Emerging

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EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
Mexico  
Relief  
The USA, Mexico and Canada have completed negotiations on a new trade deal to replace NAFTA, which has been in force since  
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994. The signature of an agreement in principle is good news for Mexico, as it will calm uncertainties about future trade links with  
the USA. On the domestic front, the new government is preparing to take power on 1 December. The reforms proposed are already  
some distance from the statements made during the campaign. Most notably, the incoming President has committed to maintaining  
the independence of the central bank, fiscal discipline and the country’s trade agreements.  
NAFTA 2.0  
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- Forecasts  
On 30 September 2018, the USA, Mexico and Canada announced  
the completion of negotiations on a new trade deal: the United  
States-Mexico-Canada Agreement (USMCA). The signature of an  
agreement in principle brought to an end a year of strained  
discussions between the three countries and removed the USA’s  
threat of a unilateral withdrawal from any deal. The new agreement  
will replace the North American Free Trade Agreement (NAFTA),  
which was signed in 1992 and came into force in 1994.  
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016  
2017 2018e 2019e  
Real GDP growth (%)  
2.3  
2.0  
1.5  
3.0  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
2.8  
6.0  
4.7  
3.5  
-3.6  
-2.2  
-2.0  
-1.6  
Public debt / GDP (%)  
47.9  
-2.5  
47.6  
-1.0  
46.8  
-1.2  
46.5  
-0.8  
Current account balance / GDP (%)  
External debt / GDP (%)  
38.9  
38.3  
36.9  
163.0  
4.1  
36.7  
161.0  
3.9  
Forex reserves (USD bn)  
167.7  
165.0  
Details of the final deal are not yet known, but the main changes are  
likely to affect the automotive sector. ‘Rules of origin’ have been  
changed: to be imported without tariffs, the components  
manufactured in North America included in a vehicle must amount  
to 75% of its content, from 62.5% previously. The aim is to ensure  
that the benefits of NAFTA do not extend to products coming from  
non-member countries which are subject only to minor modifications  
after being imported into North America. Again in the automotive  
sector, 40% of production must henceforth come from factories with  
a minimum wage of USD16/hour. This measure, which was  
imposed by the USA, was directly targeted at Mexico, in a bid to  
bring vehicle assembly back to the USA. It could, however, prove  
insufficient: vehicles that do not meet these criteria can still be  
imported into the USA subject to a tariff of 2.5% (under the WTO  
Forex reserves, in months of imports  
Exchange rate USDMXN (year-end)  
4.8  
4.6  
20.7  
19.7  
18.2  
17.8  
e: BNP Paribas Group Economic Research estimates and forecasts  
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- Relative stability of the peso over the last 6 months…  
MXN per USD  
2
5
0
5
0
5
0
2
1
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‘most-favoured nation’ clause). It will therefore still be advantageous  
to assemble vehicles in Mexico before exporting them to the US. In  
addition, a special clause could give Mexico and Canada a partial  
exemption from the punitive sanctions set out in Article 232, which  
the US President can trigger for reasons of ‘national security’. In  
practice this means that Mexico can continue to export a quota of  
2014  
2015  
2016  
2017  
2018  
2.6 million vehicles to the USA without running the risk of incurring  
Source: Banxico  
punitive tariffs. This development limits the scope for growth in the  
Mexican automotive industry, as total vehicle exports to the USA  
stood at 2.3 million vehicles in 2017.  
The signature of an agreement in principle will allow a significant  
reduction in concerns over future trade relations between the USA  
and Mexico (Mexican exports to the USA account for nearly 80% of  
the country’s total exports). However, it will not be certain that the  
new treaty will come into force until it has been ratified by all three  
countries. Ratification by the USA appears to be the most  
problematic of the three: it is unlikely to take place until early 2019.  
In the final analysis, therefore, the treaty is unlikely to come into  
force until mid-2019 at the earliest.  
