Trump Tariffs Put One In Five Mexican Corporations “In Trouble”
Kenneth Rapoza, Senior Contributor, Forbes
Jun 5, 2019
If President Trump makes good on his promise to slap 5% tariffs on everything Mexico sells to the U.S. starting June 10, then one in five Mexican corporations would be directly caught in the line of fire.
According to Fitch Ratings, one in five Mexican exporters would be in trouble if tariffs rose, particularly if they reached the 25% threshold in October, a timeline set by Trump for Mexico to get more aggressive with migrant caravans heading to the U.S. border.
Automakers, alcoholic beverage companies and energy companies are directly exposed to trade risk. All of them have bonds held by U.S. investors. Their ability to mitigate potential cash flow and credit implications of increasing tariffs varies company to company.
Companies with direct or indirect exposure to the U.S. export market include auto parts suppliers Rassini, Metalsa, Nemak and Grupo Kuo. With the exception of Nemak, the companies are all speculative-grade credit.
Textile company Grupo Kaltex, rated a low CC by Fitch, would also be one of the exporters facing potential financial problems should tariffs kick in next week.
Of note, Fitch said that Mexican oil firm Pemex is one of the two most vulnerable corporate bonds, followed by Kaltex.
PEMEX exported approximately 37% of its crude oil production to the Americas, the vast majority of it going to the U.S.
While it is not Pemex that pays the tariff at the ports of entry, there is always a risk that American importers will try to negotiate lower prices to make up for tariffs or cease signing new export orders, hurting future Pemex oil sales due to the higher cost of importing Mexican oil.
“The imposition of broad-based tariffs on U.S. imports of Mexican goods could have a direct negative revenue effect on 20% of (our) Mexican rated corporates,” Fitch analysts led by Jay Djemal, head of Latin America credit research wrote in a note published on Wednesday.
Depending on the duration of tariffs, and how high they go, there would also be indirect effects on Mexican companies linked to the broader macroeconomic repercussions of new trade tensions.
Blanket tariffs, if implemented, would diminish confidence in the future of the United States-Mexico-Canada (USMCA) trade agreement, elevating and prolonging the threat of trade policy uncertainty, Fitch analysts wrote.
The U.S. economy would not go unscathed by tariffs on Mexican imports. Business sentiment would take an obvious hit if the USMCA was not ratified.
“The latest tariffs represent a ratcheting up of trade tensions and would hit growth, not just in Mexico but also in the U.S.,” says Keith Wade, chief economist for Schroders, a U.K. wealth management firm. His macro-models suggest U.S. GDP would come in 0.7 percentage points weaker in 2020 with tariffs on Mexico. “This would put the U.S. in recession,” Wade says...