The Mexican economy is often overlooked, but traders and investors who decide to ignore this Latin market may be missing out on great opportunities. Morgan Stanley, UBS Group and Societe Generale are growing more cautious on the outlook of the Mexican economy, but this doesn’t mean that trading opportunities don’t exist. The global economic slowdown is having an impact as well, but what does this mean for the Mexican Peso? One of the biggest obstacles to economic growth may come directly from President Lopez Obrador’s pledge to maintain a budget surplus.
Spending versus Growth
The economy is slowing and a growing number of analysts believe that fiscal spending by the government is required to kick-start the economy. This is something Mexico’s left-wing president is not willing to do, AMLO as he is known for short, wants to keep the budget surplus going and bolster finances. When he took office, he promised the fourth transformation of Mexico in a reference to the following three: the push for independence from Spain in 1810, the era of political reforms under Benito Juarez and the Mexican Revolution of 1910 which lasted until 1917.
Now AMLO is faced with a growing crisis which cut into his sky-high approval rating. Societe Generale Strategist Bertrand Delgado noted “The main risk for Mexico is by the end of next year as we head toward the midterm elections and see how the AMLO administration is going to deal with potential slow growth. It looks so-far-so-good in terms of conversations between the AMLO administration and the business and investor community.” Despite the growth concerns and potential credit rating downgrades, the Mexican Peso is one of the best performers in emerging markets with an annualized gain of 2.8%.
Banxico to Cut Interest Rates
Banxico, the country’s central bank, is expected to cut interest rates by 25 basis points from 7.75% to 7.50% when it meets later this week. Some analysts believe that a more aggressive 50 basis point interest rate cut could be enacted as third-quarter GDP rose just 0.1%, the economy almost entered a recession in the first half of the year. Annualized inflation stands at 3.0% which is what the Bank of Mexico targets, therefore there is room to loosen monetary policy. The central bank will make its announcement on Thursday, how will this impact the Mexican Peso?
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AMLO Changed the Image of the Presidency, What’s Next?
Since taking office, AMLO turned the Mexican White House known as Los Pinos into a public park, he sent the presidential guard back to their respective military units and sold the presidential jet. Poor and middle-class Mexicans support him for this which explains his strong support, but what’s next after he transformed the optics while also holding daily briefings which set the agenda for the day? Optics will only go so far and an economic slowdown will hurt his base the most while he already alienated the business elite.
One supported stated “I don’t see any changes yet, prices remain high for rent, for food but I believe that the president will manage to change this situation. He is an honest, simple man, without luxuries, a man who understands the people.” AMLO himself noted that “We still suffer from insecurity and violence.” He has blamed his predecessor’s anti-crime approach for violence and gang-related crime. His approach on how to solve the crisis is anything but transparent.
AMLO deployed a 50,000+ National Guard force across the country, but most of the personnel is the same as the anti-crime units he criticized. AMLO noted “The young people were abandoned. There are no equitable salaries. There is no sense of well-being and the government gave a bad example, a lot of corruption, impunity. But all of this is being attended to.” He is not without controversy as some of his biggest backers are wealthy individuals with questionable means of how they became influencers in Mexico.
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