Other outcomes from the negotiations will see the inclusion of a  
chapter on trade in digital products, the revision of the chapter on  
trade disputes, the opening of the Canadian dairy market and, most  
importantly, a significant change to the ‘sunset clause’ promoted by  
the USA, which would provide for the ‘automatic’ cancellation of the  
trade agreement every five years if the three partners are not able to  
agree on a renewal of its terms. Once it comes into force, the treaty  
will last for sixteen years, and will be reviewed every six years.  
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EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
2019: a year of change  
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- …and of FDI inflows  
Whatever happens, the promise of a new trade deal is good news  
for Mexico, and improves short-term economic prospects whilst  
limiting concern about the change of government that will take place  
on 1 December.  
Parent company account  
New FDI  
Reinvestment  
6
5
4
3
0
USD bn 4-q rolling sum  
This said, the President Elect, Andrés Manual López Obrador,  
commonly known by his initials AMLO (who led the coalition based  
around the MORENA national regeneration movement he founded  
in 2011) has already changed his stance since his election on 1 July  
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2018. Most notably, he has committed to maintaining the  
independence of the central bank, fiscal discipline and the country’s  
existing trade agreements. In addition, the proposed reforms  
announced thus far have been more market-friendly than the more  
left-leaning proposals put forward during the campaign. The  
roadmap laid out by AMLO and his team sets a number of targets,  
concerning reductions in crime; increases in the minimum wage;  
increasing investment and major infrastructure projects; and the  
stabilisation of government debt (which represented 47.6% of GDP  
in 2017). The aim is to boost GDP growth to 4% per year by the end  
of his term in 2024. For the time being, this change of tone has been  
welcomed: indices of consumer and investor confidence have rallied.  
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10  
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Source : Banxico  
Announced reforms are ambitious  
The first two reforms announced relate to fiscal and energy policies,  
which are closely linked. Concerning fiscal reform, the target set is  
to “maintain a primary surplus that will allow the level of debt to be  
maintained unchanged”. The financing of social security and  
infrastructure spending will therefore need to be covered by a  
reallocation of existing expenditure and a mobilisation of the private  
sector. AMLO is also planning a programme of ‘republican austerity”,  
which will generate savings by: centralising government  
procurement (thus reducing corruption and generating economies of  
scale); reviewing a large number of social security programmes (for  
example in order to eliminate overlap between them); and reducing  
the government’s operational budget. At the same time, energy  
reform will be based on four main points: increasing oil output;  
renovating six existing refineries; building two new refineries; and  
modernising hydroelectric power stations.  
The new team is backed by majorities in both Congress and the  
Senate, following the victory of AMLO’s coalition in July’s elections.  
Since the beginning of the parliamentary session in September, the  
coalition’s position has been strengthened, with 252 registered  
Deputies (of a total of 500), from 190 following the elections (to the  
detriment of the smaller parties). Moreover, the opposition is  
fragmented, which would seem to give the ruling coalition  
considerable leeway in introducing its proposed reforms.  
In pursuing his ambitious programme, the President will be helped  
by Mexico’s good economic fundamentals: the major reforms  
introduced in 2014 have dampened the country’s vulnerability to  
external shocks and boosted the investment rate. The opening of  
the oil sector, and even more importantly the telecoms sector, to  
private investment has contributed to growth acceleration since  
For the time being, the exact details of the implementation of these  
measures are not known, but it would appear that expenditure has  
been underestimated (as in the case of the renovation of refineries),  
whilst the savings have been overestimated. Several goals appear  
particularly ambitious and difficult to put in place in the 2019 budget.  
2015 (to an average of 2.7% per year between 2015 and 2017). The  
IMF now estimates potential growth at between 3% and 4% per year,  
compared to average growth between 2003 and 2013 of 2.3% per  
year. Monetary policy is credible, the government’s deficit and debt  
have been reduced in recent years, the dependence of fiscal  
receipts on the oil sector has declined and the good performance of  
exports (as well as remittance flows from expatriate workers) has  
reduced the current account deficit to a modest level. Lastly, despite  
the size of portfolio investment flows, Mexico’s external position (in  
terms of both solvency and liquidity) remains solid. It is also worth  
noting that neither the strained relationship with the USA since the  
election of Donald Trump nor the concerns raised by the election of  
AMLO have weakened the peso or hit FDI flows.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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