President elect Andrés Manuel López Obrador (aka AMLO) is not due to take office until December creating an element of uncertainty about changes to Mexico’s energy reform programme. However, AMLO does seem to be taking a pragmatic approach, particularly given the government’s goal to drastically increase oil production: it is targeting to boost Mexico’s oil production to 2.48 m b/d by 2024. Rocio Nahle, the incoming energy minister, stated ‘We will respect the rule of law and the agreements that have been made with the outgoing government’.
Andrés Manuel López Obrador (AMLO), will not be officially inaugurated as Mexico’s next President until December but already looks to be taking a proactive role on issues such as NAFTA. Since his Presidential election victory on 1 July, he has written to Trump advocating that the US and Mexico work together on the key issues of ‘trade, migration, development, and security’.
Last week Moody's upgraded Spain’s long-term rating by one notch to Baa1, this follows S&P’s one step upward revision to A-. Moody’s stated its review “reflects the improvements to the credit profile seen in recent years, in particular enhanced economic resiliency due to an increasingly more balanced growth profile and improved banking sector fundamentals.” Although the nation’s fundamentals have improved, we still calculate the country has a 2 star NFA ranking, so it is therefore not included in our investable universe.
Pemex, Mexico’s dominant oil producer, 100% owned by the government, has been in the news of late. It recently announced its largest onshore oil discovery in the past 15 years with the Ixachi-1 well: estimates put total reserves at around 350m boe and over 1.5bn boe in place. The find is world scale and particularly attractive given its proximity to existing infrastructure allowing for a quick development schedule. This discovery builds on the momentum of some other discoveries in Mexico, albeit announced by private companies participating in the Mexican Government’s Energy Reform Programme; notably the Zama offshore oil field discovery which is estimated to have 1.4-2bn barrels of oil in place.
Brexit’s running for the most fruitless trade talks seems to have a contender in the Tratado de Libre Comercio de América del Norte - or more commonly known, to those of us not in the Spanish speaking world, as the North American Free Trade Agreement (NAFTA). The good news for Mexico (and for the US and Canada) is that at least NAFTA negotiations can be extended - as they were yesterday, to the first quarter of 2018. On news of this, the Mexican peso has rallied almost 2% from its weak point a couple of days ago.
Nafta talks are set to take centre stage in Washington tomorrow; where representatives from the US, Canada, and Mexico are expected to discuss the likes of: cutting the US’ trade deficit with Mexico, Canada’s wish to retain the ‘essential’ Chapter 19 panels, ‘rules of origin’, ‘Buying America’, climate talks, the digital revolution... amongst others. Some pretty high profile and strongly opinionated figures including Wilbur Ross and Bob Lighthizer will be pushing for both Canada and Mexico to increase their US imports, for example.
The Mexican Energy Reform Programme has benefited from some positive news-flow in recent weeks. A discovery at the Zama offshore oil field is estimated to have 1.4-2bn barrels of oil in place. This field is owned by Talos Energy, Premier oil and Sierra Oil & Gas and was one of the blocks bought in the earlier auctions opening up the acreage to private companies, a direct result of Energy Reform that came into effect in 2014. Also Eni announced that they had upgraded their estimates for the size of their find at the Amcoa field in the Campeche Bay to 1.3bn boe in place.
The next Mexican Presidential Election takes place on 1 July 2018 and the one term of six years limit means a new candidate will replace the incumbent President Peña Nieto. Thus, the 2017 gubernatorial election results, particularly in the State of Mexico which voted on 4 June, are of interest as a gauge of public sentiment towards the different political parties.
The State of Mexico or Edomex result is important as the state is one of the most populous (~14 percent of the population) and largest contributors to Mexican GDP. Plus, it has always been a power stronghold for the Institutional Revolutionary party (PRI) and it is the state where incumbent President Peña Nieto also served as State Governor.
Asset markets across Brazil have continued to come under pressure this week as geopolitical concerns deepen; exacerbated by the country’s bar association’s majority vote, over the weekend, in favour of President Michel Temer's impeachment. With roughly one in three cabinet members under investigation for alleged corruption, it seems the previously touted ‘EM Gem’ is set to be plagued with an uncertain outlook as the political crisis ensues, and much needed economic reform is thus put on hold.
Perhaps after the recent US healthcare reform debacle the realities of political office versus campaign rhetoric are hitting home for Donald Trump as his stance seems, for the moment at least, to be softening on a number of issues. He has repeatedly denounced NAFTA, the North American Free Trade Agreement, branding it a ‘disaster’, and threatened to withdraw from it without meaningful changes being agreed with Mexico and Canada. These comments and the withdrawal of the US from the Trans Pacific Partnership (TPP) earlier this year have seen forecasters elevate protectionism to a key risk to the global outlook.
Yesterday Oman came to the market with a multi-tranche USD5bn bond issue that was close to four times covered but with the 30 year issuing at a generous yield of 6.549%, even for a Baa1 rated credit (Moody’s), it is easy to see why investors were keen to get exposure, ourselves included. That said, we still see the greatest valuation upside in the quasi-sovereign space.
Most quasi sovereign bonds trade at wider spreads than their own governments and globally quasi sovereigns pay roughly 0.9% more than their sovereign owners. That is a lot of extra compensation for the modest additional risk.
Mexico has been hitting the headlines this month on the back of riots and demonstrations relating to a steep 14% average hike in gasoline costs as of 1 January. Under the new system the price reflects the price of an international reference plus a fixed tax thereby transferring the volatility of prices to consumer and smoothing out government revenues. Plus, maximum prices will be set for 90 regions rather than a single national price reflecting logistical differences. Unsurprisingly, consumers have been up in arms that the price has jumped by so much overnight.
