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Tempering Enthusiasm for Mexico’s Corporate Bond Market

2019년4월 - 5 분 읽기

Omotunde Lawal, Head of EM Corporate Debt, reports back from a recent trip to Mexico, where the Barings team conducted on-the-ground research through meetings with a wide variety of corporate issuers, economists and ratings agencies.

After a week in Mexico with 33 meetings in total, the one thing that remains crystal clear is that AMLO is the only one really calling the shots. With so much power now concentrated in the hands of one person, it was hard for most of the corporates to give any concrete, forward-looking plans, as everyone is waiting to see what the country’s new president, Andrés Manuel López Obrador (AMLO) will do, most especially his plan for Pemex, which will set the tone for the rest of the country’s corporate sector.

Here are a few of our main takeaways:

Politics: We heard repeatedly throughout the week that key members of AMLO’s economic team—while cognizant of the high stakes that their policies have for the country—are to some degree held back by outdated ideologies in parts of the government. Additionally, it is unclear who the key decision makers actually are, especially as it appears that AMLO seems to take counsel mainly from his inner circle—including his wife, son and the Minister of Foreign Affairs. This may not be sustainable and could possibly set up for material turnover in AMLO’s cabinet in the coming year. 

Consumer confidence is high… AMLO remains popular with the electorate, who expect to see an uplift in social expenditures. With remittances high, retail sales rebounding in January and February and local sell-side economists predicting 1.5 to 2% private consumption growth in 2019, it’s reasonable to expect real wages to continue to grow and credit to the private sector to stay strong.

But business sentiment is low… For the corporate sector, there are still too many unknowns. The administration appears to be experiencing some teething problems—for instance, in filling vacant positions in a timely manner; and we heard throughout our time in the country about delays in permits for various projects and a lack of clarity about how the government will actually deploy cash efficiently into social programs. Additionally, threats of strikes loom as union-led private sector employees demand higher wages.

On the positive side, AMLO’s relationship with the private sector seems to be improving and should start to feed through in improving business confidence/sentiment. We heard several times in the meetings that AMLO’s initial attacks on banking, mining, industrial and media businesses were more of a negotiating tactic—not dissimilar to some of the tactics President Trump has utilized.

In fact, AMLO has reportedly asked key business leaders to help implement his social programs:

Banks have been asked to help in increasing banking penetration into the lower/informal part of the economy as a means of widening the tax base and combatting corruption (by reducing use of cash within the economy). Most banks seem cautious in their outlook for 2019 vs. 2018 with mid-to-high single-digit loan growth expected. With inflation expectations between 3.5%-4%, overall real credit growth is still expected to be decent. The banks are mostly focused on the private sector—especially personal loans, mortgages and auto loans, with little need for wholesale funding in 2019 except Bancomext. There appears to be no expectation of a banking fees cut by AMLO, and no expectation of a central bank cap on interest rates in the near term

Mining companies have been asked to be more socially responsible with the local communities, which again ties back to AMLO’s social programs. Company executives also don’t appear to be anticipating regulatory changes for the sector despite previous noise around this.

Industrial conglomerates have been asked to help with Pemex and the fuel thefts. Overall, domestic company outlooks in the space are subdued, but partly offset by business outside Mexico, with some facing additional headwinds in their businesses in the Eurozone.

The consumer sector appears to be one of the bright spots in the economy, with most issuers expecting low single-digit growth in volumes and some price increases in line with or above inflation. In the second half of 2019, low-ticket item consumer companies are expecting to benefit from the impact of the social programs and higher real wage growth.

Executives in the TMT sector noted a positive change in the regulatory tone, which may provide a tailwind. The government is supportive of the sector and looking to increase penetration rates with increased network investment.

Overall, it seems AMLO is finding a way to get the business community on his side to help him with his plans, as they will be key for job creation to eventually widen his tax base.

Other takeaways:

FX: We heard from a number of parties who are anticipating that FX volatility will be quite likely with the upcoming United States-Mexico-Canada Agreement (USMCA) ratification. Specifically, much was made of the recent unofficial trip of Jared Kushner to Mexico. Consensus expectations are for a Mexican Peso end-2019 value between 19 and 21.3 (pesos/U.S. dollar). 

Monetary policy: It appears that consensus in the business community is that Banxico is unlikely to cut rates for now (currently 8.25%), as they would prefer to keep firepower for potential volatility in late-2019. The spike in inflation during 2018 due to gasoline increases from 2017 has now dissipated, with core inflation stable at 3.6% for the last few months. Expectations are for a 25-75 bps rate cut by the end of 2019.

Fiscal policy: Consensus seems to be that AMLO will do whatever it takes to try and stay fiscally disciplined and aim to keep to the target of 1% primary surplus, but even if they deliver less than 0.5% surplus, this could still be a decent result for the administration, if it was for a good cause (both Moody’s and S&P have also indicated this). The desire for fiscal discipline was reinforced by the additional job cuts announced during our trip in response to lower revenues. Our conclusion on the use of the stabilization fund and mid-term elections in 2021 is that AMLO’s focus in the first three years of his administration will likely be on “high profile” projects, which he can use as a backdrop for the 2021 election campaign. Therefore to this effect, he is likely to remain committed to fixing Pemex, which suggests that he will need to tackle the fiscal reform sooner rather than later.

Pemex requires a clear strategy, but it is unlikely that there will be any solution until the new business plan is released in April/May. There is a clear understanding of the company’s problems and the optimal solution (i.e. reducing the fiscal burden on Pemex), but the issue remains how to deliver this solution without jeopardizing the sovereign in the process. The rating agencies seem more flexible about the sovereign increasing its Debt-to-GDP slightly to rescue Pemex, but only if there is a sustainable and viable longer-term business plan. It seems unlikely that Pemex could be downgraded without the sovereign; any rating action is likely to be in tandem, in our view.

What does this all add up to? We think that 2019 will likely be a year of treading water for most Mexican corporates. The corporates that we met with on our trip all gave relatively cautious outlooks with some expectation that cash from the social programs could provide a slight boost to some sectors in the back half of the year. The one upside is that the corporates are not increasing debt, so overall fundamentals should remain stable. In our EM Corporate debt strategies, we are selectively taking profit in names that have outperformed in recent months, and looking for opportunities to add to high-conviction positions during bouts of market weakness—especially in the event that we see an increase in volatility associated with USMCA ratification, the Pemex business plan or signs of weakness in the U.S. economy.

For more on our views on Mexico and Pemex, listen to the recent episode of our Streaming Income podcast, where we discussed this in depth.

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