December 2016

CEO’s Executive Summary: The persistent and strident attacks on Mexico and Mexicans that peppered candidate Donald J. Trump’s election rhetoric have been toned down in the transition. But this more moderate stance still includes a commitment to renegotiate the North American Free Trade Agreement, deport millions of undocumented Mexicans, and have Mexico pay for the infamous “wall,” as well as economic inducements to stop a major manufacturer, Carrier, from moving 800 jobs to Mexico from Indiana. The resulting uncertainty about the future of the Mexican economy drove the peso to new lows and further reduced expectations for growth and investment. The announcement that Central Bank President Agustín Carstens will step down in July added fuel to these negative sentiments. This pessimism persists despite the Mexican Congress’s final approval of an austere 2017 budget, the upward trend in global oil prices, and the success of the government’s first auction of deepwater petroleum tracts. Stay tuned—the next few months will be critical for the Mexican economy.

Transition Watch

Stepping back from its campaign promise to tear up the North American Free Trade Agreement, the Trump transition team has taken a slightly more moderate line. The original position came out in an internal discussion memo that orders (1) the Commerce Department to study the ramifications of withdrawing from NAFTA and (2) the U.S. Trade Representative to notify Mexico and Canada that it intends to propose amendments to the treaty.

But in a 60 Minutes interview with Lesley Stahl on November 20, President-elect Trump softened his rhetoric, and in a YouTube video released the following day announcing executive actions to be taken his first day in office, he made no mention of NAFTA or Mexico.

It now appears that rather than tear up NAFTA, President-elect Trump and his advisers will instead push for substantial changes to the treaty. According to The Wall Street Journal, this could include special tariffs or other barriers to reduce the U.S. trade deficit with Mexico and new taxes directed at U.S. firms that move production to Mexico. But as Reuters noted, any attempt to renegotiate NAFTA could require the United States to make concessions to Mexico and Canada, and a renegotiation would likely take several years to complete.

A further indication of this more measured approach was President-elect Trump’s selection of Wilbur Ross as Commerce Secretary. In a November 30 interview with Fox Business News, Ross made clear his and the administration’s preference for fixing NAFTA through negotiations. Equally, Mexican President Peña Nieto has already indicated his willingness to “modernize” the treaty by updating its environmental and labor rules.

On the other hand, Trump made good on his promise to prevent U.S. companies from exporting jobs by brokering a deal with Carrier Air Conditioning not to move 800 jobs it had planned to move out of Indiana to its new factory in Nuevo Leon, Mexico. The December 1 agreement, negotiated by Indiana Governor and Vice President-elect Mike Pence, includes $7 million in state tax breaks for Carrier. Notwithstanding, 1300 jobs will still move to Mexico.

During his announcement of the deal, Trump reverted to his tougher rhetoric, stating once again that NAFTA is “a total and complete disaster”—a “one-lane highway into Mexico. Nothing coming our way, everything going their way,” adding that “I just want to let all of the other companies know that we’re going to do great things for business. There’s no reason for them to leave anymore ….”

Trump tried to build on this success over the weekend with a series of tweets calling out another company, Rexnord, for its plans to move a production facility to Monterrey, Mexico, and laying off 300 Milwaukee-based workers. This was a clear message from the President-elect that Carrier was not a “one-off,” but it raises questions as to who might be next. Is this going to be a feature of his administration’s U.S. trade policy, or is it a warning shot to other companies in the hope that they will “self-adjust” their policies? In either case, uncertainty is once again the short-term consequence.

U.S.-Mexico Relations

A week after the U.S. election, the American Chamber of Commerce in Mexico City agreed with Mexico’s U.S. ambassador on the need for a concerted effort to defend NAFTA and the underlying bilateral trade worth more than $500 billion annually. Organizations representing almost 5,000 Mexican and international firms announced a 100-day campaign in 16 U.S. states to highlight the strategic importance of NAFTA to the United States, Canada, and Mexico. Even the former president of the left-leaning Democratic Revolutionary Party (PRD), Carlos Navarrete, acknowledged that NAFTA has, on balance, been beneficial to Mexico and should be protected.

The CEO dialogue and the High Level Economic Dialogue met in Mexico City in early December to discuss the importance of the bilateral relationship. The CEO dialogue announced plans to defend NAFTA while strengthening and modernizing it. In her contribution to the dialogue, Mexican Foreign Minister Claudia Ruiz Massieu emphasized the need for Mexico and the United States to “go beyond” NAFTA to form a deeper relationship that would include the freer movement of labor and ideas.

The Mexican Ministry of Foreign Affairs, Senate and private sector agreed to create a high-level group to analyze potential Trump policy scenarios and design corresponding response strategies ahead of Donald Trump’s inauguration in January.


