CEO’s Executive Summary: While a series of high-level meetings and public statements helped to reduce bilateral tensions last month, confused signals on the Administration’s intentions with respect to NAFTA renegotiations and on the balance of power between President Trump’s protectionist and more pragmatic economic advisers have kept the U.S.-Mexico relationship “interesting” to say the least. On March 28, the Administration sent a draft of the notice purportedly informing Congress of its intention to open NAFTA renegotiations. The draft called for largely modest modifications rather than profound changes to the agreement, which would still require Congressional authorization. Yet this was almost immediately followed by contradictory statements from the White House, suggesting the draft was not in fact the Administration’s final position, as well as yet another executive order, this time calling for the re-examination of all U.S. free trade agreements, starting with NAFTA. Meanwhile, U.S. policies on deportation and the wall continue to feed bilateral tension.

The outlook for the Mexican economy improved in March, despite continuing concerns about domestic vulnerabilities and U.S. trade and tax policies. After months of holding off on purchases of Mexican assets, investors began investing in Mexico again. Growth has also been stronger than expected, and the peso surged in March to its highest level since the U.S. election in November. Still, 63% of Mexican businessmen are pessimistic about the economy’s prospects for this year because of uncertainty about U.S. policy. The energy reform continues apace, including the discovery of significant oil reserves in a shallow water block that was awarded in Mexico’s first petroleum auction in September 2015. And in Mexican domestic politics, the campaign for governor in the all-important State of Mexico is heating up, with the three principal candidates in a close race to be decided in June.

U.S.-Mexico Relations

Reduced tension and confused signals defined U.S.-Mexico relations in March. Meetings between the Mexican and U.S. finance ministers, trade ministers, and attorneys general seemed to calm the waters and reestablish a climate of bilateral cooperation, as did softened U.S. rhetoric on NAFTA.

After a presidential campaign consistently calling NAFTA a “disaster” and early Administration actions that relied on pressure, the Administration seems to be settling into a more diplomatic approach. Commerce Secretary Ross spoke of a “sensible negotiation” of NAFTA rules that would strengthen the peso. Peter Navarro, head of the National Trade Council and probably the most protectionist of President Trump’s economic advisers, spoke of the NAFTA countries uniting to create a manufacturing “powerhouse.” During his March 14 Senate hearing, U.S. Trade Representative-designate Robert Lighthizer focused his comments on China rather than Mexico and seemed to come down on the side of pragmatism rather than protectionism. Still, a sharp division over trade policy continues in the Administration and seems far from being resolved.

Regarding the NAFTA renegotiations, confused signals gave the impression that Mexico and the United States were negotiating the formal commencement date of negotiations through public statements. U.S. Commerce Secretary Wilbur Ross began the month saying that talks would probably begin “in the latter part of 2017” and would take about a year. Mexican Foreign Minister Luis Videgaray countered that talks would begin at midyear and finish in December. Ross then revised his timeline stating that the United States hoped to begin the talks in just over 90 days, and Videgaray followed suit saying that he expected talks to begin in June or July and that the “substantive elements” of the renegotiation could be agreed to by the end of the year. At month’s end Secretary Ross said the Administration hoped to formally notify congress by April 7 of its intention to start negotiations in 90 days as required by the Trade Promotion Authority (TPA) law.

Seeming to confirm this revised timeline, on March 28 the office of the U.S. Trade Representative sent a draft of the notice informing Congress of the Administration’s intention to open NAFTA renegotiation. Described as a “tweak” rather than a rewrite, the notice calls for expanded market access for U.S. goods and services, the inclusion of a safeguard clause to allow temporary tariffs to counter a sudden import surge, and a rewrite of government procurement rules to support Trump’s “Buy American” policies. And the notice seeks to “level the playing field on tax treatment” which, Jeffrey Schott of the Peterson Institute for International Economics notes, could leave the door open for a border adjustment tax. Overall, the proposed changes to NAFTA would require Congressional approval of the new agreement.

The following day, however, as if to counter concerns that the Administration might be going soft on trade, President Trump signed an executive order to re-examine all 14 U.S. free trade agreements, starting with NAFTA, to identify the drivers of the U.S. trade deficit. On March 30, both Ross and White House press secretary Sean Spicer said the notice did not reflect a change in Administration thinking. And on April 10 the Administration formally announced that it would not officially submit notification of its plans to renegotiate NAFTA until U.S. Trade Representative-designate Lighthizer is confirmed.

