Trump victory puts more pressure on Mexico’s fragile economy

Trump victory puts more pressure on Mexico’s fragile economy article image

Donald Trump’s US presidential election victory clearly brings downside risks to the Mexican economy which was already showing signs of weakness.

Coface, a global leader in credit insurance and risk management, warns Trump’s arrival to the White House will not be without consequences for the US’ southern neighbour.

In the day after elections the Mexican Peso tumbled by 8.7%, while its benchmark IPC stock index fell 2.2%.

On the same day currency depreciation reached 13%, the biggest drop since the Tequila crisis in 1994, though it partly recovered after Trump ´s more conciliatory speech.

During campaign, Trump has exhaustively called the NAFTA agreement?as the worst trade deal in history, vowing to review or cancel it.

Trump blamed the agreement for destroying US manufacturing industry jobs.

Mexico’s dependence on exports to the US is high: 81% of total sales go to the US market (i.e. 28% of Mexico’s GDP). Thus good relations with its neighbour is of the utmost importance, says Coface.

Tricky issue for Mexico

“Hence, the future of NAFTA is a tricky issue for Mexico,” Coface said in a recent briefing note.

“Admittedly its repealing seems quite unlikely at this stage (the cancelling of trade agreement that are not signed yet, such as the Trans-Pacific on, is easier to do), but the risk cannot be totally ruled out.”

Mexican President Enrique Peña Nieto called to congratulate the new president and told reporters they agreed to meet during the transition period.

Coface predicts economic activity in Mexico will also be negatively impacted by rising interest rates, more prudent consumption and the postponement of investments.

“Since early this year the Mexican Peso has been highly hit by the uncertainties related to US elections.

“On the one hand this means that risk was already highly priced, thus reducing the chances of stronger MXN deprecation in the near future.

Additional interest rate hike predicted

“On the other hand the year-to-date depreciation has been pressuring prices up (inflation 3.1% year on year in October 2016, up from 2.1% at end-2015), conducing Central Bank to adopt a tightening monetary cycle (reference interest rates was raised three times this year, to 4.75 %) .

The next Central Bank meeting is scheduled for today and an additional hike is highly expected.

“Hence, household consumption is highly expected to decelerate. While it is not clear what will be Trump ´s real behaviour, citizens will probably postpone purchases and investors are likely to postpone investments,” says Coface.

Coface says the building of a wall on the US-Mexico border is very uncertain, but any change in remittances rule would further impact the economy.

Budget pressure

The money that Mexicans in the US send to their original country is expressive. It reached 26 billion USD in 2015 (2.4 % of GDP) and it increased by 7.7 % in the first nine months of 2016 year on year.

“Indeed many Mexicans decided to anticipate remittances in the last months thanks to the uncertainties related to elections.”

The election is also expected to raise pressure over the government ´s budget, increasing the risk of an action by rating agencies.

This year Moody ´s and Standard & Poor ´s already put Mexico on negative watch highlighting the fast deterioration of its public debt (from meagre 28% in 2005 to 42.3% of GDP in 2015).

In September this year S&P mentioned that the ratio could achieve 48.6 % by the end of 2019. Government ´s efforts to contain public deficit has not been enough to compensate the combination of years of disappointing GDP growth (annual average of 1.7 % in the period of 2011-2015) and the sharp slump in oil prices since mid-2014.

The expected weak activity ahead would mean lower tax revenues raising the chances of a downgrade. Currently the economy is classified two notches above investment grade by the three major agencies.

Coface’s GDP forecast for Mexico for 2016 is 1.6%, with 1.5% predicted in 2017.

The country’s risk assessment remains at A4 (acceptable).


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