Economics: Limited Fx, Rate Risk Near Term
The slowing pace of global economic growth, rising interest rates on peso debt, peso depreciation and the growing cost of servicing dollar denominated debt could have a major impact on non financial private sector companies and on the Mexican financial system. Nevertheless, such additional external shocks will tend to have effects of a lesser magnitude than we witnessed in other crises.
Among the aspects we at GEA regard as determinants for a lesser degree of risk exposure we can cite a higher proportion of long term foreign currency debt. Only 15% of traded corporate debt securities is concentrated in short term debt instruments. Furthermore, the amortization profile of traded debt securities is concentrated in 2018-2020, so there is no risk companies will need to refinance in the near term.
It is crucial, however, that the public sector takes mitigating action, including significant and efficiency-criteria based reductions in public spending as were announced on Wednesday, February 17 by the Minister of Finance and the governor of the Central Bank in order to offset the impact of the expected erosion of petroleum income arising out of lower prices and a narrowing production platform, as well as a drop in tax collections resulting from a possible slowing of economic growth in Mexico. These include a 100 billion mx peso cut in Pemex expenditure as well as cuts in current spending by the federal government of around 130 billion pesos.
In light of such concerns, in this week’s Outlook section we analyze the possible magnitude of the risk impact on privately held companies and the Mexican financial system.
On the subject of economic growth, last week the authorities released industrial sector results for December, which proved to be unfavorable because output was flat compared to a year earlier, when industrial activity expanded 3.5%.
The lack of movement in the headline rate reflected the combination of negative results from construction (-1.4%) and mining (-4.8%). Those sources of downside were evenly canceled out by a 2.5% increase in manufacturing output. It is worth noting that the rise in manufacturing reported for December was close to the 2.9% average accumulated rate of growth of the first 11 months of the year.
In contrast to the generally downbeat industrial results, sales figures from the National Association of Supermarkets and Department Stores (Antad) for January pointed to continuing strength in consumer demand as sales showed nominal growth of 11.6% compared to those recorded for the same month a year earlier, and growth in real terms of 8.8% during that same period. In the same month, sales at comparable stores – those open at least one year – grew by a nominal 8.6% and an inflation adjusted 5.8%.
The nominal sales growth of comparable stores – those open at least 12 months – were stronger in January than they were during the same month a year earlier, when they grew 7.3% at all locations and 3.8% at same stores.
Further evidence of consumer spending came from the Mexican Association of the Automotive Industry (AMIA), which reported that revenues from vehicle sales grew 15.4% during the first month of 2016 as 119,693 cars and light trucks were sold, a volume result that the association described as similar to that of a year earlier. Exports of automotive vehicles assembled in Mexico grew 4.1% year on year, a result similar to the 4.4% average increase of 2015.
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