This Week in Mexico – March 14 , 2020
This Week in Mexico
U.S.-China Trade Disarray Sounds Like an Opportunity for Mexico—But It Isn’t Working Out That Way
Mexico’s increasing violence and economic conditions work against U.S. direct investment there. With global supply chains in disarray amid the U.S.-China trade war and the coronavirus pandemic, Mexico might seem a logical winner if U.S. companies decide they want to diversify away from China and make some products closer to home. Mexico clinched a new trade deal with the U.S. and Canada last year and has now replaced China as the U.S.’s largest single trading partner.
Mexico’s government under pressure over coronavirus response
While authorities in major cities shut their borders, announced major lockdowns and ordered curfews in an effort to stem the global spread of the coronavirus pandemic, thousands of people flocked to a two-day music concert in Mexico and the country’s top women’s football league played to a stadium full of cheering fans over the weekend. The government of Mexican President Andres Manuel Lopez Obrador has faced harsh criticism for its seemingly lax response and for downplaying the threat of an illness that has infected more than 179,000 people and killed more than 7,000 worldwide.
Mexico’s Budget Is Protected By Its Mega Oil Hedge
“Everything” in the Mexican budget that needs to be covered by oil revenues is covered, the country’s Finance Minister, Arturo Herrera, said as quoted by Reuters, in response to a local daily question about how safe the state oil company, Pemex, was. There have been reports that credit rating agencies might downgrade Pemex’s rating because of its high debt levels and the current international oil price situation but, according to Herrera, the company’s credit rating will not place Mexico’s finances in danger. Since the start of the year, Mexican crude has lost more than 56 percent of its value, according to Mexico News Daily, with a 31.6-percent plunge resulting from the start of the oil price war between Saudi Arabia and Russia. On March 18, the Pemex oil export basket closed trade at $14.54 a barrel, according to a Reuters report, down by more than 22 percent. According to Herrera, however, there is no need to worry. Some 80 percent of budget needs have been covered by the notorious Mexican oil hedge and the rest is covered be unspecified reserves. Earlier this month, Herrero, as cited by Reuters, said the hedge, at $1.4 billion, covered Mexico’s oil income completely. “The hedge is usually not cheap, it is expensive, but it is for occasions just like this. The income part is covered, we will not have a direct impact on the budget,” Herrera said. The Mexico oil hedge is the most secretive hedging transaction in the oil world and is followed closely by banks as a sort of weathervane for oil prices. A handful of these are directly involved in the hedge: Mexico buys put options on oil from them and from oil supermajors in a series of about 50 transactions. Mexico budgeted for oil at $49 a barrel this year and this was the price at which it hedged its exports. By Irina Slav for Oilprice.com.
Income Investors Should Know That Grupo México, S.A.B. de C.V. (BMV:GMEXICOB) Goes Ex-Dividend Soon
Grupo México, S.A.B. de C.V. (BMV:GMEXICOB) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 24th of March in order to be eligible for this dividend, which will be paid on the 26th of March. The upcoming dividend for Grupo México. de will put a total of Mex$0.80 per share in shareholders’ pockets, up from last year’s total dividends of Mex$0.14. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing..
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Grupo México. de paid out more than half (59%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Thankfully its dividend payments took up just 45% of the free cash flow it generated, which is a comfortable payout ratio. It’s positive to see that Grupo México. de’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut. Source
For supply chain companies, U.S.-Mexico border closures could be catastrophic
Mexico’s deputy health minister says he’s worried about people coming into Mexico from the United States. The U.S. has far more cases of COVID-19 than Mexico. The Mexican government even said it might consider restricting access at its northern borders. For businesses that operate on both sides of the border, any shutdown could be catastrophic. That includes businesses like, Hessen Group, which has an office in Brownsville, Texas. There, an 18-wheeler carrying pipes for oil and gas backs up to a loading dock. Hessen is a supply chain company — it acquires parts and components for other companies to build stuff. Its headquarters are in Matamoros, Mexico, just a few miles away. The company’s president, Francisco Homs, says that those pipes are on their way to Canada, and a few of them will travel all the way to Alaska for an oil company up there. Homs picks up a little box and explains that inside is a little screw for a tractor. Without it, a farmer would have to stop working because the tractor wouldn’t function. That little screw was imported from China. Homs says the slowdown of factories in China, because of the coronavirus, means his suppliers, like the screw-maker, were running low. That makes it tough for him to get his hands on the parts his customers need. The Chinese government says the virus has peaked there and factories are starting to get back to normal. But Homs admits he doesn’t know if he can trust that. He says his company might have dodged a bullet if Chinese suppliers are indeed coming back online. His big concern now is the Texas/Mexico border. If they close the border, he said, it would cause problems and disrupt the economies of the United States, Mexico and Canada. We’d just stop doing business, he said. All of his shipments run from Mexico into the United States and then some into Canada. So any border closure would make Hessen’s work impossible. And we can’t be interrupted, he added, because that would have a knock-on effect to many other businesses that depend on the parts and components that he gets to them..