
external position (in terms of both solvency and liquidity).  
of the year.  
Yet growth figures have deteriorated recently. Worries about  
renegotiating the trade agreement with the United States and  
uncertainty over the presidential election strained investment and  
private consumption in 2017, and public investment was scaled back  
under the fiscal austerity plan introduced by the previous government.  
Real GDP slowed to 2%, from 2.9% in 2016. As a result, growth is  
barely expected to surpass 2% in 2018, despite more buoyant private  
consumption. Moreover, growth is not expected to accelerate again  
before 2021, according to the latest IMF estimates.  
Investor sentiment  
125  
120  
115  
110  
105  
100  
Business confidence index  
Investment outlook  
95  
Private consumption will continue to be the main growth engine,  
bolstered by a very dynamic labour market, the previous government’s  
social policies and remittances from workers abroad. Yet these factors  
will not offset the cancelation of the Mexico City airport project nor  
investors’ loss of confidence, which is bound to strain private investment.  
Even if the infrastructure projects are launched as promised, and the  
public-private partnerships actually work, it will take time to set them up,  
which means they are unlikely to have an impact on growth in 2019.  
The renewed confidence reported after the elections has been  
squandered (chart 4).  
90  
85  
80  
2015  
2016  
2017  
2018  
Chart 4  
Source: Banxico  
Inflation & the central bank's key policy rate  
9
8
7
6
5
4
3
2
1
0
CPI, y/y %  
CPI, Core, y/y %  
Policy rate  
Although growth is slowing, it will also be important to monitor the  
central bank’s capacity to contain inflationary pressures in the quarters  
ahead. The Board of Governors raised the key policy rate to 8.25% in  
December, the highest level in more than 10 years. Inflationary  
pressures, which have been present since the elimination of energy  
price subsidies in early 2017, are likely to persist at least through the  
first half of 2019, driven by January’s minimum wage increase, as well  
as higher prices for petrol, fruit and vegetables.  
Upper limit  
Lower limit  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
Chart 5  
Source: Banxico  
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Mexican oil production  
Millions of barrels/day  
3
3
.6  
.4  
Introduced in 2013 and 2014, the previous government’s energy sector  
reform ended a 75-year monopoly in the country’s oil and gas sector.  
The main goal of the reform was to promote an open, competitive  
market between public and private companies throughout the sector, in  
the upstream, intermediary and downstream segments. The strategy  
consisted of opening the capital of the two state-owned companies  
3.2  
3.0  
2.8  
2.6  
2.4  
2.2  
2.0  
(
Pemex, the national oil company, and CFE, the electricity utility) and  
1.8  
.6  
1
attracting private investment. A core part of the reform was an auction  
system to attribute oil fields to private companies. More than a hundred  
contracts have been signed since 2015.  
2
005 2006 2007 2008 2009 2011 2012 2013 2014 2015 2016 2018  
Chart 6  
Source: Petroleos Mexicanos  
After several failed attempts since the 1990s, this reform was  
considered to be a success. Yet the downturn in commodity prices in  
Oil prices  
2
014 severely handicapped its implementation. The budgets of the two  
Mexican Mix, price/barrel  
1
20  
state-owned companies, Pemex and CFE, were scaled back sharply  
and their debt has swollen significantly since 2015. Blocks were not  
auctioned to private investors (including non-residents) until 2016, and  
continued in 2017 and 2018. Altogether, the previous administration  
hoped to attract USD 200 bn in oil sector investment over 20 years, and  
to boost production levels to more than 3 million barrels a day.  
100  
8
0
60  
4
0
0
0
Production continued to plunge, dropping from 3.5 million barrels a day  
in 2005 to less than 2 million barrels today (see charts 6 and 7). Faced  
with a shortage of investment, the sector was unable to develop the  
necessary production capacity to offset the decline in oil production at  
Cantarell, Mexico’s largest oil field.  
2
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Chart 7 Source: Petroleos Mexicanos  
Yet the previous government’s commitment played a key role in the 0.7% of GDP). Oil exploration and production would also be stepped up.  
auctions success and in lifting investor confidence, notably among The goal is to increase production to 2.4 million barrels a day by the end  
foreign investors. This is why AMLO’s proposals have raised so much of his mandate in 2024.  
concern since his presidential campaign was launched.  
The government has relatively little credibility when it comes to  
AMLO affirmed that when it comes to energy, his priority is national implementing all these measures. The majority of these proposals must  
sovereignty. His intentions still need to be spelled out in detail, but on still be spelled out and financed. The resources needed to implement all  
the whole, they mark a step backwards, with the exception of the the proposed measures are close to 1% of GDP, in addition to the  
development of renewable energy. AMLO intends to cancel the reform investment already planned in Pemex (see next section).  
in its current form, provide greater financial support for the two state-  
owned companies (Pemex and CFE), and limit the stakes of both  
foreign and domestic private investors in the sector.  
