NAFTA, Financial Regulations

and U.S-Mexican Relations

Nomi PrinsMay 11, 2017

Factors Impacting US-Mexico Relations

A relationship beyond geography

Trump promising "very big changes" to NAFTA.

Fluctuating Oil prices and demands: US imported 200 million barrels in the first 11

months of 2016 ($7 billion).

Price of crude around 46.5. (as of May 8, 2017)

Near middle of 2015 av. of 48.67, 2016 av. of 43.33.

Parallel US and Mexican Central bank policy

As the Fed cut rates to zero, Banco de Mexico cut rates to a 3% low by 2014.

When the Fed did QE, Mexico again reacted with similar policy.

When the Fed raised rates for the first time in seven years in Dec. 2015 by 25

basis points, so did Banco de Mexico (the next day).

US Bank Activity in Mexico intertwined with US Bank Activity in the US.

Financial Speculation and Foreign Investment.

Trade and

Economic

Indicators

• NAFTA generated one of the

world’s largest free trade

areas.

• Nearly 1/3 of the world’s

total GDP passes between

the three member states.

• Mexico ranks second in US

export markets and third in

US trade.

US-Mexico Relations & Banking

History

By the early 1990s, big US banks like BankAmerica, Chase Manhattan,Chemical Banking, Citicorp, Goldman Sachs, and JP Morgan accounted for74% of US-Latin American exposure.

Amounted to $40.4 billion, of which a big chunk was with Mexico.

When the Clinton administration signed NAFTA on December 8, 1993, the LosAngeles Times said, “Banking will be among the first industries opened toforeign competition under NAFTA.” Chapter 14.

According to the US State Department, “The implementation of NAFTAopened the Mexican financial services market to US and Canadian firms.Foreign institutions hold more than 70 percent of banking assets and bankinginstitutions from the US and Canada have a strong market presence.”

Glass-Steagall Repealed under President Bill Clinton in 1999, allowing USbanks to become “too big to fail” and paving way to 2008 financial crisis.

Bank Concentration

and CitigroupTotal assets of foreign-controlled banks in Mexicorose from 24% in 1998 to 70% after Citigroup boughtBanamex in 2001. From 1982-1989 Citibank was theonly foreign bank allowed to operate in Mexico.

Citibanamex* has more branch offices in Mexicothan in any other country (1,500). Citigroup has 700branches in the US.

Citigroup-US-Mexico Connections:

Former US Treas. Sec. Robert Rubin, Glass-Steagall Repeal, current Board PresidentErnesto Zedillo, former US Treasury SecretaryLarry Summers, Former US Treas. Sec. Jack Lewwas COO of Citigroup Wealth Management

*Renamed from Banamex in October 2016.

The Financial Crisis and Dodd-Frank

• Established under Democrats: Wall

Street Reform and Consumer

Protection Act 2010.

• “Living Wills” for big banks.

• Volcker Rule banned some trading

activities.

• May 4, 2017 Republican leadership

in House Financial Services

Committee voted to gut many Dodd-

Frank regulations. Bill would repeal

an estimated 40 provisions, but still

requires 60 votes in the U.S Senate.

• Glass-Steagall Reinstatement?

Banking Concentration in Mexico

Seven largest banks (G7) account

for 80% of total bank assets.

Five of the G-7 are foreign

subsidiaries and account for 65%

of commercial bank assets.

Concentration of bank assets has

not changed significantly since the

global financial crisis.

Tightening concentration limits

and capital charges for

concentration of risks need to be

implemented

Big Six U.S banks hold:

42% deposits in U.S

96% of U.S derivatives

JPM Chase holds 9% of global derivatives

Citigroup holds 8% of global derivatives

IMF 2016 Assessment Report on Mexico: “Key

risks ..include a United States growth

slowdown… and volatility in global financial

markets. Related shocks could adversely

impact the financial system through the

deterioration of corporate and public

balance sheets and reversal of capital flows

leading to tightening financial conditions.”

Central Bank

CollusionBig banks, stock and bond markets

buoyed by government and central

bank intervention since 2008.

US Federal Reserve balance sheet

has $4.5 trillion securities.

ECB has E2.5 trillion securities.

