RISKS IN MEXICO FOR 2024
Macroeconomic policies, Petroleos Mexicanos (PEMEX), and Asian foreign investment are expected to play a vital role in driving the Mexican economy in 2024. In 2023, the International Monetary Fund (IMF) conducted a comprehensive examination of the Mexican economy as part of its art. IV Consultation under the IMF Articles of Agreement (IMF, 2023, pp. 1–105).The IMF highlighted the opportunities and challenges that the Mexican economy is likely to face in the coming year. Moreover, one significant concern is the fiscal balance of PEMEX, a public Mexican company. The company's high level of indebtedness poses a potential risk to Mexico's financial position. This issue calls for careful attention and management to ensure stability and sustainability in the Mexican economy. Furthermore, there is a growing geopolitical interest in Mexico. China is increasingly investing in Mexico due to the advantages of nearshoring and Mexico's external trade policy. However, the United States government is apprehensive about potential threats to national security that foreign investment in the Mexican economy may pose. Overall, a proactive approach to macroeconomic policies, addressing the challenges faced by PEMEX, and managing geopolitical interests will be crucial in shaping the Mexican economy in 2024.
I. The IMF visit
The recent visit by the International Monetary Fund (IMF) yielded significant insights for investors, policymakers, and leaders in Latin America. The Staff Report emphasized two key risks related to the exchange rate and global oil prices. While the exchange rate between the Mexican peso and the American dollar has remained stable, with the peso gaining ground against the dollar, the volatility in international oil prices has adversely affected the Mexican economy.
In October 2023, the IMF Executive Board press release outlined specific climate and financial measures that Mexico should adopt to enhance its macroeconomic position. The report recommended a transition towards low-carbon and renewable energy sources by implementing carbon pricing mechanisms (IMF, 2023, p. 3). Additionally, it advised maintaining a high interest rate to combat inflation, lowering it only when inflation consistently decreases (IMF, 2023, p. 3). The report also stressed the importance of greater transparency in fiscal reporting and the implementation of policies to promote female labor force participation and economic empowerment (IMF, 2023, p. 3).
In 2024, Mexico aims to expand its domestic debt while reducing reliance on external debt. In December 2023, the Public Finance Office (Secretaria de Hacienda y Crédito Público) announced that the primary source of financing for 2024 would be the domestic market. Refinancing measures were also deemed necessary to alleviate the debt burden of the incoming government. Moreover, the government expressed the need to decrease exchange rate risks by reducing external debt. Of the 48 securities listed on the Luxembourg Stock Exchange, with a total value of approximately USD 111,888,265,000.00, only two bonds with maturity dates in 2024 and 2025 were identified (LuxSE, 2024). These bonds, totaling £500,000,000 and USD 1,000,000,000, represent a considerably smaller portion of the listed bonds, aiding the external debt management strategy of the incoming government.
II. PEMEX
The public Mexican company, is facing significant challenges in its fiscal position, raising concerns among senior credit rating analysts. According to S&P and Moody's credit evaluations, PEMEX has been rated BBB and B1 respectively (Blomberg Línea, 2023a, 2023b). However, S&P has warned that without adequate financial support from the Mexican government, PEMEX's credit rating could decline to CCC+ (Blomberg Línea, 2023a). The IMF has also acknowledged the current debt status of PEMEX during its annual visit to Mexico.
The transition to clean energy in Mexico presents a complex situation. While the IMF recognizes the country's heavy reliance on the oil industry and emphasizes the need to improve PEMEX's current status, it also highlights the importance of shifting towards clean and renewable energy sources. If the situation of PEMEX does not improve, it could potentially impact the fiscal position of the Mexican government, necessitating the incoming president to address intricate financial issues in the country.
Furthermore, the Mexican Senate recently approved tax relief measures due to the fiscal pressure faced by PEMEX (BNN Bloomberg, 2023). This Indirect financial assistance has been crucial for the company, given its considerable debt levels. On the Luxembourg Stock Exchange alone, PEMEX has 83 listed securities, totaling approximately USD 152,884,460,374 and €7,650,000,000, with nearly seven bonds maturing in 2024 and 2025, amounting to approximately USD 7,749,169,000.
In addition, PEMEX and the Mexican government have come under scrutiny due to a recent measure taken by PEMEX's subsidiary, Pemex Transformación Industrial. The government published a public utility declaration in the Diario Oficial de la Federación, which indicated the takeover of the Hydrogen Plant U-3400 within the Miguel Hidalgo Refinery to ensure hydrogen distribution in the country (Secretaria de Gobernación, 2023). This plant is owned by the French company AirLiquide, and according to Reuters (2023b), compensation terms are expected. Mexico and France have a bilateral investment treaty in place since 1998, which includes provisions for investor-state dispute resolution. However, at the time of writing, no legal action against Mexico has been announced. Regardless, any compensation, whether through arbitration or conciliation, could add further pressure to PEMEX's finances.
III. Nearshoring and Asian investment
The IMF highlighted the opportunity for Mexico to nearshoring, from which Mexico already benefits. The commercial relationship between Mexico and China has strengthened recently(The New York Times, 2023). In November 2023, after the meeting between President Andrés Manuel López Obrador and Chinese President Xi Jinping, the Mexican and the Chinese governments published their intentions to articulate their commercial strategies and cooperate to promote bilateral relations(Reuters, 2023a).
Moreover, Mexico and China have formal and informal commercial trade regulations. Although Mexico and China's commercial relations are ruled by the general norms of the World Trade Organization, they have developed a Comprehensive Strategic Partnership consisting of memorandums of understanding and bilateral informal working groups, reports, and recommendations. Additionally, this relationship is covered by a Bilateral Investment Agreement signed by both countries in 2008.
The development of Mexico's supply chain is noticeable, which the international media compares with other emerging economies like Thailand, Indonesia and Vietnam. Moreover, Mexico's geographical position makes it more attractive to information and technology industries as the U.S. market may need to ensure critical technological component provision, as resembled in the CHIPS and Science Act of 2022. Likewise, the Taiwanese tech company Pegatron(Industrial Insider, 2023) has been expanding its operation in Mexico, as well as the U.S. company Cloud H.Q(El Economista, 2023a). Moreover, goods and services arriving in Mexico can take further advantage of the United States-Mexico-Canada Agreement (USMCA), which entered into force on July 1, 2020.
Even though the U.S. and China have complex trade relations, Chinese companies still want to commercialize their products in the world's largest economy. Consequently, Chinese firms have opened branches in Mexican cities near the border, where they can move into U.S. territory. As a result, the United States has emphasized the relevance of checking current foreign investment arriving in Mexico. According to the Mexican Journal El Economista, Mexico and the EE.UU. have agreed to develop a mechanism that reviews foreign investment in industries such as tech, critical infrastructure, and sensitive data. According to the U.S., the arrival of external investment to Mexico and the U.S. may imply risks to the National Security. Even though the North American authorities did not point out specific countries, it is feasible that Asian investment in North America may be seen as a geopolitical risk in the region(El Economista, 2023b).
Concluding remarks
In 2024, Mexico's public debt strategy may be highly influenced by the international oil price and dollar fluctuation. Moreover, the domestic debt market may be more active than the international bond market for Mexican securities, which may contrast with PEMEX securities, which do not have a clear path. While the Mexican government actively supports the public oil company, the latter faces financial pressures that may impact Mexican stability. Finally, it is expected that Asian investment continue flowing into Mexican territory; however, this is without further geopolitical concern with the United States government.
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