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Protracted war Published: 07 August 2018

(Bloomberg) China let it be known that it’s in the trade war for the long haul, explaining in an editorial published in state media that it doesn’t fear sacrificing short-term economic interests. The comments came in response to President Donald Trump’s tweet that he has the upper hand. On Friday, Beijing released a tariff list designed to retaliate against the American threat to impose new duties on $200 billion of Chinese imports. While China’s economy is showing the biggest strains from the tension, pressures are also mounting in industries across the world, from oil markets to U.S. newspapers.

Mexican Bonds Rally Initially, Despite NAFTA Concerns and Dubious Budget Funding Plan Published: 02 August 2018

July 01, 2018 saw a historic shift in the centre of gravity in Mexican politics with the left-wing MORENA[1] party candidate, Andres Manuel Lopez Obrador (AMLO), winning the country’s presidential elections and Mexican bonds and the peso have rallied in its wake. ALMO received a strong mandate, winning close to 53% of the votes. The MORENA party and AMLO’s political coalition will now  be the  largest group in the Mexican Congress, providing a solid base for the president-elect to implement his legislative agenda. The markets appears to be embracing this shift in the political landscape thus far, as the average price on Mexican corporate bonds have been rising steadily while the Mexican Peso has appreciated 6.64% since the election.  However, there still some uncertainty in the market related to the on-going NAFTA negotiations and how the government intends to fund its spending plans which is expected to translate into continued volatility for Mexican bonds.  

Although AMLO’s administration will be inheriting an economy characterized by deeply entrenched fiscal discipline, favourable macroeconomic fundamentals, and a respectable (BBB+) credit profile, it will face headwinds from on-going NAFTA negotiations and the incoming administration’s spending plans.  The administration has committed to boosting social and infrastructure investments and implementing policies to improve the lives of the poor and marginalized; which for the budget, appears to place and increased emphasis on spending. It will also have to contend with Trump’s protectionist policies and negotiating a favourable NAFTA agreement.  We expect these two issues to continue to dominate the Mexican narrative and will be the key drivers of volatility within the Mexican Markets over the next 6 to 12 months. However, the expectation is that that there will be continuity in observing prudent fiscal policy, at least over the short to medium term, given the  new administration’s commitment to maintaining fiscal discipline- not increasing the public debt.   Additionally, despite the President Trump’s protectionist rhetoric and the seemingly interminable squabbles around NAFTA, the expectation is that the three parties will come to an agreement, which for the most part, preserves the trade bloc.


AMLO Pledges Fiscal Prudence

While the new administration has pledged to maintain the course of fiscal discipline over the short term by sticking to the guidelines already presented to Congress back in April., a key challenge it will face is financing a budget which is heavily skewed towards spending.   In his victory speech the president-elect vowed that he has no intentions to raise taxes, rack up debts, or interfere with central-bank’s independence. He also pledged to increase public investment, aiming to lift this amount to 5% of GDP over the medium to long-term, placing greater emphasis on social spending. ALMO has plans to create friendly environment for investors and has indicated he has no intentions of reversing policies which allowed for the privatization Mexico’s oil sector. The newly elected president had said the budget can be funded through savings by prioritizing a few important projects and streamlining the government’s procurement process, thereby reducing costs and corruption levels. However, analysts are wary of this proposition as it seems more like a panacea than a solid economic plan.   Further, the concern is that the new administration’s proclivity towards spending could put Mexico on the same path as Argentina and Brazil, both of which ran sizeable deficits causing deterioration in their fiscal position and credit profile.


NAFTA critical

The NAFTA renegotiation process and President Trump’s protectionist policies will continue to transfuse much uncertainty into the Mexican economy.  NAFTA plays an integral role in the Mexican economy, having a profound impact on the flow of trade and investments to Mexico and has contributed significantly to the country’s growth[2]  since the partnership was formed back in the early 1990’s. The agreement is also a key pillar in the country’s modernization efforts. Arguably, Mexico has the biggest stake in ensuring an amicable conclusion to the on-going NAFTA discussions given that the country has the largest exposure to trade of the three NAFTA countries[3]. However, unfortunately for Mexico, its vested interest in the agreement is not commensurate with its position at the table as the terms of current discussions are more less dictated by the  US and Canada .

