Mexico: Economic improvement, but weak fundamentals - BBH

Sandeep Kanihama FXStreet Contributor

Mexican economy has started to improve as Q1 GDP rose 2.8% y/y, the strongest since Q3 2015, but the fundamentals still paint a weaker picture of the economy, according to Masashi Murata, Research Analyst at BBH.

Key Quotes

“Inflation pressures in Mexico have been strong as May CPI accelerated to 6.2% y/y, which is the highest since April 2009 and above the 2-4% target range. Mexico’s central bank (Banxico) has been vigilant about heightened inflation pressures. It unexpectedly hiked rates for the sixth straight meeting, by 25bp to 6.75%. The bank is likely to remain hawkish as it said it will pay attention to weak peso pass through and Mexico’s monetary posture relative to the U.S. It also said its monetary policy shifted from accommodative to neutral even after 375 bp of tightening.”

“The service industry remains steady, boosted by strong remittance inflow, while manufacturing has accelerated, supported by exports. But the economic outlook is still unclear. Sluggish oil prices could encourage the government to keep tightening fiscal policy. Persistent monetary tightening will curb private demand. Uncertainty regarding US polices such as renegotiation of NAFTA, potential implementation of tariffs on Mexican goods, and possible changes to US immigration policy could weigh on the growth in Mexico.”

“The ruling party (PRI) narrowly won the elections in the State of Mexico, which is the most populous state in the country, and home of President Peña Nieto. The PRI has held the governorship of the State of Mexico for more than 80 years, but only got 34% of the vote, a decrease from 61% in the last state election in 2011. The PRI’s struggles in the gubernatorial election suggest a difficult campaign for PRI in the presidential election in 2018.”

“The peso has been firm since February under Banxico’s hawkish stance. But political risk and softening oil prices could weigh on the peso. Mexico’s fundamentals remain weak and Mexico’s rating faces downgrade risks. BBH sovereign ratings model showed Mexico’s implied rating fell a notch to BBB/Baa2/BBB compared to actual ratings of BBB+/A3/BBB+.”

Author

Sandeep Kanihama

FXStreet Contributor

Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.

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