Economics: Toll of peso depreciation on public finances and inflation sets a shaky stage for the incoming presidential administration
After a relatively long period of stability following the Covid pandemic there has been a significant depreciation of the exchange rate, beginning the day after the June 2 elections and accelerating considerably in recent weeks.
A series of internal factors have contributed to the softening of the peso, such as the Bank of Japan’s quarter point interest rate hike and the dollar’s firming in recent days. But by far, the greatest impacts on the peso have been a consequence of the election results, especially in congressional races that Morena and its allies, with support from electoral authorities, have parlayed into a qualified majority in the Chamber of Deputies and now stand one seat short of the two-thirds control of the Senate needed to rewrite the constitution and define the country’s legal and regulatory framework in keeping with the reform agenda of President López Obrador and his successor. If they are successful, this will have multiple effects in economic and political spheres in the coming years.
But already, it is estimated that the exchange rate will have an impact on inflation via the pass-through effect on importable goods prices and inflation expectations. And that carries over to public finances through an increase in the financial cost of the debt in a context of deterioration of the public balance and with several factors of uncertainty for the end of this year and the beginning of next year.
In this week’s Outlook we analyze the economic and political implications of this relatively depreciated exchange rate.
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