Some good news for Mexico yesterday as they successfully auctioned off eight deep water oil and gas blocks in the Gulf of Mexico as an ongoing policy to open up the country’s energy industry. Companies such as China Offshore Oil Corporation (CNOOC), Australia’s BHP Billiton, France's Total, Norway’s Statoil, Malaysia’s Petronas, BP and a number of US companies were all successful bidders with a number of joint ventures established.
Mexico’s relieved energy minister Pedro Joaquin Coldwell said, ‘This underlines Mexico is very competitive in the oil and gas sector’ adding, ‘Before the current administration ends in two years’ time Mexico will likely hold three more oil auctions for shallow and deep water, as well as onshore areas’.
Recent volatility across asset markets seems to have abated somewhat as befuddled markets appear to be finding their feet; although the future Trump administration policy stance still remains unknown. One thing that does appear to be ‘known’ is the future relationship between the US and Russia. After a phone call yesterday between Trump and Putin, expectations are that the two nations will look to work to normalise relationships, formalise trade agreements and work together to combat international terrorism and extremism. Our guess is that Putin will also look to Trump to ease western sanctions on Russia which are due to be reviewed in January; more recently we have heard that Italy, Hungary, Greece and Cyprus have questioned the effectiveness of the sanctions and are pushing for dilution. Although bonds within the region did sell-off post election announcement, holdings such as Russian Railways 7.487% 2031 and Gazprom 8.625% 2034 have recovered into the end of the US close and today’s trading session; up 2-3 points at time of writing. Both bonds remain attractive, yielding over 6.3%, with sufficient 2-3.5 notch protection and expected returns of 19.4% and 13.5% respectively.
As the oil glut continues to weigh heavy on black gold dependent economies, countries such as Mexico have employed spending cuts as a way to shield themselves from the ongoing pressures. A couple of weeks ago, the country’s Finance Ministry announced it will be slashing spending by an additional MXN 175bn ($10bn) in 2017, this is on top of the ~$7.5bn worth of cuts this year; or 0.7% of GDP. The spending cuts in 2017 assume crude will be priced at $35pb, this is above the pessimistic $25pb estimated for 2016, crude is currently ~$44pb; however unlike other oil producing economies, the government has the safety net of the ~$50pb revenue hedge this year.
In the midst of a turbulent first quarter of 2016, emerging market currencies have had their best performing month in 18 years this March. The top performers are the Russian rouble and Brazilian real, up 11.2% and 10.4% respectively versus the dollar. The Argentine and Colombian pesos, Korean won, Malaysian ringgit, Polish zloty and South African rand were amongst other currencies that appreciated between 5% and 8% this month also. This of course is a retracement following the 50% rise in oil, back to end 2015 prices, and a more dovish tone from the US Fed. But should Brazil really be the one of the leading performers on the back of all these developments? Are markets assuming these factors have considerably more impact than the escalating internal strife? Of course Brazil stands to benefit from these latest developments and a settling of exaggerated Fed rate rise expectations. But the country is still in the middle of a major political upset at a time when it really needs to be addressing public spending and economic reform in the face of stagnating growth.
On 17 February Banco de Mexico surprised the market with a 50 basis point intermeeting rate hike taking the benchmark rate to 3.75% and the central bank directly intervened in the currency market and announced that the Foreign Exchange Commission would suspend dollar auctions when the peso weakens by more than 1% from the previous day’s fix in favour of intervention on a discretionary basis. The Central Bank Governor, Agustin Carstens noted that the depreciation of the peso and international market volatility had “increased the probability that inflation expectations are not in line with the consolidation of the permanent objective of 3 per cent.”
Australian and Mexican equity and bond sentiments seem to suggest contrasting regional opinions.
If you visit Down-Under the locals may try to frighten you into believing in the ‘drop bear’ - a ferocious predatory koala that drops from above onto unsuspecting prey, be they a wombat or an expat. If you’re gullible you might follow their instructions to smear vegemite on your earlobes or urinate on your clothes to keep them at bay... The drop bear may be a hoax but Australians have a different sort of bear to be concerned about. Today’s headlines suggest that Australian stocks officially entered bear market territory, with the ASX200 at 4775, down over 20% from previous highs of 5997 in March 2015 (In fact they are down over 30% from 2007 highs so technically they haven’t stopped being in bearish territory for the best part of a decade). They join the growing club of global stock indices that are in bearish territory in terms of both 52-week highs and all-time highs including respectively: Euro Stoxx 50 (-27% / -46% Mar’00), French CAC (-22% / -36% Jun’00), German DAX (-27% Apr’15), Italy MIB (-31% / -66% Feb’00), Spain IBEX (-31% / -46% Dec’07), Brazil Ibovespa (-34% / -42% Mar’00), Hang Seng (-32% / -31% Dec’07) and of course Japan Nikkei (-25% / still down -60% from December 1989).
Looking back on 2015 Mexico’s government risks being better remembered for the “El Chapo fiasco” in which the drug lord, Joaquín “El Chapo” Guzmán, escaped from, Altiplano, the ‘maximum security prison’, in July ‘15 and remained on the run until January ‘16. Adding to the humiliation, only following an interview with Sean Penn for Rolling Stone magazine did the authorities finally track him down and arrest him. The media love this sort of story and it has pretty much eclipsed anything positive the government might have done.
It is reported that Mexico has won “trade of the year” and is set to receive over $6 billion for its oil hedges put on in 2014.
The government paid out $773 million in 2014 to lock in prices almost $30 a barrel higher than the average market price over the last year through a series of deals with banks including Goldman Sachs Group Inc., JPMorgan Chase & Co and Citigroup Inc.