From the CEO – August 2018
President Trump’s penchant for bilateral trade deals and turning up the heat during the phases of the negotiations were in full view as PRS was concluding this month’s ratings, analyses, and forecasts.
After weeks of what appeared to be stalled talks between Washington and Mexico City, a deal was eventually struck, whereby the two sides agreed on tighter rules for Mexican auto parts, including the provision for 75% North American content, and that 40-45% of the content be made by workers earning at least $16 USD an hour. The goal is to discourage manufacturers from relocating to Mexico, with its lower wages and less stringent labor laws. Moreover, while farm products remain tariff-free, there are some new measures as they affect health standards and related labeling. The new deal will be reviewable after six years and has a total lifespan of 16 years, thus providing businesses with some measure of certainty.
Negotiations with Canada appear to be potentially more contentious. After being sidelined from the talks for months, Canada is faced with the prospect of being left out entirely of a new deal and face additional tariffs from Washington. And with only a few days to hammer out an agreed-upon plan, the dynamics of the negotiations suggest relations between the two countries will not be terribly harmonious over the next little while.
Of particular concern to Canada is the Chapter 19 dispute resolution mechanism, which provides a bi-national dispute settlement process for challenging anti-dumping and countervailing measures. Trump wants this part scrapped given his protectionist tendencies and the US’ longtime sore spot for Canada’s support for parts of its agriculture sector. Canada, which has done well under the provision in its dealings with the US, has said the provision is a ‘red-line’ in the talks and one that it would use to walk away from the table. Complicating matters is that Mexico agreed to eliminate the provision from its deal with the US – not surprising given its limited negotiation prowess.
It is not entirely clear how Chapter 19 will fare in the Canada-US talks but Canadian equities and the dollar have not been terribly impacted by the uncertainty, and indeed shares of Canadian auto parts makers have surged in recent days. Moreover, the legislatures of all three countries would have to agree to new deals and the US Congress, in particular, is reluctant to see Canada – the top consumer of American exports – frozen out of a new pact. And given that a congressional vote likely will not be held until after the November mid-term elections – in which case a Democratic majority might hold the lower house – there is nothing certain about the deals Trump and his team have concluded.
Turning to the ICRG ratings for the month, there were quite a few adjustments to the “Investment Profile” risk metric as it affects repatriation risk and the risk of payment delays. The impact of higher lending rates in the US and a stronger greenback has created additional downward pressure on emerging and frontier market currencies (along with higher external debt servicing costs, import bills), and efforts to prop up fading local currencies (inter alia) by various central banks has resulted in dwindling foreign exchange reserves.
However, on a brighter note, there seems to be a moderate increase in overall government stability in select African countries (Mali, Guinea Bissau) and in parts of Asia (Pakistan, Malaysia).
But parts of the Americas are a different story, where political risk and country risk are on the rise. In the Dominican Republic, inflation continues to gain steam; the central bank has raised rates, and foreign exchange reserves are falling.
Over in Chile, support the President Sebastián Piñera has fallen in recent weeks given some unpopular cabinet choices along with fading business and consumer confidence levels and a weakening economy.
Haiti’s government stability rating has also deteriorated slightly as popular support for Jovenel Moïse, the president, has turned despite the selection of a new prime minister to shore up legislative support for the government’s policy goals.
And there’s very little to say about Venezuela that can be interpreted as positive, as an apparent (and unsuccessful) coup against President Maduro occurred; hyper-inflation has taken hold, and a massive devaluation (along with a new currency) has provided very little support for an economy that is clearly in dire straits.
PRS continues to enjoy considerable exposure in the press. This month we commented on the impact that Saudi’s spat with Canada could have on investor confidence in the Kingdom, especially given the regime’s efforts to privatize large segments of the economy and diversify away from oil. (https://www.reuters.com/article/us-saudi-canada-investment/saudi-canada-row-could-further-rattle-foreign-investors-eyeing-kingdom-idUSKBN1KT1UQ …)
We also talked about whether India should carve out its own bilateral deals with Iran to continue the oil supplies in the face of possible further sanctions on Iran by the US. (https://www.thehindubusinessline.com/economy/macro-economy/despite-us-sanctions-on-iran-india-looks-to-secure-oil-lines/article24747048.ece).
And PRS addressed the issue of whether international goodwill (and subsequent investment flows) towards Zimbabwe could be maintained given the violence and apparent manipulation of the election in favor of Emmerson Mnangagwa. (tps://lnkd.in/e4x6qqX )
ICRG’s August risk ratings were significant in number, as the risk profiles of some 65 countries were adjusted (of 140), affecting over 80 individual political risk metrics.
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