Mexico City. By Abraham Gonzalez (.). The stagnant Economy of mexico, whose expectations for 2020 have been worsened by the outbreak of coronavirus and the drop in oil prices, will find in the collapse of the peso against the dollar a kind of containment mesh for the following year due to the exporting vocation of the country, experts said.
The second largest economy in Latin America, which sends 80% of its exports to the United States, could contract this year up to 5% also dragged down by a dramatic drop in consumption and investment, according to renewed forecasts by major financial groups.
But in 2021, it would take on new vigor helped by increased trade and a low basis for comparison, experts said, who also anticipate that the effects of the virus will be diluted by then.
“The large depreciation of the peso, while probably a short-term contraction, will eventually help Mexico recover faster,” said Carlos Capistrán, chief economist for Mexico at Bank of America.
“Mexico is a very open economy whose total trade with the United States is equivalent to 60% of its Gross Domestic Product,” he added.
In the last five weeks, since a global sale of risky assets began, the peso has lost almost 30% against the dollar, reaching around 23.60 units on Thursday and becoming the most depreciated emerging currency in that period, according to data from Refinitiv Eikon.
A weak peso against the dollar will ‘give Mexico a breather’. | Photo: My Pocket
The last, but minor, shock to the depreciation of the peso occurred in early 2017, when it fell 20% within two months, amid Donald Trump’s political rhetoric against Mexico.
In that year and the two subsequent ones, exports grew at an average rate of 7%, compared to an average drop of 0.5% in the previous three years, attributed by economists to the cheaper prices of Mexican products abroad due to the weakness of the weight.
Unlike other episodes, the Mexican economy faces new challenges amid the shock of volatility and the collapse of the currency, since in addition to a rise in imports, the prospects for investment deteriorated.
The government of President Andrés Manuel López organized a popular consultation to stop the construction of a Constellation Brands beer plant in the north of the country, which “sent a signal that there is no legal certainty,” BBVA México said in a note to clients.
SHOCK TO ARRIVE
In 2019, Mexico, the main trade partner of the United States, had record exports of more than 460,000 million dollars, and had its first annual trade surplus in eight years, also encouraged by a collapse in imports, according to official figures.
“In a recessive context, it would be even worse to have an appreciated weight. In the long run, it will be a competitive weight … the movement in the exchange rate works as a buffer to a certain extent because it can have side effects,” Alberto said. Ramos, chief economist for Mexico at Goldman Sachs.
“The economy is expected to have a robust recovery in 2021, also because the (comparison) base will be very low,” he added.
The experts also said that the definitive approval of the renewed TMEC trade agreement is a positive factor, since the North American region could be strengthened after the trade war between the United States and China.
However, President Andrés Manuel López Obrador has been criticized for dismissing the effects of the virus on the local economy and has said that he has the resources to face the situation and favor the poor majority of the nation of 126 million inhabitants.
Given the lower local economic activity and the strong impact expected from abroad, various financial groups have cut their growth estimates, as well as consumption and investment in the following quarters.
“The consumption shock in Mexico has not yet come because the (restriction) measures have not yet been imposed, but when they are put in place, consumption is going to fall by 20-30%,” said Benito Berber, chief economist for Mexico at Natixis . (Report by Abraham González, edited by Ana Isabel Martínez)