Impact of a Trump victory on Mexico and Brazil – Rabobank

Philip Marey, Senior US Strategist at Rabobank, lists down the possible impact of the Trump’s vctory in US presidential elections on the Brazil and Mexico.

Key Quotes

“Mexico

A Trump victory and the anti-NAFTA stance that comes with it would bode very poorly for Mexico in particular given that exports heading north of the border account for over 25% of total GDP. Furthermore, domestic demand has found support from remittances which have risen to record highs and been more important than oil revenues over the past two years. Any risk to free trade with, and remittances from, the US will have a significant impact on Mexican activity and USD/MXN would likely find a new home in the 20s. Another point significant to Mexico is the potential for a Trump victory to trigger a more anti-US and populist stance amongst Mexican voters.

Brazil

In a scenario of a Trump victory, the Brazilian economy would be affected through higher risk aversion and worse financial conditions (at a global scale). Those would cause Brazilian asset prices (such as the BRL) to depreciate, despite the decline in US interest rates. A weaker BRL could slow down the ongoing speed of disinflation a bit, and pose some risk as per the pace of BCB rate cuts projected for 2017. The recovery in activity expected for next year would be mildly affected as well, via the impact of slower global growth on Brazilian exports.

Since the Brazilian economy is relatively closed (e.g. exports account for about 11% of GDP), the bigger impact would however stem from the financial channel (as Brazil’s low level of domestic savings make the economy dependent on foreign funding). Yet the sound current account deficit numbers of late and the hefty levels of FX reserves imply no risk for the balance of payments. While a “Trump” shock would probably be greater for Brazil as compared to a potential “Brexit” shock (since Brazilian exports to U.S. account for 12-13% of total, whereas exports to UK account for around only 1-2%), such a development would probably not derail the implementation of fiscal reforms, which is by far the most factor for the Brazilian economy now.”