Uncertainty regarding both financial conditions within Mexico and geopolitical developments internationally is making it hard to predict how the peso will fare in 2017.
Speaking at Profit & Loss Latin America, which took place on February 9 in Mexico City, economic experts warned that there are numerous variables that could impact the value of the Mexican currency this year, making accurate forecasts challenging.
“Uncertainty will be the name of the game this year,” explained Daniela Blancas, a financial market economist at CitiBanamex.
To illustrate how the economic uncertainty around Mexico is translating to the peso this year, Blancas highlighted a survey that CitiBanamex published two days before the conference, which showed that market expectations for USD/MXN at year-end ranged from 20.00 to 23.50.
The victory of Donald Trump, who advocated for protectionist economic policies while campaigning, in the US election has been a major cause of MXN weakness against the US dollar and forced economists to change their growth outlooks for Mexico.
For example, Blancas said that CitiBanamex had predicted 2.3% growth for Mexico this year ahead of the US election, but has since scaled that back down to 1.2%.
One factor behind this revised forecast was the criticisms of then President-elect Trump regarding the North American Free Trade Agreement (Nafta).
“We have a number of scenarios regarding the future of Nafta. The first was that nothing would change; it would be business as usual. We had this at a 5% probability, but we have since revised that down to 0%. We don’t think that’s a realistic scenario anymore.
“We had the probability of leaving Nafta altogether at a 5% probability, but now that’s up to 30%. So the largest percent probability is a scenario where we will see a real adjustment in the terms of Nafta. This will be important because Nafta has been one of the main drivers of the Mexican economy and has led to an important increase in consumption that might not be replicated going forward,” said Blancas.
Juan Carlos Alderete, an FX strategist at Banorte, said that his firm estimates Mexican growth at 1.1% year-on-year in 2017, noting that this is lower than the market consensus.
“We see the year developing in two different, well-defined halves,” he said. “We believe that in the first half there will be a lot of uncertainty regarding what Trump will do in terms of his policies and its impact on Mexico, but also that there could be an impact from possible changes in trade policies and the fiscal regime in the US.”
As a result, said Alderete, the best-case scenario that he sees for the first half of the year is moderate growth in Mexico.
He continued: “The second half will definitely be determined by the resolutions achieved with respect to our relationship with the US, and it is within this context that we see the potential for more positive growth, maybe ranging from 1.5% to 1.7% during this period.
“We believe there won’t be a drastic change in our relationship with the US, however, an important driver for financial markets in the second half will be due to local factors, such as the State of Mexico’s election for governor in June and the upcoming presidential election in 2018, coupled with a lack of flexibility in terms of fiscal and monetary policy.”
Indeed, Blancas noted that “not every difficulty in 2017 will be due to Donald Trump”, and that there are numerous other local factors that complicate the economic situation in Mexico this year.
Despite the uncertainty regarding Mexico’s economic prospects this year and the value of its currency, the panellists were not too pessimistic about the year ahead.
Alfredo Sordo, CIO at Santander Asset Management, explained that many of the firms that he deals with have not altered their plans to invest in Mexico.
“From the point of view of investors, it’s actually been very surprising to see that the enthusiasm for investing in Mexico has not diminished. Except for a few people with very specific investment concerns we are finding when we talk to firms about their investment plans they are telling us that they do not have plans to cut investment and want to keep investing, even though Mexican growth remains around 1.5-1.7% for the year,” he said.
Sordo also claimed that despite the concerns about what a Trump administration means for the Mexican economy, the economics of the relationship between the US and Mexico will to a large degree dictate how the relationship develops between the two countries this year.
“When faced with economic reality and the negative impact that radical changes in the free trade agreement would have for US growth, I think that it will be difficult for them to drastically change the current situation between the two countries,” he said.