Fitch: Unwinding NAFTA could be difficult, costly for Mexican corporates

PRESS RELEASE

By Fitch Ratings

Fitch Ratings-New York-01 March 2017: Mexican corporates may face a variety of challenges and credit concerns if NAFTA is renegotiated or terminated, according to a new Fitch Ratings report.

"Mexico's interdependence with its NAFTA counterparts, and the associated complex supply chains, are firmly rooted after 23 years. A potential renegotiation or termination of NAFTA resulting in reciprocal tariffs would have negative ramifications on Mexican corporates to varying degrees," said Jay Djemal, Director. "Companies that possess significant cross-border operations that can redirect exports or pass through higher prices as a result of tariffs to the end customer are best positioned to withstand potential negative impact to their credit profiles."

Mexican corporates face varying degrees of exposure to a potential overhaul or termination of NAFTA:

Auto & Related: High Exposure

The auto and heavy vehicle industry is highly exposed to potential tariffs due to the complicated and multi-layered connections between the U.S. and foreign suppliers, and assembly points.

Building Materials & Construction: Moderate Exposure

Mexican cement companies are mostly well placed to benefit should the Trump administration successfully implement its plan to increase U.S. infrastructure spending. Currency mismatch between debt and revenues is a concern for some.

Chemicals: Low Exposure

It is unclear whether the Mexican government will retaliate by using this sector against potential U.S. protectionism measures, since the chemical industry is not labor-intensive and thus unlikely to attract much attention from the U.S. Congress. A U.S. import tariff would likely hurt Mexican competitiveness.

Consumer Products: Moderate Exposure

Mexican consumer product companies have limited direct exposure to US trade. Depending on severity, U.S. protectionist measures could slow down the Mexican economy or trigger a recession, which would impact the sector's financial performance.

Diversified Manufacturing: Moderate to High Exposure

Manufacturers in Mexico exhibit varying degrees of exposure to a potential change in the trade relations status quo between the U.S. and Mexico. Currency mismatch between cash flows and debt is also a consideration, mitigated to an extent by effective hedging.

Electric-Corporate: Moderate Exposure

The main player in the Mexican electric sector is linked to the sovereign. Potential downgrades to Mexico's sovereign rating would impact the credit profile of the sector.

Energy (Oil & Gas): Low Exposure

Mexico did not include energy as part of its collaboration with NAFTA, as oil and gas is a global commodity. Proximity between Mexico and the U.S. maximizes trade economics for both countries. Mexico and the U.S. both stand to lose from restrictive trade policies in oil and gas.

Food, Beverage & Tobacco: Low to Moderate Exposure

U.S. protectionist measures present some risk in the Mexican food and beverage sector, as some of these companies export their products to the U.S. Risks are greater for alcoholic beverages, particularly tequila, as the product must be distilled in Mexico and exported to the U.S.

Gaming, Lodging & Leisure: Moderate Exposure

The Mexican hotel sector would not be directly impacted by U.S. protectionist measures, but potential indirect downsides could arise from reduced tourism and business traffic from U.S. visitors, and an economic downturn under a restricted U.S. trade scenario.

Homebuilding Sector: Low-to-Moderate Exposure

Housing is mainly a domestic business in Mexico and would not be directly affected. Economic fallout as a result of the wider implications arising from an adverse U.S.-Mexico trading scenario could have a detrimental impact. Sizeable FX mismatch is a credit concern.

Media & Entertainment: Low Exposure

The Mexican media industry is largely domestic and not directly exposed to potential changes between Mexico and U.S. trade agreements. Lower advertising revenues caused by an economic downturn resulting from changing trade terms are a risk.

Natural Resources: Low Exposure

Natural resources, including base and precious metals, would likely not be affected by U.S. protectionist tariffs. Imported steel is an exception because President Trump has encouraged companies to switch to U.S.-produced steel exclusively.

Property/Real Estate: Moderate to High Exposure

Although visibility is limited, the implementation of protectionist policies by U.S. authorities could negatively affect Mexican real estate credit profiles due to lower business growth and weaker demand for leasable space.

Retailing: Moderate to High Exposure

A slowdown in the Mexican economy that would likely result from a negative trading environment with the U.S., would detrimentally affect retailers' credit profiles. Retailers in Mexico are also exposed to foreign currency exchange volatility, offset to varying degrees by sales made in USD and hedging practices.

Telecommunications: Low Exposure

This sector is not subject to any trade implications as it is purely a domestic business, and would likely not be directly affected as a result of any potential changes to NAFTA.