Auctions of oil blocks were also halted (the fourth series was to have Unsurprisingly, the 2019 budget proposal presented on 15 December  
begun in February 2019). Private companies selected during previous complies with the fiscal discipline that has been observed in recent  
auctions must complete their pledged investments within the next three years: 1/ the new administration’s first budget proposal was largely  
years or have their blocks withdrawn. Concerning the oil sector in prepared by the outgoing administration, and 2/ after the turmoil of  
particular, he announced that six existing refineries would be upgraded October and November, the government naturally wanted to be  
and a new refinery would be built (construction costs are estimated at  
reassuring. Parliament adopted the budget proposal without any major  
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modifications in the last week of December, and the budget was well  
received by investors and the rating agencies.  
Public deficit  
%
of GDP  
Balance, Primary  
Balance, Total  
2
1
For the year 2019, the government is targeting a primary surplus of 1%  
of GDP, slightly higher than the 0.7% expected in 2018. The 2019  
deficit is projected at 2.5% of GDP, very close to the expected 2018  
deficit of 2.4% of GDP. The medium-term outlook calls for the primary  
surplus to hold at about 1% of GDP through 2024, and the debt ratio to  
be fairly stable at 45% of GDP.  
0
-1  
-
-
2
3
The government’s 2019 targets are based on reasonable assumptions:  
real GDP growth is estimated at 2%, inflation at 3.4% and the  
USD/MXN exchange rate at MXN20 (annual average). Even the  
assumption for oil prices is rather conservative, at USD 55 a barrel.  
-4  
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Chart 8  
Source : INEGI  
Revenues will fall, but the decline is expected to be limited (21.1% of  
GDP in 2019, compared to 21.7% of GDP in 2018). The new  
administration has pledged not to raise taxes. Moreover, on  
Public debt  
3
1 December the president decreed that more than 40 municipalities  
%
of GDP  
Domestic debt  
External debt  
Financial cost (rhs)  
50  
45  
40  
35  
30  
25  
20  
15  
10  
5
0
2.4  
2.2  
2
near the US border would benefit from a lower VAT rate (to 8%, vs 16%  
for the rest of the country) and income tax cuts (by two thirds).  
Spending will also be cut back to 23.2% in 2019, from 23.7% of GDP in  
2
increased on AMLO’s new list of “priorities (social welfare spending will  
increase by the equivalent of 1% of GDP), but to the detriment of other  
items. Certain ministries will be hit by major budget cuts (for example, -  
018. In keeping with his campaign promises, spending will be  
1.8  
1.6  
1.4  
1.2  
1
30% for the environment ministry, -29% for industry, -25% for  
communications & transport, and -9% for the interior ministry).  
Resources for Pemex and CFE, the two state-owned energy sector  
companies, will increase by 14% and 8%, respectively (relative to the  
2
007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Chart 9 Source : Secretary of Finance & Public Credit  
2
018 budget), mainly to finance capital expenditure.  
Second, the budget could be strained by several “overlooked” items,  
such as the costs associated with the cancellation of the Mexico City  
airport project, the upgrading of Pemex refineries, the installation of  
hydroelectric power plants, and the conversion of CFE’s thermoelectric  
power plants. Third, the reallocation of spending on behalf of state  
agencies and state-owned companies in the energy sector creates a  
major new source of vulnerability for public finances given the capital  
expenditure necessary to increase production (oil-related revenues still  
account for nearly 20% of the total).  
Lastly, contrary to initial announcements, social spending programmes  
will no longer be launched simultaneously, but rather one after the other.  
Some of the announced projects actually englobe existing projects that  
were financed by the previous government’s budget, which explains  
why they do not engender additional spending.  
On the whole, considering the solid macroeconomic fundamentals that  
the new administration inherited, there seems to be little risk of budget  
overruns in 2019. The debt profile (47% of GDP in 2017) is favourable,  
with non-resident holdings of public debt limited to only 30% of the total,  
a figure that has tended to decline in recent years. Similarly, the share  
of debt denominated in foreign currencies is also moderate, accounting  
for about 16% of GDP. The forex risk associated with the depreciation  
of the peso against the dollar or with a large share of non-resident  
investors during the rollover of existing debt seems relatively low.  
In particular, the government’s determination to increase capital  
expenditure at Pemex and CFE could require recurrent capital injections  
in the two state-owned companies in the years ahead. Moreover,  
additional resources allocated to the state-owned companies could  
prove to be too small to halt the decline in production at Pemex and the  
contraction in oil reserves. Oil production dropped by 9% and 8%,  
respectively, in 2017 and 2018, and the decline could continue in 2019-  
Yet several questions persist in the medium term. First, the previous  
government already made significant spending cutbacks over the past  
two years, leaving little manoeuvring room for further cuts.  
2
020. Pemex’s financial situation is likely to remain (very) fragile in the  
years ahead, especially if it continues to increase its capital expenditure.  
