Citibanamex can\u2019t catch a break. It’s been hammered by a fraud scandal, had its management shaken up, and weathered a lengthy period of uncertainty over whether its parent would hang a for-sale sign above it. The Mexican lender looked to be putting those worries behind it last year, when Citigroup in the US announced a billion-dollar investment in the bank.<\/p>\n
Then the US election changed things again. With the future of trade and foreign policy towards Mexico murky, Citi\u2019s chief financial officer told investors the bank might adjust the speed of the planned investment.<\/p>\n
John Gerspach said Citi was \u201cbroadly constructive\u201d on Mexico, and still plans to make the investment by 2020. Yet his suggestion that cash infusions will be slower at the start of that period highlights the depth of concern across the emerging markets concerning the policies of Donald Trump. The US president-elect campaigned vigorously on an agenda of protectionism, vowing to rip up trade agreements and slap tariffs on imports. His most extreme campaign-trail promises would spell economic and political chaos for Mexico, Latin America and emerging markets as a whole.<\/p>\n
Observers don\u2019t expect the administration that takes power on January 20 to push ahead with all of its campaign rhetoric. But sifting which actions will be implemented and which won\u2019t is difficult, especially given Trump\u2019s unconventional communications style. The president-elect granted a smattering of interviews and no press conferences in the two months after the election, preferring a one-way transmission through Twitter and speeches to supporters. That left little opportunity to interrogate the incoming leader on what might become substantive policy and what can be ignored as bombast.<\/p>\n
That lack of clarity has immediate implications. Investors took fright in the days after the election, dumping assets, pushing bond spreads wider for Latin American issuers and forcing some, such as Argentine airport operator AA2000, to postpone new deals.<\/p>\n
Even as Trump\u2019s cabinet takes shape, many questions remain. Can the US\u2019 free trade agreement with Mexico be replaced with a 35% import tariff? Even if it could be, would the new administration take a punt on such a radical measure?<\/p>\n
For Latin America\u2019s companies, banks, governments and investors, the answers to those questions will shape the political, economic and financial course of the region in the years ahead.<\/p>\n
\u201cThe knee-jerk reaction to the election result has been negative as markets try to discern whether we\u2019re going to get candidate Trump as president, or whether his bark is worse than his actual bite,\u201d says Sean Newman, emerging market senior portfolio manager at Invesco. The asset management firm had $202 billion of fixed income assets under management at the end of November.<\/p>\n
\u201cWhat is beginning to emerge is that the president-elect\u2019s tweets are not going to be his deeds. The negative ramifications on trade may be a bit more nuanced versus broad-brushed. And the policies around fiscal spending may not be as big bang as markets may have priced in.\u201d<\/p>\n
Jumping to conclusions<\/strong><\/p>\n Financial markets reacted quickly, with investors yanking some $6 billion of portfolio cash from the eight biggest emerging markets in the days after the election, according to the Institute for International Finance.<\/p>\n But the trade relationships between the US and Latin America are perhaps where the region\u2019s economies have most at stake. Two-way trade in goods and services between the US and Latin America is worth around a trillion dollars a year. With Mexico alone, it\u2019s $583 billion, according to the office of the US Trade Representative (USTR). In just a few months, that trade flow could be entirely unraveled.<\/p>\n As president, Donald Trump could pull the US out of the North American Free Trade Agreement (NAFTA). In the most extreme case, he could give notice of doing so on January 20, and the treaty could dissolve six months later.<\/p>\n If that unusual scenario unfolded, says Kelly Hardy, partner at law firm Hogan Lovells, \u201cthe existing tariffs would stay in place for a year. That being said, a president does have the ability to impose tariffs\u201d up to 50% higher than those in place in 1975. Further, the USTR would have broad authority under presidential direction to introduce higher tariffs under special circumstances, such as in retaliation to unfair trade practices.