Citibanamex: Mexico's Nafta fears overblown

Recent research by Mexican bank Citibanamex affirms recent calls for surging inflation, rising interest rates, a weak currency and slow GDP growth for the country, but also suggests fears over a potential US pullout from Nafta may be overblown in the face of underlying WTO rules.

Those worries, recently brought to the forefront amid the current fraying of US-Mexico relations and harsh rhetoric from US President Donald Trump, will not only be tested by the economic reality of complex supply chains in the manufacturing sectors for both nations but minimum tariffs established by both countries' WTO membership.

In Citibanamex's quarterly economic assessment for Mexico, the bank posits "the pessimism playing out seems exaggerated and does not account for the positive changes occurring recently and in the last three decades," including for Mexico major structural reforms, a replacement of central bank autonomy and strong macroeconomic fundamentals, as well as sustained expansion of its industrial and manufacturing base.

"The importance of Nafta has diminished. Its potential end would imply that Mexico would have to pay to export to the US under the highest allowable tariffs under the WTO, which is only 3.5%," noting that should the US impose something like a 20% tariff on Mexican goods, this would represent a WTO treaty violation, potentially sparking a global trade war.

Repealing Nafta and creating a protectionist stance toward Mexico would also be difficult to enact both politically and logistically due to its potentially high cost to US firms and loss in millions of export-dependent jobs.

"The central element that could impede a harsh protectionist [US trade policy] towards Mexico is the hardly reversible integration of manufacturing in North America," read the research report. "In the long term, the goal of shrinking the trade deficit with Mexico could mean an increase to the US' entire global deficit."

Nevertheless, Mexico faces a number of other problems tied to its aging energy infrastructure, troubling levels of public debt and continued low oil prices, meaning the negative impact on investor perception, tied to the US-Mexico rift, is merely compounding underlying issues.

Citibanamex's latest forecast survey of private sector experts integrated the recent hike in fuel prices to raise the average forecast for monthly January inflation to 1.70% from 1.28%, and bringing the annual 4.7% inflation forecast well above the central bank target range of 2-4%. The CPI data for January will be released on Thursday.

Looking ahead, the survey sees February inflation at 0.47% and the estimate for year-end 2017 inflation rose to 5.32% from 4.93% in the previous report.

The average year-end forecast puts Mexico's benchmark interest rate at 7.15%, up from 7.06% previously. The peso now looks to end the year at 21.84 pesos to the US dollar versus the 21.96:1 in the previous survey.

The average GDP growth outlook for this year remains little changed at 1.5%, where Citibanamex's own estimate comes in on the low side at 1.2%.