Mexico: Aggressive interest hikes, a preview for the new year?
Event
In the last months of 2016, the Mexican central bank chose to hike interest rates two times by an aggressive 0.5% to 5.75%, its highest level since 2009. The objective is to temper inflation expectations as the peso is close to record lows.
The weaker peso is a result of heightened uncertainty, caused by the recent US presidential election of Donald Trump who expressed a strong anti-Mexican rhetoric.
His victory even led to a real effective exchange rate at its weakest level since the 1994 Tequila Crisis.
Impact on country risk
Precisely which campaign proposals and what damage Trump will cause will only become clear when he will be in office, as from 20 January.
Nevertheless, despite its adequate reserves (covering 4.2 months of import in November 2016), moderate external debt (predicted at 42.8 % of GDP at the end of 2016) and its contingency facility from the IMF, Mexico is likely to face an uncomfortable period with Trump as US president.
Main risks stem from a renegotiation of the North American Free Trade Agreement (Mexico sends more than three quarters of its exports to the US), a possible slowdown of foreign investment (Trump threatens retribution against companies that move jobs abroad, which already led to the cancellation of a Mexican Ford plant) and changes in US immigration policies (remittances amount to about 6% of current account receipts, the biggest source of export revenues after manufactures).
However, the country had its work cut out for itself even before Trump prevailed. Mexico struggles with slow growth (in 2017 economic growth of 2.2% is expected), structural current account deficits (estimated at -2.8% of GDP in 2017) and persistent government deficits (expected at -2.9% of GDP in 2017).
Moreover, inflation hit a two-year high of 3.3% last November and is expected to rise further in 2017 due to the 20% rise in petrol prices in early January, the biggest rise in almost two decades, in a move to liberalise energy markets.
Weakening growth and rising inflation can intensify pressure on an already highly unpopular President Peña Nieto in the coming year.
This could compromise fiscal consolidation, result in a sovereign credit downgrade (some rating agencies put Mexico’s credit rating on a negative view last year), and empower populist candidates promising to unwind recent reforms, ahead of the 2018 presidential elections.
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Jolyn Debuysscher – Credendo Group
