Mexico: Muted Policy Reaction To Recession

After a near USD 20bn surge during 2019, Mexico’s trade balance registered a surplus for the first time in 5 years, the largest surplus since the 1990s. This surge was the result of a combination of 2% drop in imports and 2% increase in exports in the period. 

The bulk of the change occurred in the non-oil trade surplus, which increased by almost USD 18bn in the year. The oil-sector trade balance also improved for the first time in years, with the deficit dropping USD 2bn in the year, but remaining large at USD 21bn.

The sharp drop in capital and intermediate goods imports, consistent with the poor results seen in investment and industrial production, helped drive this result. Exports were, meanwhile, largely a function of US manufacturing trends, which performed relatively well early in 2019 but ended the year with a negative momentum.

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In any case, thanks to this surge in the trade balance, Mexico’s current account deficit dropped from nearly 2% of GDP in 2018 to close to 0% now. 

But, arguably, the chief anchor for the MXN remains Mexico’s highly attractive carry. And, as discussed above, given that Mexico’s local rates should remain far higher than the levels seen elsewhere among its regional peers in the coming months, the MXN’s outperformance could persist a while longer.

In our view, the risk to the MXN this year stems from eventual decisions by rating agencies to downgrade Mexico (eg, due to poor GDP growth dynamics) or market reaction to eventual policy controversies that threaten Mexico’s macro fundamentals. 

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The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.  more

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