Economics: EM Outlook Firms, but Trouble Lurks
The election of a new US president in November initially had a markedly adverse effect on most emerging economies, which had already been rocked by two years of depressed commodity prices, sluggish-to-negative growth and stressed public finances.
Mexico was among the hardest hit countries as Washington announced plans to further toughen immigration policy, rip up NAFTA, and impose de facto trade barriers in the guise of new fiscal policies that were also supposed to choke off remittance flows. The specter of a new protectionism threatened to disrupt investment flows throughout the value chains that have developed across the US-Mexico border since NAFTA took effect in 1994. This generally adverse scenario, a plunging peso and the government’s failure to carry through on promised spending cuts led ratings agencies to lower their outlook on Mexican debt.
But the worst fears of cross-border relations eased as 2017 progressed and commodity prices began to steady, and in some cases firm. Mexico’s manufacturing exports rebounded, and as the peso led an EM currency rally, export and GDP growth proved higher than expected through the second and early third quarters. In response, S&P and Fitch upwardly revised their outlook on Mexican debt to stable.
While the global economic growth outlook appears balanced in the near term, the same is not true over an intermediate time horizon given the long list of risk factors that could have a negative impact, especially on emerging economies.
In Mexico’s case, the firming of public finance could prove ephemeral given that it has been largely sustained by further slashing the physical investment budget and one-off infusions from the central bank’s trading surpluses. And current spending pressures are likely to grow significantly in the run-up to the 2018 elections.
NAFTA renegotiation became a positive factor after markets were initially relieved by the list of priority issues the US government spelled out ahead of talks, and they have begun to express greater trust in Mexico. But the White House’s insistence on improving the US trade balance could bode ill for Mexico.
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