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Among Mexico's financial firms, NAFTA sensitivities vary widely

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Among Mexico's financial firms, NAFTA sensitivities vary widely

Some of Mexico's smaller financial institutions could be among the most severely impacted by a failure to renegotiate the North American Free Trade Agreement, even as the country's broader financial system is well-placed to weather such an event.

As an April 2 deadline for a new NAFTA deal draws nearer, the U.S., Canada and Mexico have struggled to make headway to renegotiate their decades-old trilateral trading pact. While the countries claimed to have made progress during their sixth round of trade talks ending Jan. 29, there are still significant differences to be worked out. The seventh round of talks is scheduled for late February in Mexico City.

If NAFTA does fail, the U.S. and Mexico still could form a new trade deal under guidelines set by the World Trade Organization, or WTO. But, in what is widely seen as a worst-case scenario for Mexico, the U.S. also could unilaterally withdraw from NAFTA without any trade agreement in place.

Recent reports from major credit rating agencies still hold a successfully renegotiated deal as their baseline scenario, but they also have warned of the potential impact that alternative outcomes might have on Mexico, which is already battling slowing economic growth, rising inflation and a volatile peso.

To be sure, trade make up a big part of Mexico's economy, and the U.S. makes up a huge part of Mexico's total trade, largely thanks to NAFTA. As of November 2017, more than 80% of all Mexican exports were sent to the U.S., while almost half of the country's imports come from it. Exports represented 38.2% of Mexico's GDP as of 2016, according to World Bank data.

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But while the result of the trade talks could have a direct and potentially severe impact on several parts of Mexico's economy, the country's financial institutions are seen as being generally well-positioned due to their limited exposure to the pact.

That line of thinking stems from financial institutions' limited exposure to so-called NAFTA-sensitive sectors — industries that most rely on trade as part of their business, such as automotive, textile and agricultural. Overall, loans to such industries represent a relatively small proportion of the Mexican banking system's total credit book, standing at about 9% as of year-end 2017.

The low-level exposure across the financial system, combined with sufficient capital buffers to handle any negative impact from a NAFTA collapse, means that the trade talks' results are unlikely to have a meaningful impact on Mexico's banking industry overall, David Ampudia, an analyst at FocusEconomics, said.

"The banking sector is not particularly exposed to NAFTA-sensitive sectors given the low percentage of loans granted to export-related sectors, while lower leverage and healthy buffers would cushion any knock-on effects caused by the reversion to WTO rules," Ampudia wrote in an email to S&P Global Market Intelligence.

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However, such loans do makes up a sizable portion of some, mainly smaller financial institutions, according to data compiled by S&P Global Market Intelligence. For instance, nearly two-thirds of agribusiness lender Banco Finterra SA Institución de Banca Múltiple's loan book is tied to NAFTA-sensitive sectors. However, nonbank financial institutions are seen as being the most at risk given that they tend to have less diversity in their operations and rely more heavily on certain business types.

"[Nonbank financial institutions] would have a harder time weathering the U.S. withdrawal from NAFTA, particularly those with a higher propensity to lend to export-intense industries," Ampudia noted. A downturn for such export-dependent businesses could affect their appetite to take on new credit and, possibly, their ability to repay outstanding debt.

Still, Fitch Ratings analyst Alejandro Garcia said that he does not foresee a drastic rise in delinquencies among companies operating in those NAFTA-sensitive sectors.

"We do not expect ... an immediate negative impact in terms of the repayment capacity of those companies, even in a scenario of negative outcome from the NAFTA talks," Garcia said in a telephone interview. "We believe that there should be some sort of adaptation process for most of those companies."

Rather, the analyst maintained that the broader NAFTA-related worries lie in the medium-term impact for Mexico's broader economy, and in turn for its banks.

"We are mostly concerned with how a negative outcome from those events could bring downward pressure on an economy that has already been growing at a relatively slow pace," Garcia said.

S&P Global Ratings expects Mexico's economy to grow by 1.7% in 2018 and 1.5% in 2019 should the NAFTA talks fail to lead to an agreement, compared to 2.3% and 2.4%, respectively, if a deal comes to fruition. Similarly, Moody's believes that the country's economy would grow by 1.5% in 2018 and by 0.5% in 2019 if the U.S. were to exit NAFTA and revert to a bilateral deal with Mexico under WTO trading rules, down from 2.0% and 2.5% growth if NAFTA remains intact.

Moody's also pointed to the possibility that the U.S. and Mexico fail to reach any trading agreement, "resulting in punitive and potentially escalating tariffs being imposed by each side on the other."

Under this assumption, which would push Mexico into a recession, "all Mexican lenders will face rising asset risks, especially if this is accompanied by higher inflation and interest rates, which would deeply stress borrowers' finances," Moody's warned.

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Looking for detailed macroeconomic and demographic data for a specific country? Use our Search functionality at the top to type a country name and get to that country's profile. Here is an example for Mexico.
Interested to view regulatory data for a specific Mexican bank? Go to the bank's profile on the website and on the left-hand side select Mexico Bank Regulatory Financials under the section Financials. Here is an example for Banco Nacional de Mexico SA Integrante del Grupo Financiero Banamex. You can also view this data on Excel by downloading our automated template here.

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As of Feb. 23, US$1 was equivalent to 18.57 Mexican pesos.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.