Mexico tries to reassure investors after Trump win

Posted on November 16, 2016

Mexico’s finance minister José Antonio Meade, and the head of state oil company Pemex, José Antonio González Anaya, will seek to reassure investors in New York on Wednesday, despite the peso plunging to a historic low in the wake of Donald Trump’s election victory.

Mexico faces the threat of a rating agency downgrade, and analysts have been trimming their growth forecasts for next year amid an expected interest rate rise on Thursday and uncertainty over Mr Trump’s protectionist policies. Here are six things to watch for.

Interest rates — the consensus is for the Bank of Mexico to raise by at least 50 basis points on Thursday, but BlackRock, the world’s biggest asset manager, believes it will unveil a 100 to 200 bps increase. Banxico, which has raised its key lending rate by 150 bps this year, has another meeting in December to do more if needed. Nomura is betting on 75 bps now and another 75 bps next month. BBVA Bancomer expects a 100 to 125 bps rise. 

Peso and capital flight — the point of a rate rise is not to stem the peso’s fall — that is out of Mexican policymakers’ hands — but to anchor inflation expectations and deter capital flight. Foreign holdings of short-term paper, known as Cetes, have fallen in recent months, but that can reflect short-term profit-taking. The peso’s liquidity has made it a favourite Trump punch bag. Given the peso’s dive to 21.4 to the dollar on November 11, from 18.3 before the US election and 19.52 before Banxico’s last rate rise, “the Monetary Policy Committee will be hard-pressed to react, but also not to overreact”, said Alberto Ramos, head of Latin America economics at Goldman Sachs. The peso was trading at around 20.3 on Tuesday. 

Growth and inflation — how much will a rate increase hurt growth and boost inflation? Much depends on whether Mr Trump’s bark proves worse than his bite. Some analysts have started slashing Mexican forecasts: BlackRock expects just 1 per cent growth next year and some even forecast a recession if Mr Trump implements everything he has talked about, including ripping up the North American Free Trade Agreement.

Mexico has a lot to prove: rating agency S&P Global put it on notice earlier this year that disappointing growth and rising debt levels were putting its sovereign credit rating at risk. Preliminary third-quarter GDP data in October showed growth of 1 per cent, which, if confirmed by full data on November 23, will be Mexico’s fastest growth in more than two years. But the central bank notes “signs of deceleration”. Inflation is expected to head towards 4 per cent (the central bank’s goal is 3 per cent). The government has slashed spending but is facing calls from some analysts to implement new austerity measures.

Remittances — Mr Trump has threatened to interrupt remittance flows to get Mexico to pay for the “beautiful” border wall he dreams of. In September, in the latest data available, remittances hit a new rolling 12-month high of $26.2bn, far above the $18bn in Mexican oil exports. From January to September, the value of remittances was up 26 per cent in peso terms. Remittances support consumption by lower income Mexicans, and that will be especially important if inflation ticks up.

Investors on hold? — tequila maker Jose Cuervo has been planning to go public, with media reports last month suggesting the initial public offering could be up to $1bn. But some stock market deals could find themselves on hold. The first big test of post-Trump appetite for investment in Mexico could be the auction on December 5 of 10 deepwater offshore fields, considered the jewel in the crown of Mexico’s energy reform. On that day, too, Pemex will find out if it has attracted a partner to develop the Trion deepwater field, which will require investment of $11bn. Mexican foreign direct investment rose 4.6 per cent to $14.4bn in the first half of this year.

Pemex and debt — Pemex has promised a primary surplus next year, before debt payments, and is confident that is not in jeopardy. But Fitch Ratings has warned that Pemex is sliding towards insolvency, raising fears that it will need a government bailout that will put further strain on state coffers. The Bank of Mexico is one of the loudest voices calling for the government to rein in its rising debts.

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