Throughout March and early April, Mexico continued to state its willingness to renegotiate NAFTA in good faith, as well as its insistence that it would end NAFTA if the negotiators are unable to reach a mutually beneficial outcome. In keeping with its stated position, Mexico reached out to Europe, Asia (specifically China) and Latin America on trade matters. It also worked to diversify its agricultural trade including talks with Brazil and Argentina to arrange duty-free corn exports to Mexico.

This has U.S. corn farmers worried. They are worried that Mexico, their #1 export market, might find alternative sources of duty-free corn imports, about a dramatic increase in agricultural tariffs should NAFTA end, and about Mexican retaliation should the U.S. impose a border adjustment tax.

Meanwhile U.S. policies on deportation and the wall continue to feed bilateral tensions. Feeling a responsibility to its citizens living and working in the United States, Mexico is increasingly concerned about deportations of law-abiding citizens, especially those that separate families by removing the parents of U.S. citizen children. With respect to the wall, President Trump presented his budget to Congress that contains $4.1 billion for the wall: $1.5 billion this year and $2.6 billion next, without a provision for Mexico to pay. And although building a wall faces significant challenges, from questions about congressional authorization for the funds to getting access to the land, the Administration has begun accepting proposals for its construction.

On the security front, in meetings with the Mexican Attorney General Raul Cervantes, U.S. Attorney General Jeff Sessions and Homeland Security Secretary John Kelly recognized Mexican assistance as vital to protecting the U.S. southern border. And on March 29, Senator Marco Rubio presided over a hearing of the Western Hemisphere Sub-Committee of the Senate Foreign Relations Committee that emphasized the critical importance of Mexico to U.S. economic prosperity and security. The same day, a bipartisan group of Senators introduced a resolution reaffirming the strategic partnership between the United States and Mexico. These activities suggest that Washington stakeholders are beginning to weigh in significantly on the importance of maintaining strong working relations with Mexico, an important signal to the Administration as it embarks on its NAFTA renegotiation efforts.

Mexican Economy

The outlook for the Mexican economy improved in March, despite continuing concerns about domestic and international vulnerabilities. After months of holding off on purchases of Mexican assets, foreign investors began investing in Mexico again. Mexico easily sold $2.4 billion in dollar-denominated bonds, its first since Trump’s victory, and it launched the first block of 12 public-private investment projects for highways and hospitals that should generate about $1 billion in investment. Meanwhile, a Bloomberg survey rated Mexico as the most attractive emerging market for investors.

Statistics on the economy’s early 2017 performance released in March reinforced this cautious optimism. Even as the finance ministry cut its 2017 growth estimate (to 1.3%–2.3% from 2%–3%), January growth surprised analysts, registering a 2.5% annualized increase. February also showed positive signs with increases in exports and retail sales, a rebound in consumer confidence and the lowest unemployment rate since 2006. And March saw factory activity rise to its highest level of the year and the stock market register a historic high.

Mexico’s first auction of foreign-exchange hedges drew bids for twice the $1 billion in securities it offered. While this evidenced market concern about the peso, it also enabled Mexico’s biggest companies with revenues in pesos but expenses in dollars to protect themselves from future currency volatility.

The peso surged in March, driven by the availability of these peso-hedges, another Bank of Mexico interest rate increase, the Federal Reserve’s gradualist interest rate policy, and softened signals coming out of the White House regarding NAFTA. It ended the month at 18.8, a 6% increase which solidified its position as one of the best performing currencies in 2017 and placed it only about 2% below where it was immediately prior to the U.S. presidential election in November.

The Bank of Mexico increased its benchmark interest rate a quarter point on March 30, bringing it to 6.5%, further widening the risk premium between the peso and the U.S. dollar. The rate increase aimed to tame inflation, which rose to an almost seven-year high, driven in part by a jump in electricity rates.

