“Trumponomics” is not Mexico’s biggest risk

Paris, 16/03/17



Manolis Davradakis, 

Senior Econonomist (Non-Asian Emerging Markets) 

Rising populism in Mexican politics fuelled by the fear of trade protectionism is not negligible


Key points

  • Mexico has been a key focus point of the new US administration’s trade and immigration agenda.
  • The US is running a significant trade deficit with Mexico while US transfers make a major contribution to the Mexican current account balance.
  • The bilateral deficit is the most pronounced for transport equipment, manufactured goods and mining making them likely targets for higher tariffs.
  • A hypothetical tariff increase and a significant drop in US transfers would see Mexico slip into recession.
  • At 2.6% of GDP, Mexico’s current account deficit is comfortably financed by foreign direct and portfolio investment flows.
  • Only a tail capital flows’ shock would render the country’s gross external debt unsustainable.
  • In that case, the stock of foreign exchange reserves would be insufficient to cover the financing gap.
  • A surge in social unrest in the run up to the 2018 presidential elections is likely given President Nieto’s unpopularity.
  • We argue that Nieto’s successor will most likely assume a more populist tone in response to the US aggression.
  • The ensuing drop in economic policy credibility could hurt the economy more than US trade or immigration policy.