<\/p>\n In early December, Trump reiterated his enthusiasm on a campaign trail promise of a 35% tariff on companies that move production out of the US. If NAFTA is renegotiated \u2014 the more likely scenario \u2014 then all bets are off. Former President Bill Clinton needed congressional approval to pass the treaty when it was originally negotiated, and some observers believe President Trump would need the same green light to reopen negotiations. Others believe that now that the treaty is in force, different rules apply. Michael Shifter, president of the Inter-American Dialogue, says he expects the incoming administration to stop short of completely walking away from NAFTA.<\/p>\n \u201cWe do still have a Congress, and it\u2019s in Republican hands. Although there is an anti-trade faction, most of them \u2014 like [House Speaker] Paul Ryan and [Senate Majority Leader] Mitch McConnell \u2014 are pro-free trade. There are limits to what Trump can do from the executive branch and Congress is going to play an important role.\u201d<\/p>\n He adds, though, that returning to the negotiating table may not be all bad for Mexico. \u201cThe way to look at it \u2014 at least potentially \u2014 is as an opportunity to address problems that were neglected by both governments as they charged ahead with this free-trade framework.\u201d<\/p>\n Mexico has been a shrewd negotiator in the past. It slapped $2 billion of retaliatory tariffs onto US imports in 2009, after the US blocked Mexican trucks coming into the country in contravention of NAFTA. The new duties, dropped once the US agreed to advance with the cross-border trucking program, were carefully targeted at products important to the backers of the ban, according to Hogan Lovells.<\/p>\n \u201cWe have very skilled and sophisticated negotiators on both sides of the border,\u201d says Hardy. \u201cJust as our trade people understand the Mexican market, the Mexican trade representatives understand our market and which industries really count on trade with Mexico.\u201d<\/p>\n Policy vs show<\/strong><\/p>\n Yet the question remains: of Trump\u2019s rhetoric, what is going to become reality? How to sift the bluster from an actual change in the prevailing wind?<\/p>\n \u201cMy instinct is that we are likely to see a lot of symbolism and theater,\u201d says Shifter. He points to Carrier Corporation\u2019s decision to continue production of air conditioning units in the US. The company reversed course on its plans to move a plant to Mexico after discussions with the president-elect.<\/p>\n \u201cIt was a way to show that he was serious about what he said in the campaign,\u201d says Shifter. \u201cBut a gesture is not a policy.<\/p>\n \u201cSome underlying policy issues will probably change at the margins. But there will be a heavy dose of symbolism to show supporters that he\u2019s carrying out his promises.\u201d<\/p>\n Others expect more substantial changes.<\/p>\n \u201cI do expect a policy shift,\u201d says the trade specialist. \u201dI think they will realize that these one-by-one interventions will show diminishing returns, and they will want a policy shift. Some kind of revision or renegotiation of NAFTA is unavoidable.”<\/p>\n Yet the unpredictability of policy has real implications. Economists have already cut their expectations for Mexico\u2019s economy this year, saying a weaker peso, higher funding costs and tough fiscal targets could constrain growth.<\/p>\n And it\u2019s not only Mexico. Despite the rise of China, \u201cthe US is a major trading partner for the whole region,\u201d says Ram\u00f3n Aracena, chief economist for Latin America at the IIF, which predicts weaker growth across Latin America this year as a result of changing US policies.<\/p>\n \u201cThe US is a systemic country. Whatever they do regarding policy has implications for everyone \u2014 even if you are far away.\u201d<\/p>\n He indicates the Pacific Alliance countries in South America \u2014 Chile, Colombia and Peru \u2014 as a case in point. \u201cThey all have free-trade agreements with the US. That\u2019s been a main asset: if you invest in Colombia, you can export to the US. If that\u2019s not clear, it\u2019s going to affect investment.