BBVA: The Mexican economy can expand 1% to 1.5% in 2020
February 24, 2020 |
Alvaro Vaqueiro, Head of Corporate and Investment Banking of BBVA Mexico, on investment in Mexico and expected economic performance in the year ahead
What’s BBVA outlook on the Mexican economy and markets for 2020?
In 2019, we saw a slump in strategic sectors such as oil production, construction and sectors closely related to government spending and investment. As a result, the mexican economy flatlined, but the slump was not generalized. Despite the lack of growth, labor markets have been resilient. Evidence of the latter is the 1.7% growth of formal private employment and the low unemployment rate. For 2020, we anticipate a mild economic recovery in Mexico. We believe that the government will deploy resources in a more effective way this year, thus bolstering current spending and investment. As the US economy is expected to continue growing, the Mexican economy should therefore be able to expand between 1% to 1.5% y/y. For 2020 we expect a 3.5% inflation rate well under control. The main risks for this forecast are a poor budget execution and a further slowdown of US manufacturing. Never the less with the USMCA deal signed by President Trump, and a phase one deal between China and USA agreed, we see a constructive environment for local financial markets. On the local front, Banco de México has ample leeway to continue cutting rates this year, even though the Board will most likely proceed at a cautious pace. In this context, we remain constructive on the MXN Peso and see scope for an appreciation to $18.5 against the USD in the first half of the year. In the second half, we cannot rule out periods of higher volatility triggered by the US election. Mexico’s credit rating remains at risk, as two of the main rating agencies have a negative outlook for both the sovereign and Pemex. This story is not new, however, and in all likelihood it has been mostly priced into Mexico’s risk premium. 2)
Which sectors are expected to grow more?
In 2019, we saw very low activity in the construction and infrastructure sector due to the lack of new projects being tendered. On the other hand the sector recorded very important M&A transactions, such as the acquisition of relevant stakes in RCO and Ideal, two of the largest toll roads operators in Mexico. These transactions showed the strong interest from international investors in long-term projects that involve exposure to Mexico's GDP growth. We believe this appetite will continue in 2020. Construction should improve as the government flagship infrastructure projects are expected to accelerate their development, and modifications to toll-road concession titles announced by the SCT last year will be signed.
In the Telecom industry, the growing demand for data will drive investment. A friendlier government stance is being perceived by the telecommunications sector, one that doesn’t involve more regulations like the ones that ended up impacting its value during the previous administrations. This environment is favoring a more rational competition dynamic that is based on price increases in the mobile phone segment and wider margins resulting from the digitalization of operations. As a result, companies will compete by offering better geographical coverage and quality service, and thus they will require to rent a higher number of telecommunication towers in Mexico.
It is also important to underline that the communications sector has a more friendly government policy and a more rational competitive environment (ie price increases in the wireless segment) that should drive competition towards improving geographic coverage and quality of services.
The healthcare sector is poised for growth because of an existing environment of limited health coverage in the country but an increasing awareness of the need to prevent and treat diseases. In 2019, a landmark transaction took place when CDPQ, the Canadian pension fund, acquired a minority stake in Sanfer, the largest Mexican private pharmaceutical company in the country.
Even though the Energy sector has seen less activity due to uncertainty created by the public announcements in 2019 (e.g. revision of tariffs in pipelines, CELs, wheeling charges, etc.), we believe the growing need for power generation, whether investment is made by privates or CFE directly, will bring more activity to the sector in 2020.
We think Real Estate will benefit from the ratification of the USMCA and the continued interest rate cuts by Mexico’s central bank. We expect industrial real estate to be the best performer within the sector. 3)
What is the outlook on the National Infrastructure Plan?
The Mexican Government has already published a private-sector infrastructure program, whereby it commits to give the development projects the necessary administrative facilities to meet their schedule. It does not, however, offer any funding or guarantees to the private sector. The program amounts nearly $40 billion and markets have perceived it as a signal of confidence in the current Administration.
The financial sector, including us, awaits the publication of the National Infrastructure Plan to outline priorities and guidelines for developing public infrastructure. Regardless, we have already seen positive signals, since the government announced last November 147 infrastructure projects that will be financed by the public sector in the coming four years. In addition to this, soon the government will announce the energy sector investment plan. No doubt, the implementation of the National Infrastructure Plan will play a role on investor’s confidence and, thru that channel, become a catalyst for economic growth. 4)
What is BBVA Mexico’s role in this environment?
BBVA remains Mexico’s largest and most important financial group. We have had a leading position in Financing, DCM, ECM and M&A markets during the last decade, having participated in the most critical and complex transactions in the market.
We have the largest Corporate Finance team, in the current context we will continue to give our clients strategic advice focusing on structuring tailored transactions for our clients with a high strategic sense, including the search for partners to finance growth, sale of non-strategic assets, acquisitions aimed at gaining strategical geographic presence and capital raising solutions. We will also continue to support our clients with their structuring and financing needs, providing them with custom solutions with a relevant focus on sustainable financing.
One example of our commitment to our clients is the important role that BBVA’s played in helping them win five of LatinFinance’s 2020 Deals of the Year Awards. They were: Fibra Uno - Financing Innovation of the Year; Grupo Bimbo – Corporate High Grade Bond of the Year; Mexico - Sovereign Liability Management of the Year; and Pemex - Syndicated Loan of the Year.
Top photo by BBVA
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