A recent macroeconomic report from a US entity puts in black and white the doubts about whether the Mexican economy will be able to avoid the worst possible scenario and whether the forecasts on trading in the Mexican peso can be fulfilled.
After the June elections, we expressed our optimism that the worst possible scenario for Mexico would be avoided. We believed that the Mexican authorities would not jeopardize the sovereign’s investment grade credit rating, the inflow of crisis-related investments, the credibility of the authorities and general financial instability to implement more controversial reforms. All these aspects are those that could be breached and jeopardize trading in the Mexican peso, on the rise.
The economists explain in more detail: under these premises, we believed that the fall of the Mexican peso had been exaggerated and that the peso would recover as political risk improved. As we highlighted in our September Outlook, our base case for Mexico continues to be driven by the improvement in optimism and stability under Claudia Sheinbaum’s mandate; However, we have lost confidence in the peso’s ability to recover. Thus, such trading in the Mexican peso may not be bullish.
At the moment, we believe that the Mexican peso can strengthen again towards 19.00 units per dollar, although there are multiple risks on the immediate horizon. Should these risks begin to manifest, the triggers could break, to the point that we adopt a totally pessimistic view on the Mexican peso and the Mexican economy in general, they warn.
The base scenario for trading in the peso dissipates
Mexican institutions have been weakened by judicial reform and the implementation of additional amendments to the Constitution during AMLO’s last month in charge. The business landscape has also suffered as a result of a weaker governance and legal environment, in addition to the recent expropriation of assets owned and managed by US companies in the country.
That said, we believe Claudia Sheinbaum’s appetite for AMLO-style amendments or expropriations is limited and she will focus on advancing her own measures. AMLO might retain a certain degree of influence over Mexican politics; however, we believe Sheinbaum will seek ways to establish her credibility as a politician and thus break AMLO’s sphere of influence. Until the inauguration, we believe the president will pursue a more business-friendly policy and express a certain desire for medium-term fiscal consolidation that maintains Mexico’s credit ratings that carry so much weight in trading in the Mexican peso.
But this was the base scenario. The truth is that economists consider that the downside risks to this central idea have intensified and that they have lost confidence that it can materialize. There are four major issues to which they pay special attention. If several of them continue to worsen, they will act as a trigger for us to adopt a more pessimistic outlook for the markets and the Mexican economy, not to mention trading in the Mexican peso.
Bearish factors for trading in the peso
The first of these are the financial rating agencies. For now, Mexico has investment grade, the highest rating. However, judicial reform and a large fiscal deficit present risks to Mexico’s credit profile. We are watching closely to see if the agencies adopt negative forecasts and downgrade the country to below investment grade in the short term.
The second of these is the fiscal budget, which will also have its impact on trading in the Mexican peso. Sheinbaum campaigned on fiscal consolidation. However, early signs indicate that efforts to cut spending could fall short. Economists predict a fiscal deficit for 2025 much higher than the target of 3% of GDP as a sign that fiscal responsibility may not be a priority and that the lack of fiscal responsibility could persist.
A third factor to consider for trading in the Mexican peso will be Sheinbaum’s rhetoric. The president welcomed judicial reform and has not expressed a strong desire to go against AMLO’s unorthodox decisions. If Sheinbaum were to maintain AMLO’s political ideas of constitutional reforms, expropriations of foreign assets and financial support for Pemex, we would interpret it as Mexico’s political risk having worsened.
The fourth and final aspect would be the US presidential elections. And this is because a Donald Trump victory in itself would not change the forecasts for the Mexican economy, but if the 10% tariff advocated by the former president were applied, border control were tightened as he has promised and the USMCA were changed, the Mexican economy would be harmed.
It is worth remembering the variation ranges that are handled in trading in the Mexican peso by consensus and that would be 19.00 units per US dollar by the middle of next year, with a very serious bias towards 20.40 units per dollar (greater weakness in the peso).
Regarding the growth of the economy, experts handle a forecast of 1.2% for 2024, improving only to 1.6% for next year and with a downward bias towards lower growth.
Finally, as far as the Central Bank of Mexico is concerned, the consensus estimate will be 10.00% for this year and 8.00% for next year with a clear risk with immediate effect on trading in the Mexican peso because the bias is towards a more aggressive monetary easing.
In short, economists are losing confidence that Sheinbaum will implement the promises about greater economic discipline that she made during the electoral campaign and that will have repercussions on trading in the Mexican peso.
Source: eleconomista
