What Australian businesses need to know about NAFTA

Insolvencies are on the rise in the United States of America and Canada, while increased volatility in Mexico is expected to continue until US President-elect Donald Trump’s policy towards its southern neighbour becomes clear.

A report from trade credit insurer, Atradius, has revealed that Australian businesses need to be careful when doing business with participants in the North American Free Trade Agreement (NAFTA).

Mark Hoppe, managing director ANZ, Atradius, said, “The USA, Canada and Mexico are facing difficult market conditions. This doesn’t mean Australian companies should steer clear of doing business with organisations in these countries but it does mean it’s important to ensure that any business dealings have been well-considered and that the Australian organisation is protected by trade credit insurance.”

The USA

In the USA, corporate insolvencies increased in 2016 as exporting businesses struggled with lost competitiveness due to a stronger US dollar and ongoing problems in the oil and gas sector. Many companies are highly leveraged and access to bank funds and capital markets has reduced. In 2017, insolvencies are set to decrease very slightly.

Overall, US economic growth is expected to rebound in 2017, mainly driven by domestic demand and exporters continue to suffer from a strong US dollar. Consumer confidence and business sentiment could be dampened due to volatility in the world economy and international markets.

Mark Hoppe said, “On the plus side, unemployment is set to fall again in 2017 and job security has increased. This could help drive increased private consumption, which can contribute to economic growth. Unfortunately, average wage growth has been modest since 2009 but, fortunately, household debt as a share of GDP has decreased from almost 100 percent in 2007 to 78 percent in 2015. Consumers are likely to welcome cheaper imported products as a way to save money.”

Canada

Canadian corporate insolvencies increased in 2016 but are likely to decrease slightly again in 2017, and growth is expected to rebound. However, as the world’s fifth-largest oil producer, Canada has been affected by the decrease in oil prices since mid-2014, triggering a major decrease in investment. Economic growth is slow at approximately two percent.

There is some uncertainty presented by US President-elect Donald Trump’s potential to introduce more protectionist trade policies or renegotiate NAFTA, which could have a negative impact on Canada’s economy.

Mark Hoppe said, “The Canadian manufacturing industry is unlikely to take over from the energy sector as it has lost competitiveness internationally as a result of currency depreciation and high wage costs. The current account deficit is likely to decrease to 1.7 percent of GDP in 2017 but any future trade frictions with the USA could dampen Canada’s export performance in the future.”

Mexico

The Mexican peso has been hit hard by Donald Trump’s election, depreciating by more than 10 percent following the election. This volatility is expected to continue until President-elect Trump’s policies towards its southern neighbour become clearer.

Mark Hoppe said, “The peso depreciation has pushed up inflation and the Bank of Mexico has increased the benchmark interest rate several times in the past 12 months. Rate hikes to more than five percent are likely. However, this monetary policy negatively impacts domestic demand in times of an already-sluggish GDP growth rate. And there are increasing concerns about government creditworthiness, with growing public debt and rising spending pressures.

“Add to this ongoing domestic political instability, fuelled by drug-related crime and widespread corruption, and consumer confidence and business sentiment are understandably subdued. If President Trump makes good on his promises to impose import tariffs on Mexican goods, impose capital controls over remittances, and order mass deportations of illegal immigrants, then the projected Mexican GDP growth rate of about two percent in 2017 and 2018 could end up much lower.

“However, it’s not all doom and gloom in Mexico. The country’s fiscal framework has improved and tax revenues have increased. A flexible exchange rate and solid external balances, with limited external refinancing needs, underpin Mexico’s resilience. Crucial reforms have also been passed to overcome the economy’s structural weaknesses such as low earnings capacity, limited fiscal flexibility and high dependency on volatile portfolio capital inflows.

“The bottom line when doing business with companies from any of these three countries is to thoroughly research the individual organisation as well as having a robust understanding of the economic and political climate in which it operates. Australian companies must protect themselves with trade credit insurance, which has the added bonus of providing them with risk management information regarding many of the organisations they may look to do business with.”

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