\u201d<\/p>\n Others are less pessimistic.<\/p>\n \u201cColombia is one country that could be on the periphery of being hurt by a more aggressive protectionist policy in the US, given the manufacturing sector,\u201d says Jim Barrineau, co-head of emerging markets debt at Schroders, which managed some $487 billion of assets at end-September.<\/p>\n \u201cThe rest of the region, though, is tied more to global growth. One reason why Latin America, aside from Mexico, has done pretty well is that the market expects that US growth should be better. Aside from the protectionist fears, that is always a good thing for Latin America in general.\u201d<\/p>\n Others cite indications that the new administration will plow money into US infrastructure. That could spur demand for metals exported by Andean countries like Chile and Peru.<\/p>\n Diplomacy asunder<\/strong><\/p>\n In the months between the election and Trump\u2019s inauguration, the uncertainty about the US\u2019 new relationship with emerging markets inched higher as the president-elect cast aside established rules of engagement.<\/p>\n Yet by mid-December, some hope was emerging that Trump might act more benignly toward Mexico than indicated during the campaign, after news broke that he had held a meeting with telecom billionaire Carlos Slim.<\/p>\n \u201cI think it\u2019s a sign that the worst kind of policy fears are not going to be realized,\u201d says Schroders\u2019 Barrineau. \u201cCarlos Slim certainly has a big stake in the Mexican economy and keeping Mexico integrated with the US. Just the fact that Trump wants to meet him suggests there\u2019s a dialogue there.<\/p>\n \u201cWhen people are speaking, generally you don\u2019t get the most negative outcomes.\u201d<\/p>\n Trump\u2019s approach towards other parts of Latin America is similarly unclear. He had a reportedly amicable call with Argentine President Mauricio Macri in mid-November. Both parties denied rumors that the pair had discussed a Trump business development in Buenos Aires.<\/p>\n Whether the new administration will continue the rapprochement towards Cuba that was launched by outgoing President Barack Obama is unclear \u2014 although Trump all but broke out the champagne when Fidel Castro passed away. \u201cToday, the world marks the passing of a brutal dictator who oppressed his own people for nearly six decades,\u201d Trump said in a statement on the transition team\u2019s website.<\/p>\n Studying the tea leaves<\/strong><\/p>\n With much of the cabinet nominated by mid-December, analysts were able to get greater clarity on the policy direction of the new administration. Many were private sector executives.<\/p>\n \u201cHe was supposed to be the big anti-banks guy, the big anti-markets guy. And what has he done? He\u2019s hiring hedge fund managers and Goldman Sachs bankers,\u201d says Jan Dehn, head of research at Ashmore Group, a specialist emerging markets firm managing some $55 billion of assets at end-September.<\/p>\n Dehn says he expects only small tweaks to NAFTA as a result. \u201cThe truth is, he\u2019s going to ease financial conditions. He\u2019s going to repeal parts of Dodd Frank. He\u2019s going to make it easier for banks to lend money.\u201d<\/p>\n The USTR was one important nomination that remained pending in mid-December. One name circulating as a possible nominee was Dan DiMicco, Trump\u2019s trade adviser on the campaign and part of the USTR transition team. A staunch opponent of free trade, the possibility of DiMicco\u2019s appointment had some Mexican officials worried.<\/p>\n At the same time, the commerce secretary nominee, private equity investor Wilbur Ross, suggests that the new administration will advance on Trump\u2019s campaign trail pledge. Ross, as reported by US media, described NAFTA as a \u201clogical starting point\u201d on the roster of the new administration\u2019s priorities.<\/p>\n Markets will be looking closely at further signposts in the weeks ahead. Trump\u2019s inauguration speech on January 20 is top of the list, followed by any pronouncements that may come in the days after. The State of the Union address in March should fill in any remaining gaps.