Event

This month, Mexico has been in the spotlights. Firstly, an international consortium discovered one of the largest oil finds in recent years. Indeed, they potentially discovered more than 1 billion barrels of oil, off the coast of Mexico. It is estimated that the discovery can add at least 100,000 barrels a day to the nation’s output, equivalent to roughly 5% of the current Mexican production. Secondly, a few days later, the United States trade representative announced that the renegotiation of the North American Free Trade Agreement (NAFTA) will begin on 16 August. The US government also unveiled its NAFTA renegotiation priorities. The US stance seems less aggressive than Trump’s campaign promises of last year. The US does not mention the imposition of trade quotas nor includes threats of unilateral trade tariffs.

Impact on country risk

The oil discovery is a major windfall for the oil-importing economy since the historic opening of its energy sector after 70 years of state monopoly control. However, gains will appear only in the long term. The long lead time from the exploration to the start of production means that those finds will not start to lift national production before 2020. The impact of the NAFTA renegotiation will be felt on a shorter time horizon. The softer tone of the US towards NAFTA is a good sign, although the unpredictable nature of President Trump can still throw surprises. Indeed, even as the US recognises the importance of free trade, it is still focused on the need to reduce its trade deficit with Mexico. Furthermore, any potential diplomatic dispute emerging (e.g. the possible construction of a US-Mexico border wall) can complicate the talks. A protracted renegotiation process poses uncertainties for Mexico as it can generate greater economic uncertainty in the country. This could potentially lead to companies putting investments on hold until the new trade environment is clarified. However, it should be noted that Mexico’s economy has shown resilience in the past months. Though GDP growth was expected to diminish to 1.7% in 2017, the exchange rate has rallied by over 18% since January and the current-account deficit has slightly ameliorated to an expected 2.4% of GDP in 2017 while adequate reserves (of around 4 months of import cover) have been maintained.

Analyst: Jolyn Debuysscher, j.debuysscher@credendo.com