Outlook

After a world-beating drive higher, the Mexican peso lost momentum late in the third quarter and has largely failed to regain it, staging a relatively modest rebound against a retreating dollar. Several factors are in play: A drastic increase in government spending plans – coming ahead of the presidential election in June 2024 – spooked investors. The foreign exchange commission’s decision to unwind its non-deliverable hedging programme put pressure on spot rates. And the Banxico began making dovish noises, suggesting that it might begin cutting rates by March. Change in spot exchange rates, DXY and MXNUSD We think markets overreacted...

Under President Andres Manuel Lopez Obrador’s recently unveiled budget plan, Mexico will run its largest deficit since 1988 next year – amounting to roughly -4.9 percent of gross domestic product, up from this year’s -3.3 percent. With global interest rates holding near post-2000 highs, higher borrowing costs could threaten credit ratings and limit the next government’s room for maneuver.  But Mexico’s fiscal position remains more positive than many of its peers. After years of relative austerity under Obrador’s pseudo-populist leadership, the government debt-to-gross domestic product ratio compares favourably with most of the country’s less-developed counterparts and is well below those...

With geopolitical tensions between the US and China forcing businesses to diversify supply chains, the country’s stability, low labour costs, and geographic proximity have raised hopes that a “Made in Mexico” moment is at hand. Indeed, the country has displaced China as the United States’ largest trading partner. Share of US imports, 12-month moving average, % But under López Obrador, energy policy has become less flexible and even less climate-friendly, limiting the extent to which companies with net-zero commitments can relocate production facilities. Critical regulatory bodies remain captive to political whims. And the country devotes an incredibly low share of...