Carlos Serrano, Chief Economist Mexico at BBVA Bancomer, and Alejandro Chiaradia, Head of GTF Mexico, discuss developments in trade in the region.
The Mexican economy has been hit by some shocks that will mean growth in 2015 will be lower than expected. These shocks are the fall in international oil prices and reduced oil production. Although oil no longer has such an important weight in the country’s economy (it now accounts for less than 10% of total exports, while in the 1990s the figure was over 70%), it is still fundamental for the public finances: around a third of the government’s revenues come from this commodity.
However, in the medium term, the outlook for the Mexican economy is very optimistic. First, the country has solid fundamentals: a low debt as a percentage of GDP (44%), a low current account deficit (2%), financed fully by foreign direct investment, low inflation levels (currently under 3%, which is the Central Bank’s target) and a solid and solvent banking system that fully complies with the Basel III capital requirements.
Second, the structural reforms approved last year will improve economic competitiveness. At BBVA we consider that they could increase potential growth from 3% to 4%. This scenario provides an excellent opportunity for the development of the trade finance business, both in transactional short-term finance and longer-term finance using more complex structures.
Third, we have to highlight the increasingly greater trade integration between Mexico and the United States, which has resulted in the country becoming a strong manufacturing exporter, in particular in the automotive, aerospace and electronic sectors. At the same time, important value chains have been developed between both countries, together with a good logistics that allow the export of goods from Mexico to the United States in one or two days.
BBVA Group aims to be a strategic partner in its customers’ internationalisation process. To this end, it presents excellent geographical coverage and an unbeatable range of products and services, above all within the framework of international trade between Mexico and the US.
Currently all the countries in the Latin American region are facing major challenges in the face of the imminent monetary policy rate hike by the US Federal Reserve. This situation has resulted in a high level of financial volatility, which is reflected in the fact that all the currencies in the region have depreciated significantly against the dollar.
The rise in foreign currency uncertainty has not affected trade flows between Mexico and the US. It has certainly boosted exports in some economic sectors as a result of the increased competitiveness offered by the appreciation of the dollar against the Mexican peso. On the side of imports, there has been a demand from many of our importer customers to hedge their dollar-denominated obligations. These hedging instruments have allowed them to continue to maintain their trade in imported goods and services.
Having said that, today the region is better prepared than in past decades, as prudent monetary and fiscal policies have been consolidated in most countries.
Also of note is the increasing importance of the Pacific Alliance. Mexico, Colombia, Peru and Chile are competitive and dynamic economies that are among the most open in the world. Each of them has free trade agreements with more than 40 countries. The countries making up the alliance aim to foster regional integration, boost greater growth, development and competitiveness through co-operation and the complementarity between their economies, making progress toward a free trade zone that will allow them to become a logistical and business platform for China, Japan and emerging countries in Asia and the east coast of the United States.
However, there is great potential for increased trade within the Pacific Alliance: trade between the countries only accounts for 4% of their total foreign trade. Increasing this figure must be done by stressing the aspects that facilitate trade: infrastructures of all kinds, such as roads, ports, power grids and telecommunications networks, logistical networks, etc, and improved access to markets, creating harmonised and simplified regulatory frameworks.
BBVA can help trade between these countries to grow. Recently BBVA Research published a study identifying sectors that have a great potential of seeing more trade between countries in the alliance, including machinery, paper and cardboard, perfumes and ceramic products.
BBVA Group has a major presence in the member states of this alliance and in many of their main trading partners in the Asia Pacific zone, as well as in new potential markets such as Turkey, where the Pacific Alliance already has a Commercial Office since 2012, to promote trade, investment and tourism at bilateral and multilateral level.
The Global Trade & International Banking Area has a team with the necessary skills and capabilities to support our customers’ trade finance needs in this region.