In the wake of the election, the Bank of Mexico increased interest rates to 5.25%, their highest level in more than seven years. Still, the uncertainty associated with protectionist rhetoric and a potential NAFTA renegotiation hit the Mexican economy hard. It increased Mexico’s bond risk premium (EMBI) to 261 basis points and led to reduced growth estimates for the economy. Growth is now expected to be 2.1%-2.2% this year—despite a third quarter rebound that drove unemployment to a nine-year low in October—and just 1.8% next year. In November, the stock market registered its largest monthly loss since 2011, falling 5.6%, and the peso-to-dollar exchange rate fell to a record low of 21 before closing the month at 20.6, off 9.15% for the month. November also saw significant pass-through inflation from the peso depreciation, rising 3.3% over last year. These trends led Nomura securities analysts to express concerns about the longer-term impact of U.S. protectionism on the Mexican economy going forward.

Any benefit the peso might have felt from OPEC’s November 30 agreement to cut production was erased the next day by the announcement that Central Bank president Agustín Carstens will be stepping down on July 1, 2017, to head up the Bank for International Settlements. The peso fell 1%, touching new historic lows before closing the day at 20.8.

In other economic news, Foreign Direct Investment fell 8% in the third quarter—and that was before Donald Trump’s unexpected election victory. Although large corporations agreed to maintain their investment plans, smaller firms are taking a wait-and-see attitude.

On a more positive note, OECD economists argue that Mexico could benefit from President-elect Trump’s proposed expansionary fiscal policy, and some analysts expect a short-term increase in remittances driven by uncertainty about the potential for government measures affecting migrants’ ability to work.

Following the U.S. election results, the Mexican Congress rushed through final approval of an austere 2017 federal budget it hopes will protect Mexico from possible post-election financial turbulence. It was approved in the early morning hours November 10 and made minimal changes to the president’s proposal. The legislation includes a primary surplus to be achieved through sharp spending cuts for federal entities with the education, environment and communication and transport ministries taking the biggest hit. But it did retain funding for 16 public-private infrastructure projects. And Finance Minister Meade made clear his determination to make additional cuts as needed to maintain market confidence in the government’s fiscal management. Meanwhile, the national minimum wage commission announced a 4.5% increase for 2017.

In the telecommunications sector, two events dominated the news. The Mexican government announced that the Atlan group will build and operate Mexico’s national wholesale mobile network, the “Red Compartida.” And the Federal Telecommunications Institute tendered 148 television concessions throughout the country in a move intended to increase competition in the sector.

In energy news, on December 5 the National Hydrocarbons Commission announced the winners of the long-awaited deepwater petroleum block auction. The auction was an unmitigated success. BHP Billiton won the bidding to become Pemex’s first deepwater oil partner, and the Chinese company CNOOC won two fields in the Perdido fold belt, just south of the U.S. border, crushing their competitors with bids that offered five to six times the minimum royalty. All told, Mexico licensed 8 of the 10 fields up for bid, including one each to Exxon and Chevron (also in the Perdido region), that should bring in about $34 billion in investment over the next 35 years.

In company news, peso volatility is making it difficult for some companies to develop reliable financial forecasts and creating debt servicing challenges as the depreciation over the past five years has almost doubled Mexican companies’ cost of dollar-denominated debt. With regard to security, according to a biannual poll by the Mexican national statistics agency (INEGI), over 35% of Mexican businesses reported being the victims of crime in 2015, up from 33.6% in 2013. Crime is now estimated to cost 138.9 billion pesos/year ( US $6.75 billion/year), or 0.73% of GDP, yet 90.3% of these crimes go unreported.

Mexico Politics

President Peña Nieto’s support plumbed new lows, reaching the low 20s in all the major polls, with the most recent fall attributed to profound popular opposition to the visit of then candidate Donald Trump. Following Donald Trump’s election victory, opposition leader Andres Manuel López Obrador published a YouTube video calling for calm in an initial effort to disassociate his brand of politics from “Trumpian populism.”

Margarita Zavala of the National Action Party (PAN) continues to lead national preference polls for the 2018 presidential election, but trails behind other candidates in her own party. A mid-November Reforma poll shows Ricardo Anaya leading Zavala among party members by 43% to 39%, with Rafael Moreno Valle a distant third at 18%. In a head-to-head race, Anaya’s advantage increases to six points, 50% to 44%.

Events and Presentations

December 6-7: ManattJones President and CEO, Michael Camuñez, and its Chairman, Ambassador James Jones, attended the U.S.-Mexico CEO dialogue in Mexico City.

December 6 & 8: ManattJones Senior Adviser, Pamela Starr, discussed the impact of the U.S. election on Mexico and U.S.-Mexico relations at the Opal Group’s Alternative Investing Summit and the U.S.-Mexico Business Environment binational conference at Rice University, respectively.

December 9: Mr. Camuñez attended and participated in the new North American Working Group organized by the U.S.-Mexico Chamber of Commerce in Houston to advise the Trump Administration on U.S.-Mexico commercial relations.

Camuñez and Starr discussed U.S.-Mexico relations as part of the Pacific Council on International Policy’s “First 100 Days” interview series.