1
3
Conjoncture // January 2019  
economic-research.bnpparibas.com  
Current account deficit & FDI  
of GDP  
Net FDI flows  
%
Current account balance  
4
3
2
1
0
1
2
3
Although the Mexican economy boasts solid macroeconomic  
fundamentals on the whole, the country is still vulnerable to a reversal  
of investor sentiment. The proposed policies lack clarity, especially  
concerning the future of the energy sector reform. This could tarnish the  
country’s attractiveness for foreign investors. Consequently, external  
vulnerability risks increasing during AMLO’s mandate.  
-
-
-
Nonetheless, Mexico’s external vulnerability is not a real source of  
concern in the short term. Over the past 10 years, the current account  
deficit (which averaged 1.7% of GDP between 2010 and 2017) was  
usually covered by FDI inflows (which also averaged 1.7% of GDP  
between 2010 and 2017). This tendency is expected to continue (chart  
2
007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Chart 10  
Source: Central Bank of Mexico  
Hot money  
1
0). In the medium term, we expect the current account deficit to level  
Stock of foreign investment in government local bonds  
off at about 1.5% of GDP. It will continue to be financed by FDI. Mexico  
has substantial reserves, roughly USD 175 bn in December 2018 (about  
4
Hot money  
strictly speaking  
Stock of foreign portfolio investment in equity  
Forex reserves  
USD bn  
months of imports). Even if investor sentiment were to deteriorate  
350  
300  
250  
Forex reserves + IMF's Flexible Credit Line  
rapidly, Mexico has the necessary resources to meet its liabilities.  
Since 2008, Mexico has also had access to a Flexible Credit Line (FCL)  
with the IMF , an immediately available contingent credit facility of  
nearly USD 88 bn. This credit line provides additional assurance that  
the country can withstand any shortages of capital flows.  
4
200  
1
50  
00  
1
5
0
Fears about future trade relations with the United States (the US  
accounts for nearly 80% of Mexican exports) have eased significantly  
since the final signing of CUSMA, which ended more than a year of  
tense relations between the three countries during which the US  
0
2
009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Chart 11 Source: Central Bank of Mexico, IMF  
threatened to definitively withdraw from the trade agreement. The prevent NAFTA’s advantages from spreading to products originating in  
details of the new agreement have not been released yet and it is still non-member countries, with only minor transformations being made in  
difficult to evaluate its impact on Mexico.  
North America. In the automotive sector, 40% of production must also  
come from factories that pay a minimum wage of at least USD 16 an  
hour.  
The main changes are likely to pertain to the automotive sector. The  
“rules of origin” were changed: for goods to circulate freely without  
tariffs, the percentage of a vehicle’s components manufactured in North Imposed by the United States, this measure targets Mexico directly so  
America was increased to 75%, from 62.5% previously. The goal is to  
that vehicle assembly can be repatriated to the United States. Yet it  
might not suffice: vehicles that do not meet this criterion will still be able  
to enter the US by paying a tariff of 2.5% (based on the World Trade  
Organisation’s most-favoured nation clause). This means it would still  
be attractive to assemble vehicles in Mexico before exporting them to  
the US. Moreover, a special clause will partially exempt Mexico and  
Canada from the punitive tariffs stipulated in article 232, which the US  
president can call on when invoking “national security” concerns. In  
practice, this means that Mexico can export a quota of 2.6 million  
vehicles to the US without risking punitive tariffs. This measure limits  
the growth potential of Mexico’s automotive industry, since total exports  
to the US accounted for 2.3 million vehicles in 2017.  
4
Flexible credit lines were designed to respond to the financing demands of a  
country that presents very solid economic policies and a track record for preventing  
and resolving crises. This instrument was created as part of the reform engaged by  
the IMF to modify the conditions under which it grants loans to countries which  
encounter cash flow problems, by adapting to their specific situation and needs. To  
date, three countries have called on FCL: Colombia, Mexico and Poland (until 2017).  
None have drawn on the credit lines, but the FCL provides these countries with  
precious assurance and assistance to strengthen market confidence during periods  
of growing risks.  
1
4
Conjoncture // January 2019  
economic-research.bnpparibas.com  
The final agreement contains a radical change in the “sunset clause”  
proposed by the United States, which would have “automatically”  
terminated the trade agreement every five years, if the signing partners  
are unable to agree on the terms of renewal. In the end, the new treaty  
will be valid for 16 years and can be revised after six years, a period  
beyond the Trump presidency, even if he were to win the 2020 elections.  
In general, the Mexican economy has solid macroeconomic  
fundamentals, but the country is still exposed to a change in investor  
sentiment. AMLO has launched a two-pronged policy, with one part  
designed to reassure investors (central bank independence;  
commitments to avoid eroding public finances and to support the free  
trade agreement, despite campaign promises to the contrary) and the  
other to uphold his campaign promises (fight corruption, reduce  
inequality, reform the energy sector), but he will not be able to conduct  
both over the course of his mandate.  
The lack of clarity over energy sector reform raises fears of  
backtracking, which risk straining public finances and discouraging  
investors. From a broader perspective, any signs of backtracking could  
damage the government’s credibility and undermine the country’s  
attractiveness.  
Completed on 25 January 2019  
helene.drouot@bnpparibas