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Moody's: Uncertainties from NAFTA talks continue to weigh on Mexico's outlook

Uncertainties stemming from the renegotiation of the North American Free Trade Agreement, or NAFTA, remain a threat for Mexico's outlook, Moody's said Feb. 20 in a report that outlines what potential outcomes from the ongoing trade talks could mean for Mexico.

The rating agency's baseline scenario still assumes that a revised NAFTA deal would be reached at the end of the first quarter of 2018. This scenario would anchor a slight uptick in Mexico's economy as it grows between 2.0% and 2.5% annually from 2018 until 2019.

However, Moody's also laid on the table three alternative outcomes that could happen if talks extend after the first quarter. Under the first alternative scenario — in which talks continue past the April 1 deadline but progress still continues — Mexico along with the U.S. and Canada would reach a NAFTA update deal most likely in mid-2019. Policy continuity will anchor medium-term growth and investment as well as trim uncertainty, Moody's said.

In the second scenario, Moody's envisions the termination of NAFTA but a bilateral agreement being formed between the U.S. and Mexico. In this case, Moody's does not expect the NAFTA split to damage Mexico's long-term growth prospects, although short-term financial variables are likely to be affected, including a temporary devaluation in the peso.

However, Moody's expects an economic recession in Mexico under a third scenario, in which the U.S. exits NAFTA and imposes trade restrictions on its southern neighbor. The magnitude and duration of the shock would be significantly larger, Moody's said, adding that this scenario offers the most severe risk on Mexico's credit profile and could put a dent in the country's growth by up to -3%.