New York - Bank of Mexico’s governor has warned that
Donald Trump could be a “ horror film” for the nation. Analysts say the
country’s economy is in for a nightmare even if the incoming president
doesn’t build that wall or ball up NAFTA.
Surely, Trump’s ability to alter relations between the
nations will play a major role in how Mexico’s economy performs in 2017, but
the country had its work cut out for itself even before he prevailed, as
problems from a weakening currency to faster inflation look certain to deliver a
third straight year of slowing growth.
Economists forecast gross domestic product will expand
just 1.7 percent this year, according to the latest surveys from Banco de
Mexico and Citi/Banamex, as anticipated rate increases weigh on borrowing
and spending. That’d be the slowest since the 1.4 percent achieved in
2013.
“It’s going to be a very difficult year for policy
makers,” said Benito Berber, the senior economist for Latin America at Nomura
Holdings Inc. in New York. “The central bank will have to navigate a lot of
different shocks, external and internal.”
While forecasts are more dire at Credit Suisse Group
and Bank of America - where economists anticipate growth could be the slowest
since the height of the financial crisis -- any threat to the North America
Free Trade Agreement that started Jan. 1, 1994, would make these seem rosy.
Mexico sends more than three-quarters of its exports to the U.S. and ran a
trade surplus of about $60 billion in 2015, accounting for more than 5 percent
of economic output.
Perhaps the last thing a country with anaemic growth
needs is higher interest rates, but the central bank may not be able to avoid
tightening. Inflation is expected to run well above the 4 percent top end of
the institution’s target throughout 2017, according to forecasts from Banco
Bilbao Vizcaya Argentaria SA, Grupo Financiero Banorte and JPMorgan Chase &
Company, as the government moves ahead with plans to raise the price of
gasoline by as much as 20 percent in January.
Read also: Mexico's peso sinks to historic low
As inflation expectations keep climbing, swap traders
increasingly see Banxico tightening as soon as February, before the Federal
Reserve. The Mexican central bank may need to act swiftly to anchor price
expectations and safeguard its own credibility, Governor Agustin Carstens
has repeatedly stressed.
Maintaining a stable interest-rate spread to the US to
prevent currency outflows could also force Banxico’s hand as the Fed signals a
faster pace of tightening in 2017. Mexico’s swap curve prices in about 125
basis points of increases in 2017.
Trump’s promise to make Mexico pay for a border wall
seems less likely to be a burden in 2017 than his threat of retribution against
companies that move jobs abroad. If that makes U.S. manufacturers hold off or
slow down investment in Mexico, the impact would be significant. More than half
of the $30 billion in foreign direct investment in Mexico in 2015 came from the
U.S. Already, Citigroup Inc. has cut its projections for total investment
in Mexico from abroad for 2017, to $25 billion from $35.8 billion.
Perhaps Trump’s biggest impact will be on the peso, which
became a proxy for his election chances. It’s tumbled about 11 percent since
the election to near record lows, putting pressure on the central bank to
intervene as inflation expectations rise.
BLOOMBERG