The Manufacturing sector, which accounts for over 80% of the country’s exports[4] to the US, is expected to be most heavily impacted by any retreat in from NAFTA.  This would no doubt have a significant impact on the country’s GDP as domestic demand would not be sufficient to replace the reduction in US demand.   Additionally, since the industries are supported by the tertiary/service sector,  a retreat from NAFTA would also have an adverse second order effect on support sectors such as the financial services. However, despite the current impasse, observers such as Fitch and Standard and Poor’s (S&P) are expecting a favourable conclusion to the talks that does not materially disrupt Mexico's trade with the US. An amicable conclusion of the NAFTA discussions will go a far way in providing clarity and easing some of the angst about Mexico’s economic future.   This would also be good news for Mexican corporates such as Pemex (Oil and Gas) and Unifin Financiera (Financial).

Sovereign Rating Outlook

In its March 2, 2018 report, S&P maintained its BBB+ rating and  stable rating outlook   on Mexico based on expectations of continuity in economic policies in the coming two years, along with observation of fiscal prudence. The rating agency also expects the three governments involved to conclude the NAFTA renegotiation, to come to a new arrangement which largely preserves the cross-border trade and critical links that underpin the North American economy. Mexico’s current BBB+ rating could be at risk of a downgrade if GDP growth along with larger-than-expected fiscal deficits which could make it difficult for the administration to stabilize its debt as a share of GDP over the next two years. Likewise, radical shifts in energy policies which could threaten the financial health of Petroleos Mexicanos (Pemex) and Comision Federal de Electricidad (CFE) could inadvertently increase the sovereign’s debt. This would affect the country’s credit profile and make the sovereign more susceptible to external shock, thereby increasing its downgrade risk. 




The average price on Mexican corporate bonds fell as much 7.85% since the start of the year, reaching its lowest point in mid-June, fuelled by uncertainties related to NAFTA and concerns regarding the outcome of the elections. Consequent on AMLO’s victory at the start of July bond prices have rallied initially, with prices increases ranging from 0.65%- to 4.33% amid an orderly transition, AMLO softening of his tone around his policy agenda and greater certainty around the new administration ability to achieve its policy agenda due to its absolute majority in Congress,  One credit for which we currently have a buy recommendation, Unifin Financiera 2023 has shown persistent price improvements since the election, growing 4.33% over the period. On the other hand, despite rallying initially on the news of the election results, the price on Pemex 2028 is down 4.05% since the start of this week, reacting negatively to the President-elect’s recently announced appointment of a new head for the company. As the NAFTA talks evolve and the new administration transitions into office, we continue to anticipate this volatility in Mexican bond prices.  In light of this, we continue to encourage investors in Mexican corporates to seek out entities with strong fundamentals.


[1] Movimiento Regeneración Nacional

[2] Economically, politically and institutionally

[3] Approximately 81% of Mexican exports went to the United States in 2017.

[4] Primarily capital and consumer goods such as machinery and transportation.


[NAFTA] Talks back on Published: 25 July 2018

(Bloomberg) Negotiations for a new North America Free Trade Agreement restart in earnest after stalling ahead of Mexico’s presidential election on July 1. Canadian Foreign Affairs Minister Chrystia Freeland will discuss progress in Mexico today with both the incoming and outgoing administrations, while Mexican Economy Minister Ildefonso Guajardo will be in Washington tomorrow to meet with U.S. Trade Representative Robert Lighthizer. Gaping differences remain have yet to be resolved, including car-trade rules and a sunset clause that would kill the deal after five years. 

Tariffs are great, let’s end them Published: 25 July 2018

(Bloomberg) President Donald Trump said the U.S. and the European Union should drop all tariffs, barriers and subsidies ahead of his meeting today with European Commission President Jean-Claude Juncker. He made the suggestion in a tweet, which ended with “but they won’t!,” suggesting there’s little hope of such an outcome. Earlier yesterday, the president said on Twitter that “tariffs are the greatest.” Juncker said that the EU delegation is in Washington to find out how to avoid a trade war, adding that the bloc is prepared to “immediately” retaliate should talks fail. 

Moody's changes Jamaica's outlook to positive from stable, affirms B3 rating Published: 21 July 2018

(Moody's) New York, July 20, 2018 -- Moody's Investors Service, ("Moody's") has today affirmed Government of Jamaica's B3 long-term issuer ratings and changed the outlook to positive from stable. Jamaica's senior unsecured ratings were also affirmed at B3, and its senior unsecured shelf ratings were affirmed at (P)B3. The key drivers for the outlook change to positive are as follows:

1. Ongoing fiscal consolidation, if sustained, supports a continued reduction in Jamaica's government debt burden

2. Improving institutional capacity and policy effectiveness

The affirmation of the B3 rating captures the authorities' commitment to continued fiscal consolidation, implementation of structural reforms, progress in lowering government debt ratios, and reduced external vulnerabilities. These credit strengths are set against the very high government debt ratios, large interest burden, and low GDP growth rates. In a related action, Moody's has also changed the outlook to positive from stable and affirmed the B3 senior unsecured ratings of government-related entities Air Jamaica Limited and National Road Operating and Construct. Co Ltd.

