The deterioration of Mexico’s fiscal position has become a significant vulnerability factor for the country, particularly in light of the upcoming US electoral process. Prior to this crucial event, foreign investors withdrew from Mexican securities in October, marking two consecutive months of disinvestment. According to data from the Bank of Mexico up to October 25, there was a disinvestment of 87,988 million pesos, representing a decline of 4.77% compared to September’s close. This trend reflects the risk aversion associated with the possibility of Republican candidate Donald Trump returning to the White House, along with the constitutional modifications that have introduced the so-called reform of the judicial power.
Moreover, analysts from Banco Base and UBS agree that the high liquidity of the Mexican peso makes it the most exposed asset to the outcome of the US elections. The director of investment strategies at UBS, Gabriela Soni, pointed out that a second Trump presidency would pose challenges similar to those faced in 2016, including threats to impose tariffs on certain imports, especially those related to automobile manufacturing.
However, despite the short-term market impact being negative, it is likely to be less extreme than in 2016. On the other hand, the Banco Base expert believes that a Trump victory would lead to more volatility in the short-term financial market but may have a positive effect on the real economy due to his previous trade agreements.
In contrast, a virtual victory by Democratic candidate Kamala Harris is expected to bring more inflation to the US and could result in lower growth of exports from Mexico. However, UBS experts suggest that a Harris victory might cause a short-term rebound in Mexican assets due to the prospect of more stable relations with the United States.
The director of economic and financial analysis at Banco Base, Gabriela Siller, emphasizes that the real risk for Mexico lies not in Donald Trump but rather in internal factors such as constitutional reforms, a deficit that needs to be lowered, and budget items that will be cut. The participation of foreigners in debt holdings has decreased from 28% of the total in December 2019 to 16% in October of this year.
The scenarios presented highlight the vulnerability of Mexico’s fiscal position to the outcome of the US elections and underscore the need for careful analysis and preparation to mitigate potential risks. ###
Source: El Economista
