Donald J. Trump US President Donald J. Trump address Joint Session of Congress, Washington, USA - 28 Feb 2017US President Donald J. Trump delivers his first address to a joint session of Congress from the floor of the House of Representatives in Washington, DC, USA, 28 February 2017. Traditionally the first address to a joint session of Congress by a newly-elected president is not referred to as a State of the Union.

MEXICO CITY — Mexico’s mall developers could delay or cancel up to 30 projects if U.S. President Trump’s threats to upend the North American Free Trade Agreement or unilaterally slap tariffs take a heavier-than-expected blow on the economy.

“A cancellation of NAFTA or higher peso devaluation would be catastrophic and we would see a very big hold back from developers,” said Sergio Legorreta, a managing partner with Baker & McKenzie, adding that roughly half of more than 60 projects eyed by 2020 could be deferred or scrapped altogether.

“Most clients are in a wait-and-see mode” until the U.S. and Mexico negotiate the high-stakes trade accord in the next 90 days, providing greater clarity on Mexico’s future prospects. Consequently, builders and investors could defer new projects for six months to a year, he predicted.

Diplomatic relationships took another dramatic turn Monday after Mexico’s Economy Minister Ildefonso Guajardo said the country will walk away from NAFTA talks if Trump imposes a 20 percent tariff on key car exports. Newly expanded laws to expel more Mexican illegal immigrants are also straining relations to a historic low.

In the worst-case scenario where NAFTA is canceled and the peso plunges further, the economy — already tipping into recession — would deteriorate to such a degree that developers would be forced to postpone billions in new mall projects, Legorreta said, adding that many high-end developers — such as Sordo Madaleno or Thor Urbana — would be severely hit.

“You can survive with smaller lease margins and higher costs, but if you add tariffs on goods, manufacturing would become a lot less competitive and that would simply be too much,” he mused.

Fitch Ratings analyst Maria Pia Medrano agreed, saying many FIBRAS (Mexican equivalents to real estate investment trusts or REITS) owning many malls are evaluating whether to hold or continue expansion.

“Some are taking a conservative approach on openings to preserve liquidity but others are sticking to plans. It really depends on the REIT and what kind of shopping malls and how many they have in their portfolio,” she said.

FIBRA Uno, FIBRA Danhos, Cigsa, Liverpool, Mexican Retail Properties and Sordo Madaleno own most of Mexico’s 650 malls.

The slumping peso is hurting major department stores El Palacio de Hierro and Liverpool, which sell a lot of imported merchandise, as well as fashion franchiser Grupo Axo, according to Medrano.

“If they expected EBITDA [earnings before interest, taxes, depreciation and amortization] to grow 5 percent before Trump, that has now fallen to 2 percent,” she said. “I expect a 2 percent operating cash flow decline for Liverpool depending on how much they can translate higher costs to consumers.”

Guillermo Sepulveda, a consultant with Avison Young, said those views are “very exaggerated,” noting that most portfolio properties target Mexico’s vast middle- and low-class consumers, not riskier, higher-end developments.

“All these builders are making long-term bets on the growth of Mexico’s middle class and internal consumption,” Sepulveda said. “While there might be some delays, I don’t see developers canceling malls.”

The peso’s 50 percent drop in the past 24 months has helped developers reliant on international financing, such as Thor Urbana, cut costs.

“Building is around 20 percent cheaper than a year ago so why not build now instead of later?” Sepulveda asked. “I think there will be some winners and losers but only temporarily because these malls are being built to be there in 20 years.”

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