- Mexico and China are the most exposed to Trump’s economic policy
- Downside risks for Mexico are mainly exports and remittances
- FX forwards suggest that the Mexican peso will depreciate (against the US dollar) by another 2.5% by year- end, bringing total year-to-date peso depreciation to 25%
In the wake of Donald Trump’s election, Mexico, together with China, appears to be the country most exposed to Trump’s economic policy.
According to AXA IM, Trump’s proposed fiscal stimulus has already led to a strong increase in inflation expectations, and his pledges to restrict imports and immigration has spurred a record broad EM selloff.
Manolis Davradakis, Research and Investment Strategy at AXA IM says: "Mexico has been at the eye of this storm given its vicinity and close trade relations with the US. The Mexican peso has depreciated by 10% relative to its pre-election day closing level, the stock market is down 6% and the local currency sovereign 10-year rate has shot up by 112bps. The Mexican central bank had already pre-emptively tightened policy rates to mitigate the impact of a declining peso on headline inflation."
Since election day, the president-elect has adopted a more reconciliatory tone, downplayed trade protectionism, and focused on deporting illegal immigrants and securing the US/Mexico border. Davradakis believes downside risks for Mexico are mainly exports and remittances, with implications on the current account deficit and economic growth. The US is Mexico’s main trading partner, shipping 81% of its total exports, or 27% of GDP, to the US, mainly consisting of machinery and transport equipment. Mexican exports to the US stood at 10% of GDP in 1994, before the implementation of the North American Free Trade Agreement that president-elect Trump argued in favour of renegotiating during the election campaign.
Remittances are an important component of Mexican household income, and a significant source of the hard currency flows which support the current account balance. The latter recorded a deficit of 2.8% of GDP in 2015, which would have been 5% of GDP without the remittances from the US. Remittances from Mexicans living abroad equate to 2%-3% of GDP over the last decade. Of these Mexicans living abroad, 95% reside in the US, 23% of which do so as illegal immigrants. "Remittances to Mexico from the US would be curbed, also, if levies on remittances for securing the US-Mexican border were to be imposed."
He believes FX forwards suggest that the Mexican peso will depreciate (against the US dollar) by another 2.5% by year- end, bringing total year-to-date peso depreciation to 25%. This could top up inflation by 0.4pp to 3.4% in 2017 after 2.9% in 2016.