The Mexican economy has been a source of stability for most multinationals operating in Latin America, with relatively more stable performance than other major regional economies. However, most executives are confronting significant uncertainty, as NAFTA renegotiations and the July 1st presidential elections have become potentially highly disruptive events for the Mexican economy. In our recent executive event in Mexico City, FSG moderated a discussion between 29 Mexico country managers and regional executives on how they perceive the challenges of executing against an environment of seemingly perpetual uncertainty.
Key takeaway 1: Most executives are confident in achieving their growth targets this year and somewhat confident in meeting their profitability targets
- At this early point in the year, 79% of executives surveyed state that they are confident or very confident in their ability to achieve their revenue growth targets in 2018, while only 42% expressed the same confidence in achieving their profitability targets. Top-line economic growth continues to mandate stable performance relative to 2017, but most executives believe that foreign exchange volatility and inflation are likely to drive higher cost pressures compared to 2017.
Key takeaway 2: Uncertainty over NAFTA has not deterred investment, but a breakdown in NAFTA negotiations could have dire consequences
- 88% of executives polled have not noticed any impact on corporate appetite for investment in Mexico due to the uncertainty over the future of NAFTA and the potential for an end to the agreement. However, there is deep concern that any scenario that drives toward a U.S. exit from the agreement and increased tariffs against Mexican exports to the United States would drive a reorientation of investment away from Mexico, and a potential reduction or reorientation of investment away from Mexico (see graph above)
Key takeaway 3: Most executives believe a victory by leftist Lopez Obrador in presidential elections would be bad for their businesses and the economy, and more are expecting that to happen
- 44% of executives surveyed believe that Andres Manuel Lopez Obrador (AMLO) will win the presidency in this year’s elections, higher than any other candidate. The majority of executives believe that AMLO’s victory would be at least somewhat negative for the economy and their business (see graph above), but the greatest disagreement is whether the impact would be relatively short-lived (and largely occurring through the financial market shock that would follow his election), or whether the negative impact would be a more medium-term concern. All the same, most executives also fear that any change in government would lead to a significant delay in setting up new public spending priorities and disrupt current investments
Key takeaways 4: Contingency planning is an increasing necessity
- Executives are increasingly cognizant of the importance of leveraging scenarios and contingency plans to manage the uncertainty driven by both sets of events, as well as other potential headwinds that may occur in 2019 and beyond (including a necessary fiscal reform). While over half of executives have built out a threshold for when contingency plans need to be greenlit, most still believe that more needs to be done to prepare for the potential market-changing external events that may shift the landscape for business in Mexico sooner rather than later.
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