Mexico: Politics should weigh on the peso – BBH

The Mexican economy has stalled due to monetary and fiscal tightening as its Q3 GDP slowed to 1.5% y/y, the lowest rate since Q4 2013, points out Masashi Murata, Research Analyst at BBH.

Key Quotes

“Monthly data in Q4 suggests that the economy continues to slow. October Mexico ANTAD retail sales rose 2.1% y/y, which is the slowest growth since December 2014. The average IMEF index level in October and November was lower than the Q2 average level in both manufacturing and non-manufacturing.”

“Inflation pressures remain high. November CPI accelerated to 6.7% y/y from 6.4% y/y in October. The Mexico central bank, Banxico, says it will remain vigilant to ensure a prudent monetary stance. It will need to keep monetary policy tight and maintain the relative monetary stance between it and the Fed. Another rate hike cannot be ruled out if the peso comes under pressure.”

“The Mexican government has kept the fiscal policy prudent. The fiscal deficit continues to shrink. It will be 1.4% of GDP in 2017, down from 2.5% in 2016. The rise in oil prices might be a trigger to ease tightened fiscal policy ahead of the presidential elections in July 2018.”

“The political situation remains unclear. According to polls, Andres Manuel Lopez Obrador (AMLO), who leads the left-wing party, Morena, is the front-runner with around 30% support. Former Finance Minister Meade, who is expected to get the PRI presidential nomination, follows AMLO with around 20% support. The PAN-PRD alliance continues to squabble over the method for selecting their presidential nominee, but PAN leader Anaya will be its candidate. Former First Lady Margarita Zavala left the PAN and is running as an independent.”

“The Mexican presidential elections tend to be fluid as President Peña Nieto’s 23% lead over AMLO slid to just 6.5% on election day. If AMLO is expected to win, markets would react negatively. The fifth round of NAFTA renegotiations ended without significant progress on contentious issues. The sixth negotiating round will be held in January in Canada, and could delay a final deal due to lack of agreement.”