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SWOT Analysis: Mexico Elections and Beyond

SWOT Analysis: Mexico Elections and Beyond

As Mexico voted in the new president, Bonds & Loans met with a broad range of local finance leaders, corporate chiefs and state officials to discuss the market outlook and get a sense of the risks and opportunities on the horizon.

The below is a look at the strengths, weaknesses, opportunities and threats present in Mexico at the moment, as the new administration comes into office, and over the coming 12 months.

Strengths

  • The participation of foreign investors and multi-national companies in the Mexican markets is growing despite increased volatility
  • The economy is showing strong fundamentals with low levels of FX denominated debt and historically high levels of FX and stabilisation fund reserves
  • International investors are using the Mexican peso as a hedge against increasing volatility across other Latin American currencies
  • Strong fundamentals and credit growth amongst Mexican corporates have kept credit spreads from drastically widening despite increased macroeconomic risks
  • Mexican corporates have been refinancing liabilities and securing new capital over 2017 & Q1 2018, leaving them in a strong position to face incoming volatility in the H2 2018
  • Any drastic policy reversals under the new President will be limited by Congress

Weaknesses

  • Liquidity and regulatory constraints are restricting the development of the local capital markets
  • Mexican issuers don’t have unrestrained access to the international bond markets, having to wait for windows of opportunity to open up to access better rates and pricing
  • The buy and hold investment strategy adopted by local fund managers is preventing the improvement of a liquid secondary market
  • Weak rule of law and lack of good governance remain key challenges for Mexican corporates seeking better conditions from foreign lenders and investors

Opportunities

  • The government’s strategy of selling Credit Default Swaps to help foreign investors hedge against volatility has been an effective tool and will sustain investor demand in the long-term
  • Mexico’s automotive and affiliate industries are expected to rebound in Q4 once the NAFTA renegotiation is finalised (as US Midterms approach)
  • The Mexican real estate and property markets are heating up, with strong supply driven by lower prices and demand for expansion
  • Asian investors and banks, looking for asset and geo diversification, are becoming increasingly interested in Mexican credit and have already participated in transactions
  • Project finance activity is expected to resume once the uncertainty of the Presidential elections fades, with rates improving and new projects coming online, especially on the energy side
  • Following the success of recent issuers, the increasing popularity of the green bond market is opening access to new liquidity for Mexico’s projects

Threats

  • With recent yield curve trends suggesting the US Fed will accelerate the pace of monetary tightening, capital outfl ows and a lower peso are likely to push pricing up for Mexican issuers in the near term
  • The newly elected president plans to drastically change Mexico’s economic policy and put an end to strategic projects, creating uncertainty and aversion to new investment
  • Rising geo-political tensions and the threat of a global trade war are negatively impacting credit flows, depressing investor appetite and increasing risk premiums
  • Prolonged global political economic volatility is raising the possibility of rate increases on long-term securities

 

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Bonds & Loans

Bonds & Loans is a trusted provider of news, analysis, and commentary that helps illuminate the most significant issues, events and trends impacting the global emerging credit markets.

 

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