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Mexico report

GTR AMERICAS

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at the time of writing, things should be looking up for the currency. Speaking to GTR on the sidelines of the Mexico event, HSBC’s Mexico product head of global trade and receivables finance, Luis Fernando Mendoza, said: “The clients have been a lot more aware and concerned about our exchange rates, so they come to us a lot asking for support and advice. We’ve been very careful on reviewing how the clients do business in terms of which currency they use to sell and to collect – that’s something that wasn’t so critical a few years ago. “We expect to see some volatility, but after the US election there won’t be as much uncertainty as in the last year. We’re now in a good position to start thinking ahead and start regaining momentum in world trade.” Another issue is the current account deficit, which, according to Arnulfo Rodriguez, senior economist at BBVA Bancomer, has been made worse by the low oil prices of the last two years. “Foreign direct investment (FDI) in oil could finance about 50% of the current account deficit,” he said at the conference, and looking at recent news, this forecast may well come true.

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The Mexican government is due to auction 10 deepwater drilling areas on December 5, hoping to raise US$44bn in its first-ever attempt to open the market to international oil companies. “Of course, the energy reform [enacted in 2013] was affected by the oil price and the reaction of foreign investors was to put on hold many of their investments. However, Mexico has very important deepwater reserves that are going to be important in the future,” Mauricio Munguia, head of the Latin America desk at Santander UK, tells GTR. In August, Exxon Mobil, Chevron and Hess agreed to bid together for this auction, against no fewer than 18 other oil majors including Shell, BP, Total and Mexico’s own Pemex. “The appetite for the reserves is there and this bid proves that foreign companies want to participate,” Munguia adds. Moreover, oil prices are expected to recover in the coming months and years – BofAML’s Capistran placed it at US$61 per barrel in 2017 – which will also be very helpful to Mexico. And as shale takes a more important spot on the global oil stage (see page 74), Mexico is expected to capitalise on its northern reserves, thought to be extensions of the Eagle Ford basin in South Texas. Mexico’s energy secretary Pedro Joaquín Coldwell said in a speech in September that the government could begin shale auctions any time after March 2017, creating another source of FDI for the country. The state of the oil sector is not the only thing affecting the current account deficit: the country is also attempting to strengthen its public finances. The 2017 budget was announced by finance minister José Antonio Meade – who was appointed when his predecessor, Luis Videgaray, resigned in protest against President Peña Nieto’s soft handling of Donald Trump’s visit in September – at the start of October. It includes cuts of almost Ps240bn (US$12.9bn), adding to the Ps169bn expected to be cut in 2016, and Ps124bn saved in 2015. According to Meade, the cuts will include scaling back Pemex’s output to a 36-year low of 1.925 million barrels a day, as well as slashing the number of government personnel and reducing government operating costs by about a fifth.

Manufacturing strength Mexico’s economic promise is best seen in foreign investors’ faith in its manufacturing sector. Despite continued drops in exports since the start of 2016 (up to 10% year on year in July), investment in the automobile industry has made countless headlines. In September, Audi inaugurated a high-tech US$1.3bn Q5 crossover factory in San José Chiapa, with a production capacity of 150,000 cars a year. BMW is investing US$1bn into a new plant in San Luis Potosi, which will have a similar capacity. Mercedes-Benz is expected to set up shop in Aguascalientes with a US$1.4bn investment. Ford caused controversy (and fuelled the Trump campaign) in September by announcing that it would move all its small car production to Mexico within the

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November/December 2016 issue  
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