This week, POTUS Donald Trump will begin the process to renegotiate NAFTA, delivering on one of his campaign pledges 207 days into his administration. Yesterday US, Canadian, and Mexican officials gather in the first of seven rounds of negotiations that will likely redefine the economic and geopolitical future of North America.
According to the Mexican Ministry of Economy, the priorities of the Mexican government in these negotiations are divided into four sections. The first will focus on strengthening the competitiveness of North America; the second, moving toward inclusive and responsible regional trade; the third, taking advantage of the opportunities of the 21st century economy; and the fourth, promoting trade and investment certainty in North America.
According to the Executive Office of the President, the US government has four objectives in these negotiation rounds. The first is to continue breaking down barriers to American exports, which includes eliminating unfair subsidies, unfair practices by state-owned companies, and intellectual property restrictions. The US President also wants to adjust NAFTA to 21st century standards and correct the trade balance deficit the US has with its counterparts in this deal. Another objective is to reach a more open, equitable, secure, and reciprocal market access for the US. And fourth, the President wishes to effectively implement and enforce this trade agreement with the US’ largest export markets: Canada and Mexico.
Chrystia Freeland, the Canadian Minister of Foreign Affairs, outlined Canada’s priorities in a speech delivered on Aug. 14. Canada wants to update NAFTA to meet the economic needs appropriate to the digital revolution and achieve competitiveness in the technological era. Secondly, it wants to make NAFTA more progressive by addressing labor issues, integrating environmental protection provisions, commitments to gender equality and better relations with indigenous populations and ensuring the right of governments to regulate public interest. Freeland said the Canadian government also aims to cut red tape and harmonize regulations across the three jurisdictions and to further liberate the government procurement market. A fifth objective is to ease the movement of professionals throughout the region and finally Canada wants to uphold the NAFTA elements of utmost importance to Canadian national interests.
Analysts from Reuters, CNN, RT News, and think-tank Council on Foreign Relations suggest the automotive industry in Mexico could take the worst blow if negotiations go badly and regional trade suffers. However, other industries sensitive to trade and investment influxes like infrastructure could also be heavily affected. The ability of negotiators from each country to reach deals that benefit both their national interests and regional trade will depend on the concessions each is willing to make.
In the blog Real Estate to Triumph over Trump published in January by Mexico Infrastructure & Sustainability Review, MISR evaluated the resilience of the Mexican infrastructure and real estate industry in the face of the market uncertainty felt when President Trump entered office. We observed the rough start that the Mexican economy was experiencing as domestic demand and international oil prices dwindled and budgets for public expenditures in several sectors, including infrastructure, shrank. In January, OECD’s Mexico Economic Survey projected that throughout 2017 the growth of Mexico’s final domestic demand would fall to 2.1 percent. As of June, in OECD’s Economic Outlook 2017, this forecast was reduced to 1.6 percent.
The silver lining MISR expected in inflation was slightly underwhelming. In January, the 2017 Consumer Price Index forecast for 2017 was 3.5 percent, which indicates an increasing yet manageable rate of inflation. In June, this was adjusted to 5.3 percent, an increase of 1.8 percent. Staggering inflation bears an impact on the purchasing power of consumers in Mexico as real salaries fall. In January, the World Bank reduced its growth estimates for Mexico from 2.8 percent to 1.8 percent. As of June, this growth estimate was maintained, largely due to the political uncertainty in the US.
But while FDI was expected to shrink due to investor uncertainty, Mexico attracted a record US$15.6 billion in 1H17, representing an 8.8 percent increase on the same period in 2016. The largest contributor was the US with a 52.8 percent share of the total FDI during this period, followed by Spain with 10.6 percent, and Canada with 8.8 percent. As of June, Fitch Ratings raised its expectations for economic growth in Mexico by 0.5 percent. In July, the IMF also raised its forecast for Mexico’s growth from 1.7 percent to 1.9 percent. Bloomberg reported in March, Mexico is the most attractive emerging market for foreign investors. So far, Mexico seems to be largely unaffected by the so-called “Trump slump”.
Industrial parks in Mexico were one of the most vulnerable segments to the negotiation of NAFTA. For instance, WTC Industrial SLP kicked off the year with the cancellation of Ford’s manufacturing plant in San Luis Potosi. As Claudia Ávila, Executive Director of AMPIP, explains, “The industrial real estate market is directly linked to FDI and US demand because of the North American interdependency.” When certain industries like automotive face a high product demand or when FDI is on the rise, industrial parks are more likely to develop to supply the real estate needs of OEMs and the suppliers that install close to them. Industrial real estate in manufacturing areas like the Bajio region experienced a slowdown but now is back on track. Queretaro, Puebla, Nuevo Leon, Coahuila and Guanajuato are only a few of the states where industrial parks are planned, projected or under construction. The demand for spaces in industrial parks seems to continue blooming.
Tourism Real Estate
Tourism remains immune to the political uncertainty that harmed other sectors at the beginning of 2017 and most likely it will be unaffected by any change to NAFTA. If anything, as Moody’s pointed out last year, low dollar-peso exchange rates have only promoted Mexico as a destiny for international tourists. This country already receives the eighth highest volume of foreign tourists. In Cancun alone, where there are 31,662 hotel rooms, this number is expected to grow 50 percent by 2020. The most popular destinations are Cancun, Los Cabos, Puerto Vallarta, Guadalajara and Mexico City. In order to meet the growing demand for hospitality services in these areas, several developers, operators, and hotel chains are increasing their available capacity as well changing the kind of amenities they offer.
Due largely to budget cuts for new public infrastructure projects (which is largely related with low government revenue due to low international oil prices), the civil works segment has suffered compared to other years. According to CMIC, the deceleration of the internal economy weighs the most on the civil works segment. The segment shows a negative variation in real terms compared to its situation in 2017. CMIC says that “taxing the free flows of products or investments between NAFTA countries would entail huge negative consequences for the economic growth of Mexico and weigh indirectly in the construction industry.”
While other sectors seem to face uncertainty, residential real estate experienced an increase of 1.4 percent in investment between January and May 2017, according to CMIC. The construction chamber reports that residential units for lower income homebuyers continue to be built, with support from the government to house these workers close to workplaces. Moreover, Mexican Fibras have emerged as an attractive option that allow Mexican pension managers to invest in housing developments. Fibras are a similar mechanism to REITs in the US and increased use of the tool has boosted the possible funding opportunities for housing developments. The results of NAFTA renegotiations will determine to what extent foreign investors from the US and Canada are likely to continue investing in the residential sector in Mexico.
Mexico will need to develop its infrastructure regardless of the results of the NAFTA renegotiations in order to promote its competitiveness. This is challenging as there is no sign public expenditure will increase soon, so civil works that take place are likely to be completed under PPP models. Manufacturing industries aimed at exporting finished or semi-finished goods to the US could be seriously affected if trade barriers are established, which would indirectly affect industrial real estate developers. Tourism real estate is likely to continue booming as it has in the last few years because of the number of projects announced and the increasing volume of foreign and national visitors to Mexico’s tourist destinations. The peso-dollar exchange rate seems to have stabilized and the peso continues to appreciate while the dollar has been sliding since January. It may continue in this path unless market uncertainty surrounding NAFTA negotiations or the upcoming elections hit the Mexican currency again. Although there is still plenty on the line, the landscape seems promising.