Fitch and the IMF warned Mexico over the need to reduce its public debt and fiscal deficit, especially given the uncertainties surrounding U.S. policies. The Finance Ministry expressed certainty that it will regain ratings agencies’ confidence by meeting its debt reduction plan for this year. This goal was reinforced by a transfer of a $17.2 billion from the Bank of Mexico to Hacienda, the equivalent of 1.5% of Mexican GDP, which by law must be used to pay down debt. Still, 64% of Mexican businessmen remained pessimistic about the economy’s prospects in 2017 due to concerns over U.S. policy. Yet when asked about their own company’s prospects, 64% of Mexican CEO’s surveyed expect growth at least in the single digits this year.

Energy and Telecom

A continuing source of market attraction is the Mexican energy sector, where implementation of the 2013 reform continues apace. The energy minister estimates that the cumulative amount of investment committed to energy projects will approach $100 billion by the end of 2017, including $30 billion of commitments added this year, driven by renewables and new markets, including new bid rounds for petroleum tracts.

And the impact of these investments is beginning to be felt. Eni announced a “meaningful” discovery that is expected to hold more than 800 million barrels of oil in a shallow water block awarded in Mexico’s first auction in September 2015. The timing could not have been better as the National Hydrocarbons Commission announced reserves fell another 10% in 2016.

The reform of Pemex’s operations continued as the firm formally signed its contract with Chevron and INPEX for its first deep-water joint venture and inked a deal with BHP Billiton for its first deep-water farm out. Taking advantage of liberalization in the gasoline market, BP opened the first of a planned 1,500 gas stations on March 9, the first oil major to do so.

In other energy news, Mexico launched the electric power capacity balancing market, designed to minimize blackouts by compensating generators for providing electricity during peak times, and auctioned off natural gas pipeline capacity with bids exceeding available supply by 30%.

CENACE will hold its third long-term auction for generation projects and clean energy certificates in April. The results will be published by mid-October. The outcome is expected to be in line with the previous two auctions that have attracted upwards of $6 billion in investment commitments.

In the telecom sector, Mexico’s Federal Telecommunications Institute (IFT) imposed new asymmetric regulations on Televisa and America Movil. This followed a ruling last month labeling Televisa a dominant actor in the pay TV market.

Mexican Domestic Politics

The election for governor in the bellweather State of Mexico is a three-way race in which the candidate of the ruling PRI party has a small lead over the candidates of the PAN, and Andrés Manuel López Obrador’s (AMLO) Morena party. With concerns running high that a Morena victory would give an added boost to AMLO, who is already leading in early polls for the 2018 presidential election, President Peña Nieto and Central Bank President Agustin Carstens offered veiled critiques of AMLO at the Mexican Bankers’ Convention. The President sharply criticized populist solutions to political challenges, and Carstens described the Bank as a bulwark against populism.

Events, Speeches, Publications

March 1: MJGS President & CEO, Michael Camuñez, was invited to join the Advisory Board of the Woodrow Wilson Center’s Mexico Institute. Camuñez joins Ambassador Jones, who is a long-serving member of the board.

March 12: MJGS President & CEO, Michael Camuñez, gave a presentation on the state of the technology ecosystem in Mexico at the 2017 South by Southwest Conference.

March 9–22: Senior Director, José Carlos Rodríguez Pueblita, discussed the health of the Mexican Banking system in the Financial Services Advisor, a publication of the Inter-American Dialogue.

March 21–24: MJGS collaborated with the Styrofoam industry to present the photo exhibit #UnicelSíSeREcicla #Foam on how Styrofoam is recycled.

March 25: MJGS President & CEO, Michael Camuñez, was quoted in The New York Times in a feature entitled “Renegotiate NAFTA? Mexicans Say Get on With it.”

March 27–29: MJGS President & CEO, Michael Camuñez, joined a delegation from the city governments of San Diego and Tijuana to Mexico City for a series of meetings with senior Mexican government officials to promote the development of the new Otay Mesa East border crossing. His meeting with Mexican Foreign Minister Luis Videgaray was reported in the San Diego Union Tribune here.

April 3: MJGS President & CEO, Michael Camuñez, and the Mexican Consul General in Los Angeles, Carlos Garcia de Alba, presented on the state of NAFTA at the Los Angeles Latino Deal Makers forum.

April 5: MJGS Chairman, Ambassador James Jones, evaluated the White House’s plans for changing NAFTA in the Latin America Advisor, a publication of the Inter-American Dialogue.