Beyond Mexico's moment

Feature | 12 April 2017
Regional_Focus_Latin_America

Ivan Castano takes a deeper look at what the impact of the new administration in the US could mean for trade and trade finance in Mexico and the opportunities beyond the turmoil

"There could be a hard or soft landing." This is the way Mauricio Horvilleur, managing director at Nicaraguan bank Banpro, describes Mexico and Central America's potential fate in the new era of President Trump.

"If logic prevails and President Trump does not impose unilateral tariffs or a border tax on Mexico, it won't be a hard landing but if he does, there could be a bigger de-risking toward economies that depend on US exports," he says.

That of course includes Mexico, which ships more than 80% of its goods north of the border. Central America, which is nearly as dependent, could suffer less as President Trump's protectionist measures are not aimed directly at it. Elsewhere in the region, Brazil, Peru and Chile are also seen as being able to survive the US president's proposals as their exports target Asia and Europe more heavily.

Horvilleur's comments come as US and European banks have sharply reduced their correspondent banking lines toward Latin America in the past three years, seeking to cut their exposure to risky markets and to meet Basel III capital requirements.

Citigroup, Bank of America Merrill Lynch, Wells Fargo, JP Morgan, Bank of Boston, Deutsche Bank and Standard Bank have all pared funding lines, regional bankers say.

Latin America's economy is set to bounce back from recession this year, growing by 1.3% after shrinking 1.1% in 2016, according to Alicia Barcena, executive secretary of the UN's Economic Commission for Latin America and the Caribbean. She added that the 'modest' recovery will be ephemeral unless the region boosts integration to lift trade and create a single market.

The recovery could fuel a 3% rise in the volume of Latin American exports, up from flat gains in 2016, as Brazil and other South American commodity producers benefit from higher energy and metal prices, PNC Financial Services Group senior international economist Bill Adams predicts.

Mexico risks climb

Growing risks in Mexico could undermine that projection, however. President Trump's threat to upend or renegotiate the breadwinning North American Free Trade Agreement (NAFTA) to the US's favour, and impose a 20% border tax to force it to bankroll its US$10bn wall on the US-Mexico border, is harming Mexico's investment attractiveness and raising the spectre of a trade war.

If that happens, Mexico's exports could plunge 50% this year, says Delia Paredes, executive director of economic analysis at Banorte, one of the largest commercial banking groups in Mexico.

"The worst case scenario is that our exports are halved," Paredes says. She adds that the administration in Mexico is unlikely to sit on its hands while President Trump threatens economic harm, proposing to tax remittance flows from Mexicans living in the US, on top of new and tougher laws geared towards expelling illegal immigrants - a move that triggered a diplomatic feud upon its announcement.

"You can't assume we won't do anything. There are instruments we can use including tariffs on key US agricultural exports such as corn, wheat or soy, which would hit farmers," Paredes says.

If President Trump and Mexico can strike a mutually beneficial deal, exports could inch up 0.5% to 1% in 2017, up from a 1.8% contraction last year to US$380bn, as a strengthening US economy and sharply devalued peso make Mexico's exports more attractive. Shipments to the US declined to US$309bn from US$302bn in 2016, according to Paredes. The remainder went to the Eurozone, Brazil, Colombia, Chile and Peru.

"Technically, the currency depreciation should make us more competitive but there is a lot of uncertainty," she says, adding that foreign investment will remain frozen until Mexico and the US haggle over NAFTA over the next 90 days and provide investors with clarity about the future make-up of the playing field. "I think Trump will renegotiate where he thinks he wins," Paredes adds.

Automotive sector hit

Meanwhile, the automotive industry will be worst hit as US manufacturers, notably Ford and GM, bow to the president's border tax threats and scrap investment projects, Paredes predicts, adding the automotive trade surplus with the US could decline to US$45bn in 2017, down from US$67bn last year. Other categories with which Mexico has a surplus with the US - appliances and machinery - could also be severely hit, the analyst predicts.

Amid rising tensions, Anierm, a for-export 'maquila' manufacturer's federation [maquila is a manufacturing operation, where factories import duty and tariff-free materials or equipment for assembly, processing, or manufacturing and then re-export products], has urged Mexico City to help bolster export and import financing for small and medium-sized enterprises (SMEs), already hurt by local banks' refusal to issue risky loans. Echoing other banks keen to mitigate threats from the north, development bank Bancomext insists it will continue to support SMEs with a 'solid' balance sheet, adding that its correspondent lines have not declined.

"I don't have any information that the lines have fallen," says Rafael Velasco, export finance director at the institution. "We continue to use products that address SMEs' necessities and will continue to finance these firms."

Should international funding shrink, Velasco reiterates that Bancomext has a cash war-chest large enough to cope. "We have enough funds and we are not the only ones financing SMEs," Velasco says.

Bancomext's treasury and international finance director, Gontran Hernandez, adds that the lender's key line with the Inter-American Development Bank (IDB) remains unaffected. "We have established lines with [the IDB] and they have the obligation to give us those resources whatever happens," Hernandez says. He conceded, however, that loan prices are set to rise as the Bank of Mexico has raised interest rates six times in the past 12 months, in a bid to shore up the peso and tame rising inflation.

Eric Levy, who is commercial director of clothing exporter Industrias Cavalier, agrees not all is doom and gloom, adding that its lenders BBVA Bancomer and Citibanamex have not restricted financing so far, though he says capital loan rates have gradually risen to between 8-10% at the time of writing.

