“Trumponomics” is not Mexico’s biggest risk
Senior Econonomist (Non-Asian Emerging Markets)
Download the Research 16/03/17 282 KB PDF
Rising populism in Mexican politics fuelled by the fear of trade protectionism is not negligible
- 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.