BOJ has $4.1 trillion securities.

US and European banks have paid more

than $130 billon in settlements since

the crisis.

Rate hikes can hurt emerging market

dollar-denominated debt significantly.

Federal Reserve Bailout

• The Fed set aside $16

trillion in loans for the

big banks.

• The Fed provided $2.5

trillion in loans (at a

near zero interest rate)

to Citigroup alone.

• Citigroup fired 52,000 US

based employees after

the global financial

crisis.

Mexico: Remittances and Risk

Remittances in March 2017 up 15.1%, due to increased concerns over Trump.

However, remittance flows outside of Latin America and the Caribbean have slowed.

Total remittances at record $26.97 billion in 2016, rising steadily since 2009.

But remittances in Mexico hit historic lows after financial crisis in 2008.

De-risking could hamper this flow of funds.

Not all cash is “criminal” but all of it is still effected.

Foreign banks re charging more, closing branches, or diverting funds elsewhere.

This hurts national economies and revenue streams.

Risk of Trump Reactionary Policy to remittances and the Mexican economy.

In Mexico: outstanding gross government rose from 29% in 2012 to

42.4% of GDP in 2017.

Gross public debt up from 43% (2008) to 58% of GDP (2016)

In the US: Outstanding gross government debt has risen from 64.7%

of GDP in 2007 to 105.6% in 2015.

Gross public debt hit103% of GDP in 2015.

GDP:

Mexico & US

Trends

"Poor Mexico. So far from God and so close to the United States."

— Porfirio Díaz

Mexico / US Foreign Exchange Rate

Source: Board of Governors of the Federal Reserve

System (US) – St. Louis Fed.

Trump, NAFTA and

the WallJuly 2015: “I will build a great, great wall on our southern border, and I will make Mexico pay for that wall.” Trump campaign.

September 2016: "NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.”

March 8, 2017 "We're now in the early stages of the TPA process, the Trade Promotion Authority, the so-called fast track," U.S Commerce Secretary Ross told Bloomberg .

April 11, 2017: “It’s been a disaster from the day it was devised and we’ll have some very pleasant surprises for you on that one, I can tell you,” Trump said to business CEO’s regarding NAFTA

April 27, 2017: "I decided rather than terminating NAFTA, which would be a pretty big, you know, shock to the system, we will renegotiate,” Trump said after passing the Continuing Resolution.

April 28, 2017: "I’m not looking to hurt Canada and I’m not looking to hurt Mexico. They’re two countries I really like," Trump said to Reuters.

Worth Consideration: U.S Congress Passed a Bipartisan Continuing Resolution budget that included no funding for any proposed border wall between US and Mexico.

NAFTA: US and Mexico Past and Future

Mexico, Canada and US signed NAFTA December 1992, introduced in January 1994.

In 2017 US trade deficits in goods with Mexico reached the levels this March that

were the highest since the global financial crisis (November 2007).

US trade gap with Mexico in goods up 22% to $7 billion in March, 2017.

About 70% of Mexican export goods require further inputs via US production.

Mexico remains a strong catalyst for allowing the US to maintain an edge over

Chinese economic competition globally. Yet, there is a West to East shift continuing.

Mexico and NAFTA negotiations face December 2017 deadline, with important

general elections being held in July, 2018.

Mexican economic minister, Ildefonso Guajardo told the Financial Times that parts of

the TPP assist in renegotiating NAFTA.

Mexico considering TPP without the U.S and potential new trade partners like China.

US and Mexico: The Trend

US and Mexico trade more than a half-trillion dollars in goods and services yearly.

Mexico looking at other options like TPP without the US and other trade agreements.

One of every 29 US workers is supported by US and Mexico trade relations.

NAFTA tripled the level of the Mexican economy since introduction in 1994.

US exports to Mexico rose from $41.6 billion in 1993 to $240.3 billion in 2014,

Oil price declines caused drop in exports to $236.4 billion in 2015 and $231.0 in 2016.

Many US banks and branches have left Mexico since the crisis and due to de-risking. European banks have reduced presence due to EU post-crisis capital requirements.

Rising corporate defaults could hurt global banks and EM in 2017 and beyond.

Healthy spirit of nationalism = Opportunity for Mexico.