Political Risk is Back

Wed, 2017/12/06 - 3:31pm | Your editor
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Today's blog is late because of a water outage in my building.

The stock markets of the world today are being roiled by diplomacy, starting with Pres. Trump's move of the US Embassy in Israel to Jerusalem. But other diplomatic White House plans are also putting stock markets at risk, notably Mexico's, with the renegotiation of the terms of the North American Free Trade Act, or Nafta. Political risk is back.

Bank of America Merrill Lynch analyst Carlos Capistan says Mexico is seeing “a clear downturn” in consumption “with retail and auto sales contracting” year/year by 0.33% and 10.2% repectively. The cause is high inflation and tight monetary policy to control it. At over 6%, inflation is pushing real wages down, leaving households poorer and with less spending power. Meanwhile tight money is slowing credit growth.

However, Capistan says that offsetting the household spending drop is a good external environment. Historically, that would mean sales to the USA eventually boosting a Mexican recovery. Until now, the US has accounted for 80% of Mexican exports. But with Nafta changes potentially blocking Mexican exports, it is different this time.

But Eduardo Garcia of www.sentidocommun.co.mx writes today about a new factor not typically taken into account in Mexican forecasts: the rest of the world where Mexico can find new agricultural and industrial markets if Trump force abandonment of the Nafta treaty. Eduardo quoted a study by the Inter-American Development Bank (IADB) which listed 130 products, accounting now for 59% of Mexican exports, whose pricing is highly competitive, and can tempt new buyers.

Selling more widely can help Mexico overcome the damage President Trump has heralded to Mexican sales to the USA. Products which used to go north can be sold to Norway, Canada, New Zealand, Japan, and Australia and the proceeds can boost Mexican consumption as well as that of destination countries.

The study was done by IQOM Commercial Intelligence which employed analysts led by Herminio Blanco, the Mexican Secy of Commerce and Industrial Development (1994-2000), who negotiated the terms of Nafta for over 20 years; Jaime Zabludovsky, a deputaly Nafta negotiator; and Sergio Gomez Lora, who was chief Mexican global trade negotiator for 9 years and who now heads IQCM. They examined trade data over the last 25 years and the impact of GATT and preferential access to 46 destinations under its terms over the last 23 years.

Manufactured products where Mexico has an edge in price range from autos and auto parts to telephone equipment, hearing aids to computer hardware, microphones to domestic appliances, air conditioners and compressors to medical and mineral equipment.

Among the best future target markets are Pacific Alliance Pact countries (a treaty already renounced by the US Administration) like Chile, Colombia, and Peru, Spanish-speakers where Mexico has an edge. It also of course can sell to the rest of the Pacific Rim which is hungry for farm products like meat and corn (maize) for feed.

The think-tank advised that the Mexican government encourage exports by opening new distribution channels and cheaper transport of merchandise. Other Mexican winners in a non-Nafta world would include tourism, retirement, and dental and medical tourism.

 

*Pres. Trump signed a document recognizing Jerusalem as Israel's capital. Yerushalayim shel zahav, Jerusalem of gold, is a major pilgrimage site for all 3 monotheistic religions and the Old City fell into Israeli hands only 50 years ago after 6-day war. Its status and that of other territories captured then is supposed to be part of a peace treaty which nobody has managed to reach since then.

 

*Dozens of Republicans on Capitol Hill have come out against compulsory first-in-first-out calculations of capital gains taxes for individual investors, a matter I pinpointed in my Monday blog this week. The amount to be earned is not worth the aggravation it will cause among voters, $2.4-2.7 bn over the next 10 years. There are also good chances of removal of the proposal to disallow state and local income taxes—a deduction ever since Federal Income taxes were invented, in the early 1900s.

 

More on Mexico today along with 3 updated analyst reports and news from Britain, Belgium, Canada, China, Finland, Germany, Israel, Mexico, The Netherlands Antilles, Nigeria, Spain, Switzerland, and a few other places.

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