"I doubt the tariffs or tax remittances will take place, and so do the banks," Levy says, adding that the US president's rhetoric is aimed at gaining negotiating power against Mexico, instead of imposing extreme protectionist policies. "Those things would be damaging to his economy. So far, his capacity to implement his ideas has been disastrous."

Improving mood in Brazil

In recession-hit Brazil, Trump's win is heralding opportunities. Blairo Maggi, Brazil's minister for agriculture said in February that Latin America's largest economy will benefit from President Trump's protectionism by fuelling export opportunities to Mexico, as it is keen to slash its umbilical cord with the US by sourcing agricultural goods elsewhere. Brazil could export more soybeans, corn, pork and cotton to Mexico, for example, Maggi said. Maggi is a soy plantation farmer and former governor of the state of Matto Grosso.

Brazil is also seeking 'an industrial and commercial integration agreement' with Mexico, which envisages the scrapping of 2,000 product tariff classifications to broaden trade, Brazil's ambassador to Mexico Enio Cordeiro told Mexican press. He added that any accord must include provisions to help large industries install manufacturing facilities in both nations.

Brazil's economy is also staging a mild recovery with GDP expected to rise 0.5% to 1% after shrinking by 3.5% last year, lifting confidence among banks and encouraging them to start lending again, says Marcos Rossi, investor relations director at Fibra Bank. Rossi also predicts that some global banks could return to the country after severely restricting their intra-banking lines during Brazil's four-year recession.

"We saw big [line] declines of around 15% a year for the large banks like Bradesco and Itau BBA, and of up to 30% for the smaller and midsize banks," Rossi says. The situation worsened so much Fibra Bank folded its trade business in 2014. The lender was suffering under the weight of bad car loans.

"We had a bad balance sheet with huge losses from loans to individuals who could not pay their car premiums and returned them, and they were sold at auctions. The financial system was not prepared to properly value how bad things would get in the recession," Rossi says.

To shore up its business, Fibra terminated trade loans to agricultural SMEs and began offering more lucrative short-term credit, derivatives and currency services to corporates with annual revenues exceeding 300m reals or US$96m (at current rates). Low funding rates in Brazil along with foreign bank exits have triggered an opportunity for Fibra, and rivals like Banco Industrial, to offer more profitable products to big companies.

As a result, Fibra has managed to shore up its business and expects to deliver a one million-real profit this year and revenues of 5m reals.

"We don't have access to a correspondent line yet as we still have restructuring to do," Rossi says. He adds that foreign banks are looking for returns on equity of at least 10% before considering opening up lines in Brazil - a threshold Fibra doesn't yet meet. Short-term loan prices should also start coming down after peaking at 15% last year, half their rate when the recession began, Rossi predicts.

Andean compliance

In the Andean region comprising Colombia, Ecuador, Peru and Chile, small banks are facing challenges to improve their correspondent relationships, says Daniela Soza, assistant manager for international business at Banco de Credito in Bolivia.

A sticking point is banks' lack of strong compliance systems to manage relationships with obscure customers, a problem that led to money laundering and fraud scandals in Mexico (involving HSBC and Citigroup's Citibanamex) in the past five years, and to a lesser extent, in Panama and across the region, bankers say.

"We are all working to improve but we need more demanding and sophisticated regulators," Soza says, adding many firms need to prioritise know your customer KYC processes because the Andean economies have large informal markets. "We have a lot of work to do to learn these issues and it is hard to put an experienced team together."

Soza says bank-to-bank lines fell 15% in Bolivia last year as sluggish energy commodity prices hit exports in the impoverished country, a major natural gas and tin producer.

Soza adds lines have declined significantly across South America as once-top players Citibank, BOAML, Deutsche Bank, JP Morgan and Wells Fargo terminated many relationships or departed altogether. She expects conditions to remain relatively similar this year, as Latin America takes a wait-and-see approach to US policy impacts.

"Investors remain interested in the region, except for one-off cases," says Soza. But we are all waiting to see what happens with Trump."

Diversification challenges

Meanwhile, Mexico and Latin America face big integration challenges. Mexico could look to strengthen trade ties with the Pacific Alliance, a sleepy trade agreement between it, Colombia, Peru and Chile, as well as with Brazil to tap the Mercosur bloc. Brazil, Argentina, Uruguay and Paraguay make up the latter trade corridor which has been frayed with problems and protectionist spats between Brazil and Argentina.

Carlos Laverde, owner of Colombian swimsuit label Modamar, says Colombia must take greater advantage of the Pacific Alliance to grow sales to Mexico and other countries. However, he says Mexico faces an uphill battle to sell its goods to Colombia, at least in the fashion sector. This is because Colombia and Brazil have strong clothing labels catering to a loyal consumer base while Mexico has mainly focused on selling basic apparel to US retailers.

"Unfortunately for Mexicans, there is no bigger and more profitable market than the US," Laverde says. However, he notes Mexico could seize niche opportunities in Central America, Peru and Chile, where consumers are more open to foreign trademarks.

"Peru, Chile and Colombia offer limited opportunities because their economies are similar to Mexico," says Paredes. "The US remains our natural market. If we participated in the Trans-Pacific Partnership it wasn't because it was especially convenient for us to trade with its countries," she adds, "We wanted to know what they were negotiating with the US."

Ivan Castano is a financial journalist based in Mexico City

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