Mexico: Trump, trade and the earthquakes – Nomura

Benito Berber, Research Analyst at Nomura points out that the Mexican economy contracted by 0.2% q-o-q in Q3 after posting positive growth in H1, largely due to the earthquakes in September and the moderation of oil production.

Key Quotes

“The contraction in Q3 was less than what we had expected considering the earthquakes affected more than two-thirds of the country. We marginally increased our 2017 growth forecast to 1.9% to factor in the weaker than expected contraction in Q3 and the likely impact from reconstruction efforts in Q4.”  

Inflation: We expect inflation to remain above 6.0% for the rest of the year. Agricultural prices have started to come down, however gasoline and other energy prices have started to increase on higher oil prices and MXN depreciation. For 2018, we expect inflation to gradually decrease, ending the year below 3.5%, with risks tilted to the upside if there is a NAFTA exit and risks to the downside if NAFTA 2.0 is agreed upon.” 


  • The country became a net importer of oil and gasoline in 2015. However, 18% of fiscal revenues are derived from oil production, therefore higher oil prices improve the fiscal accounts. We estimate a 10% increase in oil prices to improve fiscal revenues by 0.7% of GDP, while also boosting the financial health of state-owned oil company Pemex. In the context of the recent oil discoveries (1.5bn barrels by the government; 1.0bn barrels of oil and gas by private consortium Talos Energy and Sierra), higher oil prices can be expected to increase private oil firms’ participation in bidding rounds after the sector was opened to private investment in 2013.
  • The impact on inflation could be negative as the price of gasoline is also affected by the weaker MXN. More than half of the gasoline in Mexico is imported from the US. However, we believe the government would likely reduce taxes on gasoline to cushion the impact on inflation. On the other hand, there are risks to consider. Mexico suffers from weak economic growth, twin deficits and a rising geopolitical risk premium associated with the possible cancelation of NAFTA. Further, left-leaning presidential candidate Andres Manuel Lopez Obrador could win the 1 July 2018 election, potentially threatening the energy reforms that have opened up the oil sector to private investment.”

Risks: The main risk is that the US implements anti-trade policies.”

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