Fitch: Trump Victory Increases Mexican Economic Uncertainty

LONDON--(BUSINESS WIRE)--

Donald Trump's victory in the US presidential election increases economic uncertainty for Mexico and may add downside risks to economic growth, Fitch Rating says.

During the campaign, President-elect Trump made statements supporting increased trade protectionism (including the potential renegotiation or termination of the North American Free Trade Agreement, or NAFTA), the blocking of workers' remittances, and building a wall along the US-Mexico border.

The likelihood and feasibility of pursuing these policies is unclear. But the advent of a Trump administration increases economic uncertainty in Mexico given its very close economic ties to the US.

These ties have increased significantly since the adoption of NAFTA in 1994. Mexico sends just over 80% of its exports to the US, which is also the leading provider of foreign direct investment inflows to Mexico (FDI inflows reached 2.5% of GDP in 2015). Mexico receives around 2% of GDP in annual workers' remittances, also predominantly from the US. Any hit to exports and remittances is likely to widen Mexico's moderate (2.8% of GDP in 2015) current account deficit.

Weakness in the US industrial sector has already been felt in Mexico this year, with non-oil manufacturing exports contracting by 2.4% during January-September. In our September Global Economic Outlook, Fitch cut Mexico's 2016 growth forecast to 2% from 2.4% reflecting the economic weakness in 2Q16. We forecast 2.6% growth next year, but the US election result would put this at risk if it hurt domestic confidence and delayed investment until greater clarity emerges on the new administration's stance towards Mexico.

The election campaign caused peso volatility and this looks set to continue. The currency has depreciated today and further weakening is possible. During the year, Mexico has addressed the potential impact of financial market volatility. The Bank of Mexico has increased rates by 150bp so far this year, including a 50bp increase in September. The authorities have also increased its two-year IMF Flexible Credit Line by around USD21bn to USD88bn. This provides a buffer against disorderly capital outflows and severe market volatility.

To support investor confidence, the government is targeting a public sector primary surplus of 0.4% of GDP for 2017, the first such surplus since 2008. Next year's external sovereign debt repayments have also been pre-financed.

We affirmed Mexico's 'BBB+'/Stable sovereign rating in July. As we noted at the time, deterioration in the economic, trade and financial links with the US would weigh on Mexico's sovereign credit profile. We will monitor how these risks evolve; the effectiveness of the authorities' policy response; and the implications for Mexico's growth, public finances and debt trajectory, and external accounts. Weak growth performance and worsening of government debt dynamics would be negative for Mexico's ratings.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Related Research

Mexico

https://www.fitchratings.com/site/re/885837

Mexico - September 2016 Global Economic Outlook Forecast

https://www.fitchratings.com/site/re/888652

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