Uncertainty is increasing for peso assets as the fight for the White House heats up. Even a victory for Hillary Clinton comes with reservations attached, demonstrating how it is not just the possibility of Donald Trump winning that is ringing alarm bells.
Expect fireworks: Mexicans burn an effigy of Donald Trump
Lying 39th in the global rankings, towards the top of the third of five tiered categories in Euromoney’s Country Risk Survey, Mexico has remained until now a keen and comparatively safe option for emerging market investors.
Latin America’s reliable borrower has resisted the misfortunes piled on Brazil, South Africa, Turkey and other emerging market sovereigns suffering the worst of the commodity shock exacerbated by their own bruising political turmoil.
With no elections in sight until 2018, and a stronger economy than most, Mexico seems a decent bet compared with other countries with higher risk profiles.
Industrial production contracted, agricultural output floundered and construction activity was reined in by budget cuts during the second quarter.
All of these were factors prompting a fall in quarterly GDP for the first time in three years, despite producing a 2.4% year-on-year expansion.
Economists and other risk experts taking part in Euromoney’s survey are also less certain about structural factors, including infrastructure and demographics.
State-level finances are a worry, and the deadly drugs violence and corruption grabbing the headlines with unnerving regularity underline the nation’s institutional weaknesses.
Mexico’s capital access score has, as an added factor, similarly weakened.
Battle for White House key factor
But it is the upcoming US presidential election that is now grabbing attention and putting investors in a flux.
Mexico is heavily dependent on the US economy, not least for its maquiladora (cross-border manufacturing) trade, which has proliferated under the North American Free Trade Agreement (Nafta) for more than two decades since it was conceived as a single market linking Canada’s Cape Columbia all the way down to Suchiate, Chiapas, at Mexico’s southernmost point.
Some four-fifths of Mexico’s exports go to the US market, making Washington and its trade policy hugely important for Mexico’s investor prospects.
“During the main debates in September and October, as well as close to the date of the US election itself (November 8), the peso may under-perform,” says Mariana Ramirez Montes, an ECR survey contributor at Grupo Financiero Ve por Más.
Other factors affecting the peso include monetary policy – action taken by the US Federal Reserve for example – and how the oil price performs.
However, any prospect of electoral victory for Donald Trump would also come into play in view of his rhetoric regarding Nafta, Mexican remittances and ‘the wall’, she believes.
But increasingly risk experts are also questioning whether Trump is the only negative risk factor.
Professor John Hund from the University of Georgia believes the US election cycle is “unambiguously negative for Mexican assets”, whoever wins, with the only uncertainty concerning how large the winning majority will be.
There is a slim but real possibility of victory for Trump, Hund believes, softened by Senate control which is likely to be Democratic “or hung by the filibuster rule”.
Crucially though, even if Hillary Clinton wins, she might owe her victory to the Rust Belt states, which could stifle immigration and repatriation reform, while prompting increased protectionism for a while as the election has strengthened the populist and protectionist wings of both parties.
Clinton is already saying Nafta is a mistake. It is perhaps electoral bluster, and she might simply follow Barack Obama’s lead and shelve the issue when in office.
But she might also make an attempt to redraw the agreement in favour of the US.
“It will be bad for trade for everyone, and especially Mexico, for at least a few years, regardless of who wins,” Hund warns.
Investors are taking no chances. The peso is under pressure and hedge funds are piling into credit default insurance on Mexican bonds until it becomes clear who is in control and what their trade policy looks like.
With CDS spreads rising, and Mexico’s risk score falling, it would appear emerging market investors have yet another option that is ruled out for the time being.
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