In July, the Mexican peso appreciated from 23.066 to 22.154. Notwithstanding, economists at MUFG keep a bearish view on Mexican economic perspectives driven by local technical issues and policy choices.
Key quotes
“The combination of deep recession and low inflation provides room for further cuts on the policy rate, thus leading to the continuity of lower carry-trade return. Secondly, the deep recession damages tax collection and increases the pressure for more fiscal spending, but government response keeps below expectation.”
“AMLO insists on the plan to increase the role of the State in the energy sector. However, his plans to obtain energy independence by increasing oil production and refining capacity for PEMEX tend to fail, impacting even more the company’s finance that has been already hit harshly by the relatively low oil prices and weaker demand, and it would require more government capital injection. And on the electricity segment, government has been making a number of regulatory changes that benefited state owned company CFE in detriment of private companies, in particular renewables plants. These government strategies damage even more business confidence, thus jeopardizing private investments. In such negative scenario, we keep our view of a gradual MXN depreciation.”
“The USMCA trade deal is now in effect, being positive for Mexico once it maintains trade preference with the USA and Canada. In case of a faster-than-expected recovery of the USA, there would be perspectives of higher USD inflows to Mexico. On the other way around, a scenario of more prolonged and/or deeper recession would intensify the pace of MXN depreciation.”
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