<\/p>\n Going to extremes<\/strong><\/p>\n The financial markets\u2019 immediate reaction to the election was to bet hard on US growth \u2014 spurred by fiscal stimulus \u2014 and against the fortunes of developing economies. The $6 billion pulled from emerging market portfolios in the days after the US election was several times greater than the investor flight during the 2013 taper tantrum and the shock from Chinese currency moves in mid-2015, according to the IIF.<\/p>\n Spreads on Latin American bonds widened around 30 to 60 basis points. New equity and bond issues alike were put on hold.<\/p>\n For contrary investors, the exaggerated market reaction offered a buying opportunity.<\/p>\n \u201cI think Mexico has been oversold,\u201d says Dehn, who suggests that Latin America as a region has been \u201cbeaten up\u201d more than other emerging markets. \u201cI don\u2019t think that we will see really draconian policies toward Mexico, not at all. A lot of it was election rhetoric.\u201d<\/p>\n Dehn expects the incoming administration to focus overwhelmingly on the domestic economy in its first two years, in the hope of growing its majority in the Senate in mid-term elections to get through other policy changes, such as ending Obamacare.<\/p>\n \u201cWe\u2019ve probably already seen the extent of the foreign policy initiatives, which was basically to end the Trans-Pacific Partnership. There was no surprise in that.\u201d<\/p>\n Others are more cautious. Invesco\u2019s Newman agrees that US policy towards emerging markets is unlikely to be as negative as Trump indicated during the campaign, but reserves judgment until he sees how events will unfold.<\/p>\n \u201cWe still have to go through a period of price discovery and, on a day-to-day basis, evaluate who the policy nominees are for various key roles,\u201d he says<\/p>\n Upside and downside risks exist, says Schroders\u2019 Barrineau. An aggressive stance on protectionism or weaker-than-expected US growth would both be bad for Latin American investors, he says.<\/p>\n \u201cIf we get a more reasonable Trump administration, Latin America will outperform the rest of emerging markets, just because we\u2019ve had this fear about it.\u201d<\/p>\n Access to capital tightens<\/strong><\/p>\n On the other side, Latin Americans wanting to raise capital internationally \u201cshould fasten their seatbelts,\u201d says one head of debt capital markets for Latin America. \u201cI\u2019m advising clients to access markets in the first window that comes available and to have a plan B.\u201d<\/p>\n Those back-up strategies might include setting up lines of credit with banks, looking to local markets for funding and, for sovereigns, seeking contingent support from organizations such as the IMF. Asset sales and operational efficiencies might be another strategy, says the banker, who did not want to be quoted suggesting clients look beyond debt capital markets for funding.<\/p>\n Mexico\u2019s Pemex heeded the advice in December, when it stepped into the bond market with a triple-tranche bond issue. The state-owned oil company has been a regular issuer of such deals in Januaries past. Its decision to get in sooner suggests it wanted to avoid any further bad news that might hit the market around the inauguration.<\/p>\n The timing \u2014 which also came days after OPEC opted to limit oil production \u2014 paid off nicely for Pemex. The borrower raised slightly more and paid a lower yield than it had in its $5 billion January 2016 bond sale.<\/p>\n Chief financial officer Juan Pablo Newman says the change in administration in the US won\u2019t have any negative impact on the oil company. \u201cThe hydrocarbon sector isn\u2019t included in NAFTA. It wasn’t included from the start, so it avoids any volatility.\u201d Recent participation by US oil companies in Mexico\u2019s deepwater oil and gas auction is a sign of continued interest from the northern neighbor, he adds.<\/p>\n Manufacturing is more likely to be hurt by changes to US trade policy, says Thomas Mueller-Gastell, a partner at law firm Ritch Mueller in Mexico City.<\/p>\n International capital markets activity by Mexican companies may slow down because of the volatility of the peso and rising interest rates, he says. \u201cI suspect local capital markets will perhaps become more active.\u201d<\/p>\n As for direct investment, both foreign and domestic, plans that are already in place will likely continue, says the chief executive of Mexico\u2019s export-import lender, Bancomext.