An upset victory by Republican nominee Donald Trump in the US Presidential election scheduled for this November would have an immediate negative impact on investor sentiment towards Mexico, and be a net negative for GDP growth.
Despite strong consumer spending levels, tightening credit conditions and low confidence levels will begin to weigh on the performance of the services sector, prompting us to lower our economic growth forecasts for the coming years, particularly given recent weakness in manufacturing and the energy sector.
Mexico's historically large current account gap will leave the external accounts reliant on short-term portfolio investment and susceptible to renewed bouts of investor risk aversion and financial market volatility.
Mexico's central bank will resume a more gradual tightening cycle in 2017 after taking decisive steps to shore up the Mexican peso in 2016 with three 50bps overnight rate hikes to 4.75%.
Major Forecast Changes
We have revised down our 2016 real GDP growth estimate from 2.6% to 2.2%, and have lowered our 2017 real GDP growth forecast from 3.0% to 2.6% on account of a weaker growth outlook for the US.
We have revised up our average Mexican peso forecast for 2017 to MXN18.00/USD from MXN18.25/USD, and for 2018 to MXN17.10/USD from MXN18.07/USD, as recovering oil prices and reduced political uncertainty after the US presidential election will place upside pressure on the exchange rate.
The single-biggest risk confronting the Mexican economy in the near term is the prospect of an election victory for US Republican Party candidate Donald Trump, given the immediate implications this would have on capital flows and Mexico's trade relationship with the US, which would become subject to revision.
Underappreciated recession risks in the US pose significant uncertainty for Mexico's export sector, which has already been under considerable strain in light of low oil prices.
Record-low approval ratings for President Enrique Pena Nieto and weak economic growth could play into the hands of more populist elements in Mexico's political landscape ahead of general elections in 2018. Although moderate, we see increasing tailwinds that a future administration could backtrack on some key structural reforms implemented in 2013.
|f=BMI forecast. Source: National Sources/BMI|
|Nominal GDP, USDbn||1,152.4||1,053.0||1,136.7||1,280.5|
|Real GDP growth, % y-o-y||2.5||2.2||2.6||2.9|
|Consumer price inflation, % y-o-y, eop||2.1||3.5||3.8||3.8|
|Exchange rate MXN/USD, eop||17.20||18.50||17.70||17.00|
|Budget balance, % of GDP||-3.5||-3.1||-2.8||-2.5|
|Current account balance, % of GDP||-2.8||-2.8||-2.8||-2.6|
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