CEO Executive Summary

The entire Monarch team wishes all of our clients and friends a very happy and successful new year! 2018 is already off to a fast start, and we are expecting it to be a dynamic year.

With respect to NAFTA, while the intersessional discussions in early December toned down what had been quite heated rhetoric and made modest, workman-like progress on non-controversial issues, the upcoming sixth negotiating round in Montreal is expected to bring many of the most difficult issues to a head. We anticipate it will be a pivotal round where sparks may once again fly. With the U.S. tax reform package passed and signed into law in late December, the private sector, congressional leaders and governors are now focused like a laser on the NAFTA negotiations. This should create significant pressure on the Administration to be more flexible to nudge the negotiations forward. And the pressure seems to be working, at least for now. Whereas the general mood and expectation at the close of the year seemed to be quite pessimistic (with many analysts expecting a definitive U.S. withdrawal from NAFTA potentially early in 2018), as this newsletter goes to print President Trump is sending signals he is in no hurry and may wait until the Mexican presidential elections before deciding whether to withdraw from the agreement. But as we’ve seen in other contexts, predicting this President’s behavior can be a fool’s errand, so stay tuned.

Meanwhile economic conditions in Mexico continue to decline. Mexico’s economy finished off 2017 on pace for annual growth in the range of 2.0 to 2.6%, but with the highest inflation rate in 17 years and substantially renewed peso volatility. While analysts disagree about the precise impact of the U.S. tax reform legislation on the Mexican economy, they generally agree that it will not be positive. In the energy sector, Pemex’s problems persist as electricity reform moves forward. The energy ministry announced a project to connect Baja California’s electricity grid with the rest of the nation and proposed rules to regulate Mexico’s new electricity market.

In Mexican domestic politics, the first phase of presidential campaigning began in December between José Antonio Meade of the PRI-led electoral coalition, Andrés Manuel López Obrador of the Morena-led coalition, and Ricardo Anaya of the PAN/PRD-led coalition. At the same time, independent candidates continued their efforts to get on the ballot with Jaime “El Bronco” Rodriguez and Margarita Zavala well positioned to succeed by the February 19 deadline. December and early January also saw changes in President Peña Nieto’s cabinet with more expected in the coming weeks.

Full Newsletter: Monarch News – January 2018