By Steven Levine

Mexico: What’s Brewing South of the Border?

Mexico is set to provide further color about the nation’s economic health in the week ahead, including updates on its labor market and trade balance, while Banco de México readies its next interest rate decision.

The Mexican economy has been recently flagged by major credit ratings agencies, including S&P Global Ratings and Moody’s Investors Service, as showing signs of potential credit deterioration, while the country’s leadership has generally railed against the assessments.

Mexican President Andrés Manuel López Obrador – widely referred to as ‘AMLO’ – had said earlier in March that certain nationally recognized statistical rating organizations (NRSROs) have been “punishing the country” for what the leader attributed to failures of “the neoliberal policy that was applied in the last 36 years.”

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AMLO continued that his administration would “have to pay for the broken dishes” of past economic policy, which he characterized as “inefficient” and rife with looting and corruption.

The President further underscored his commitment to rescuing Mexican state-owned oil giant Petróleos Mexicanos (Pemex) and the Federal Electricity Commission (CFE) from the alleged corruption under the former neoliberal regimes, during which, he added, the ratings agencies had “remained silent.”

Among its strategies, AMLO’s administration aims to play a larger role in Pemex and CFE, as well as promote development finance by merging certain government-owned development banks to create new institutions.

However, S&P Global Ratings at the start of March revised its outlook on Mexico’s long-term ratings to negative from stable, while affirming its 'BBB+/A-2' foreign currency and 'A-/A-2' local currency sovereign credit ratings.

S&P noted that while it expects the López Obrador administration to “pragmatically implement economic policies that balance social priorities with the need for macroeconomic stability in Mexico,” a recent shift in government policy to reduce private-sector involvement in the energy sector, along with other developments, have “diminished investor confidence.” 

The agency added the policy actions could “contribute to higher contingent liabilities for Mexico and lower its GDP growth prospects” to 1.8% in 2019, down from 2% last year.

S&P placed at least a one-in-three possibility of a downgrade over the coming year.

Against this backdrop, Mexico's central bank, which carries a single mandate to maintain stable, low inflation rates, is set to announce its interest rate decision.

At its prior meeting in early February, Banco de México’s Governing Board elected to keep the target for the overnight interbank interest rate at 8.25%. 

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During the fourth quarter of 2018, the bank said the nation’s economic activity slowed “significantly” compared to the previous quarter, and “this pattern could continue” in large part due to a deceleration of global economic growth, as well as “some weakness in domestic demand.” 

The central bank also highlighted that Inflation had fallen from 4.72% in November 2018 to 4.37% in January 2019, mainly due to a reduction in non-core inflation. It further added that “the possibility that the peso exchange rate comes under pressure stemming from external or domestic factors stands out.”

Marc Chandler, the chief market strategist at Bannockburn Global Forex, observed that the Mexican peso fell nearly 1.25% ahead of the weekend, amid a bout of general risk aversion. He also pointed out that President AMLO indicated his government will not act to address bank fees and that banks ought to regulate themselves.  

In intraday trading Monday, Chandler added the peso is recouping some of its pre-weekend losses, but the dollar may find support near MXN19.00.

Meanwhile, market participants will have no shortage of economic data in the week ahead to further gauge the direction of Mexico’s economic health, starting in earnest with:  

Tuesday, March 26

• Retail Sales (Jan)

Wednesday, March 27

• Trade Balance (Feb)
• Unemployment Rate (Feb)

Banco de México outlined some obstacles to trade in its prior meeting, including the ratification of the trade agreements reached between Mexico, the US and Canada, increased domestic uncertainty and less confidence in the outlook for the Mexican economy, as well as certain delays in the execution of public spending related to the beginning of its new administration.

One central bank member cited that “given the lower global dynamism, the country will face a certain deceleration in foreign trade, which has been one of Mexico’s main growth drivers in recent years.”

As for the labor market, some members noted the rise in the unemployment rate at the end of 2018 may have been affected by factors related to the present juncture, such as the cancelation of the New Mexico City International Airport’s construction.

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Overall, however, the labor market remains tight, but slack conditions in the economy are expected to widen in the coming quarters. 

In the latter part of the week, market participants will be eyeing:

Thursday, March 28

• Banco de México’s Interest Rate Decision

Investors will generally be watching the data for further direction into Mexico’s economy and financial well-being. 

Sentiment about the country’s ability to honor its debt obligations has been positive, as suggested by a more than 27.5bp tightening in its five-year credit default swap (CDS) spreads over the past three months. Mexico’s sovereign CDS stood at around 130bps intraday Monday.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.