Fate of Mexican Economy in the Hands of the US

The Mexican peso (MXN) is another currency that is highly dependent on the economic performance of the US, given that that the United States is a buyer of approximately 80% of Mexico’s exports. Stronger demand from the neighbouring US should translate into an increase in manufactured exports particularly as we enter a period of policy normalisation at the Federal Reserve amid expectations that ‘rate-lift’ will commence in the 2H of 2015.

From a domestic point of view, on the 21st of November 2014 the Mexican government cut its forecast for 2014 growth (2.0%-2.5% from 2.0%-2.8%) and the Finance Ministry lowered its full-year forecast to a range of 2.1% to 2.6%, from its previous 2.7%. This comes after the economy expanded less than had been expected for the eighth time in the past 10 quarters, as a result of weak domestic demand with the deputy finance minister Fernando Aportela outlining that the government expects lower crude-oil production to shave 0.4% off overall growth this year. Given the current economic environment, the head of the central bank, Agustin Carstens, has recently pushed forward with various economic overhauls which have included the opening of the state-controlled energy industry to private investment and spurring more competition in the telecommunications industry.

Mexico is the world's tenth largest crude producer, and given the decade-long decline in output, the country’s ruling government has been pushing to open up the oil-sector by ending a dominant monopoly by state-owned petroleum company Pemex. Most recently the company has lost ~USD 11bln this year as output fell and as about half its revenue went to the government in taxes. Additionally, oil production averaged 2.4mln bpd in Q3, 4.3% less than a year ago. Pemex, which has posted losses for eight straight quarters, funds about a third of the federal budget and as such news pertaining to the financial performance of the company or any legality changes as to the energy sector may need to be monitored for any read across into the local currency. This may now be of greater importance as the company is looking to take a record amount of debt in order to bolster production, a move in which has fuelled concern among its bondholders.

Looking forward, the country seems relatively well-placed in-spite of the recent cut to their growth outlook. The World Bank has said that Mexico’s fundamentals, policy framework and macroeconomic management have allowed the country to deal with financial volatility related to the timing of exit from unprecedented accommodative monetary policies in major advanced economies. Meanwhile, a recent inflation report from the central bank confirms a neutral bias and that the policy rate is set remain unchanged for the foreseeable future (rates currently 3.0%) according to analysts at Goldman Sachs.