As Nafta talks advance, S&P reviews AMLO's task ahead
Technical discussion on Nafta renegotiation picked up again Tuesday ahead of planned talks Thursday and Friday between Mexican economy secretary Ildefonso Guajardo (pictured) and US trade representative Robert Lighthizer.
The movement comes with broad signals that talks are now advancing quickly with the introduction of the surprisingly pro-Nafta negotiation team representing incoming Mexican president Andrés Manuel López Obrador (AMLO), whose transition point person on Nafta Jesús Seade accompanied existing negotiators, including Guajardo, to Washington DC last week for the initial restart to talks.
Ahead of those talks, Mexican officials met in Mexico City with Canadian foreign minister Chrystia Freeland, where they reaffirmed commitment to the trilateral nature of the treaty. Following the meetings, on Monday, US commerce secretary Wilber Ross confirmed his outlook that positive progress is afoot.
"Our immediate, most close-to-completion negotiations are with NAFTA, particularly with Mexico," Ross said Monday at a conference in Washington, adding that AMLO has "wasted no time" appointing a new trade team. "There's a pretty good chance that we could be on a pretty rapid track with the Mexican talks."
S&P Global Ratings, in a report released Tuesday, stressed that the completion of Nafta renegotiations is one of the biggest challenges facing the next Mexican administration.
"The outcome will have a large impact on Mexican politics and the economy," said S&P in the report "Can Mexico's Banks And Insurers Benefit From The New Administration's Mandate?"
"We still expect that the three governments will agree eventually on a new arrangement that largely preserves the cross-border trade and financial links that underpin the North American economy," said the ratings agency.
S&P said its analysts believe that Mexico's banking system is well positioned to absorb the repercussions of a collapse in negotiations. "However, a breakdown in NAFTA's renegotiations could generate volatility for the Mexican peso, which could spike inflation.
Under such a scenario, S&P expects interest rates to increase to contain inflation, crimping households' debt capacity, which could also curb credit demand. This, in turn, could act as a drag on asset quality in the banking system.
The corruption factor
Beyond Nafta, S&P sees other challenges facing AMLO as having potential damaging effect on the country's economy and banking penetration, notably his promise to significantly reduce corruption and establish a solid rule of law.
"The deleterious effect of an inefficient rule of law and high corruption prevent investment and consumption from rising significantly, reflecting shaky business and public sentiment. In our opinion, if AMLO's administration fails to make a dent in these problems--or if such efforts lack credibility--the operating conditions for commercial banks and insurers, and consequently their performance, could turn for worse."
"If the new government fails to shift some portion of the workforce into the formal economy or shrink the widespread income disparity, we don't expect significant improvements in banking penetration," added S&P.
AMLO argues that the currently limited scale of banking services in Mexico is the result of excessive regulation and lack of competition, given that loans from the top five banks represent 69% of total loans as of December. 31, 2017.
However, a similar scenario exists in other Latin American countries in terms of concentration, such as Brazil (74%), Chile (slightly more than 75%), Colombia (70%), and Panama (51%) but with higher banking penetration. S&P said it believes Mexico has a sound regulatory framework with a long track record of prudent supervision and the adoption of international regulatory standards.
"Relaxation of the banking regulatory framework or the introduction of market distortions (for instance, government's involvement in setting lending interest rates and in directing lending) are not part of our base-case scenario. However, if the new administration decides to adopt such practices, the bank industry risk could rise and the sector's creditworthiness could weaken, in our view," said the agency.
S&P gave the following key takeaways on challenges and opportunities for AMLO:
- AMLO's landslide victory will allow the new administration to pursue its agenda. If the new government is able to boost GDP growth while fulfilling the promises of fighting corruption and strengthening the rule of law, business and operating conditions for domestic banks and insurers could improve significantly.
- The new government's initiatives include the promotion of lending to more economic sectors. AMLO has also proposed the use of development banks as a countercyclical tool to boost economic growth.
- The sound regulatory framework will continue anchoring the Mexican financial system.
- AMLO aims to shrink insurance policies for government employees; however, the insurance industry could take advantage of the opportunities in other economic sectors from the new administration's initiatives.
Subscribe to the leading business intelligence platform in Latin America with different tools for Providers, Contractors, Operators, Government, Legal, Financial and Insurance industries.
News in: Political Risk & Macro (Mexico)
Ecuador's battle against organized crime: The rising threat to the region
"What we're seeing in Ecuador is a combination of events we've already seen in Mexico and Colombia. Drug trafficking spread its tentacles when they...
Mexico's new protected natural areas put mining companies on alert
Mining consultant Alberto Vazquez explained to BNamericas the possible implications for mining companies with concessions being processed since bef...
Subscribe to Latin America’s most trusted business intelligence platform.
Other projects
Get key information on thousands of projects in Latin America, from current stage, to capex, related companies, key contacts and more.
- Project: Martí solar park
- Current stage:
- Updated:
3 hours from now
- Project: New San Jose de Melipilla hospital
- Current stage:
- Updated:
2 hours from now
- Project: Cement Plant in Ponta Grossa (Companhia de Cimento do Paraná)
- Current stage:
- Updated:
2 hours from now
- Project: RSC-287 highway concession
- Current stage:
- Updated:
1 hour from now
- Project: Closure of the San Pedro Thermoelectric Plant Combined Cycle
- Current stage:
- Updated:
2 hours from now
- Project: Itatí - Itá Corá hydropower plant
- Current stage:
- Updated:
1 hour from now
- Project: Serra da Borborema I Wind Farm (Serra da Borborema Complex)
- Current stage:
- Updated:
1 hour from now
- Project: Luna Greenfields
- Current stage:
- Updated:
1 hour from now
- Project: Uruguay River Dredging (Between Km 0 and Km 207.8, Including Access Channel to the Port of Concepción)
- Current stage:
- Updated:
2 hours from now
- Project: Kuara photocoltaic complex (Phase 1 - Stage 3)
- Current stage:
- Updated:
58 minutes ago
Other companies in: Political Risk & Macro
Get key information on thousands of companies in Latin America, from projects, to contacts, shareholders, related news and more.
- Company: Secretaría de Defensa Nacional de Honduras
-
The description contained in this profile was taken directly from an official source and has not been edited or modified by BNamericas researchers, but may have been automatical...
- Company: Ministerio de la Vivienda, Hábitat y Edificaciones de República Dominicana  (MIVHED República Dominicana)
-
The description contained in this profile was taken directly from an official source and has not been edited or modified by BNamericas researchers, but may have been automatical...
- Company: Agência de Transporte do Estado de São Paulo  (ARTESP)
-
Created in 2002, the São Paulo State Transport Agency (ARTESP) is in charge of overseeing public transportation for Brazil's São Paulo state. Working under the Secretariat of Go...
- Company: Alvarez & Marsal, Sucursal México
- Company: Business Finland Oy  (Business Finland)
-
The description included in this profile was taken directly from an official source and has not been modified or edited by the BNamericas’ researchers. However, it may have been...
- Company: Control Risks México S.A. de C.V.  (Control Risks México)
-
The description contained in this profile was taken directly from an official source and has not been edited or modified by BNamericas researchers, but may have been automatical...
- Company: Alcaldía Municipal de Montenegro  (Alcaldía de Montenegro)
-
The description contained in this profile was taken directly from an official source and has not been edited or modified by BNamericas researchers, but may have been automatical...