<\/p>\n \u201cWhat we have gauged from our clients is that they continue with their plans,\u201d says Alejandro D\u00edaz de Le\u00f3n. \u201cAs you can imagine, some of these investments are really long-term investments that take time to execute. Of course the uncertainty may have an effect on some of the early versions of new projects. To a large extent, on the ongoing projects, we continue to see a lot of interest and a lot of appetite for our financing.\u201d<\/p>\n Cheerleading for NAFTA<\/strong><\/p>\n Mexican President Enrique Pe\u00f1a Nieto was heard in late 2016 to be planning a meeting with the US president-elect ahead of the January 20 inauguration, as drumming up support for bilateral trade on both sides of the border looked to be more important than ever.<\/p>\n \u201cThere\u2019s a lot of incomplete information about NAFTA for the US,\u201d says the trade specialist. \u201cProbably Pe\u00f1a Nieto could mobilize American businesses that are clear winners of NAFTA to give the administration a more balanced view of what\u2019s going on.\u201d<\/p>\n Bancomext\u2019s D\u00edaz de Le\u00f3n is already on message. \u201cGlobal value chains in North America are very much intertwined,\u201d he says. \u201cGoing forward, even in a world where globalization per se is downplayed and where the local agenda regains some resonance, I do believe that regions matter. And I do believe that North America is going to continue to be a strategic region for all its members. It\u2019s a region where we produce things together and we can sustain strong competitiveness levels and compete with other regions.\u201d<\/p>\n At the same time, investors expect Mexican policymakers to be in crisis mode in 2017, especially with last year\u2019s disappointing growth numbers.<\/p>\n \u201cWe believe the country needs a catalyst,\u201d says Invesco\u2019s Newman. December\u2019s energy auctions may kick-start some activity, he says, but overall it will be tougher for consumption-led growth to continue. Slower economic expansion will make Mexico\u2019s debt load look heavier and raise concerns over ratings downgrades. \u201cWe believe Mexico needs some additional policy measures for a broad-based growth plan so that the economy can continue to grow,\u201d says Newman.<\/p>\n Adding to the external uncertainty for Mexico is a change of leadership in two key positions. Finance Minister Luis Videgaray stepped down \u2014 ironically, after receiving criticism for having orchestrated a meeting between Pe\u00f1a Nieto and candidate Trump \u2014 and was replaced by Jos\u00e9 Antonio Meade, who had previously held the job. In December, Central Bank Governor Agust\u00edn Carstens announced his departure after six years, to lead the Swiss-based Bank for International Settlements. A replacement has not been named.<\/p>\n Investors are broadly relaxed about the changes. Invesco\u2019s Newman says the two institutions are filled with astute policymakers \u2014 and that anyway it may be time for a new hand on the wheel.<\/p>\n \u201cMexico has a deep policy bench,\u201d he says. \u201cThe changes are certainly not negative but they do open the door for a fresh approach and a different set of perspectives on the challenges the country faces.\u201d<\/p>\n For the full story click: NAFTA, Trump and the future of financing in the Americas | LatinFinance <\/p>\n Source: <\/em><\/strong>\u00a0<\/em>latinfinance.com\u00a0<\/em><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" Citibanamex can\u2019t catch a break. It’s been hammered by a fraud scandal, had its management shaken up, and weathered a lengthy period of uncertainty over whether its parent would hang a for-sale sign above it. The Mexican lender looked to be putting those worries behind it last year, when Citigroup in the US announced a billion-dollar investment in the bank…. 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\nNafta in Numbers<\/strong><\/p>\n
\n\u201cMy main concern is the uncertainty that will be generated, and the length of that uncertainty,\u201d says a Mexican trade specialist, regarding a potential renegotiation. \u201cIdeally, the parties can commit to saying, we won\u2019t renegotiate the whole of NAFTA, just certain chapters.\u201d<\/p>\n
\nFor daily news and data on the critical transactions, developments & people moves that drive the LatAm capital markets, sign up for a free trial at http:\/\/www.LatinFinance.com \u00a9 2014 Latin American Financial Publications Inc.<\/p>\n