Energy company [Petrotrin] achieves $85.6m profit Published: 20 July 2018

(The Trinidad Guardian Newspaper) Petrotrin chairman Wilfred Espinet said cost reduction initiatives undertaken by the interim executive team installed [since March 2018] at the energy company resulted in a second-quarter profit after tax of $85.6 million.

[According to the Chairman,]  “The mandate given to the board, to make Petrotrin a sustainable profitable entity, through proper governance and management of a competitive business, is planned in three phases: Survive, Thrive and Grow.

For the past three months, the focus was on the first phase, “Survive”. Discretionary spending that was not adding tangible benefits to the operations was reduced and we concentrated on cutting waste.”

Espinet said results for the period ended June 30 followed a loss of $517.5 million for the quarter ended March 31.

Recently published results showed a decrease in the state-owned company’s operating costs of $92.4 million when compared to the same quarter last year and a decrease of $41.9 million when compared to the quarter ending March 31.

In addition, Petrotrin earned $18 billion in revenue for the nine months ending June 30 —a 21.2 per cent increase with the corresponding period in 2017, which Espinet was due to higher oil prices.

He said in a statement accompanying the financial results: “Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA) increased to $1,767.4 million, or 80 per cent more than the 2017 result for the comparable period. Despite the enhanced operating results, the Group incurred a loss before tax of $242.8 million which translated to a loss after tax of $500.7 million,” the chairman said.

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European risk rises again Published: 20 July 2018

(Bloomberg) Italian bonds suffered a selloff this morning after reports emerged of a rift between the leaders of the populist coalition government and Finance Minister Giovanni Tria, leading to speculation he may be forced to step down. Bond yields remained elevated even after the country’s treasury office called the claims “pure invention.” Elsewhere, the U.K.’s new Brexit Secretary Dominic Raab will meet with Chief European Union negotiator Michel Barnier in Brussels later today with negotiations over Britain’s path out of the trading bloc still stalled as Prime Minister Theresa May continues to grapple with rebels within her own party. 

Enough- Yuan Stabilizes Published: 20 July 2018

(Bloomberg) The yuan recovered from a steep decline overnight amid signs authorities were seeking to halt the plunge that have hit Chinese markets this week. The central bank’s apparent indifference to the drop in the currency have made traders nervous, with some expecting further volatility through the summer. Hopes of currency stabilization have given a boost to battered base metal prices, with copper rebounding as much as 0.8 percent this morning. 

Jay Talking- Trump's Fed comments rattle markets Published: 20 July 2018

(Bloomberg) President Donald Trump criticized the interest-rate polices of the Federal Reserve under Chair Jerome Powell, saying “I don’t like all of this work that we’re putting into the economy and then I see rates going up," in an interview with CNBC broadcast yesterday. The president’s comments, which break with a two-decade tradition of the White House respecting the central bank’s independence, may make the Federal Open Market Committee more inclined to raise rates to signal that independence. The dollar fell immediately after the comments were released, with the Bloomberg Dollar Spot Index trading 0.5 percent below yesterday’s high this morning. 

The Jamaican Economy sees growth for first quarter 2018 Published: 16 July 2018

The Jamaican economy grew by 1.4 % in the first quarter of 2018 when compared to the similar quarter of 2017. This was as a result of improved performance in both the Goods Producing (2.8 %) and the Services (0.9 %) industries.

Higher levels of output were recorded for all Goods Producing industries: Agriculture, Forestry & Fishing (0.6 %), Mining & Quarrying (25.9 %), Manufacturing (0.8 %) and Construction (1.1 %).


All eight Services industries recorded growth: Electricity & Water (1.0 %); Wholesale & Retail Trade; Repairs; Installation of Machinery & Equipment (0.5 %); Hotels & Restaurants (1.9 %); Transport, Storage & Communication (1.4 %); Finance & Insurance Services (1.2 % ); Real Estate, Renting & Business Activities (0.8 %); the Producers of Government Services (0.1 %) and Other Services (1.3 %).

The economy grew by 0.9 per cent in the fiscal year 2017/2018 compared to fiscal year 2016/2017.


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Source: STATIN