MXN

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...

Most of the factors driving the peso’s post-pandemic outperformance are still in place. Implied interest rate trajectories suggest that Banxico will cut more slowly and more incrementally than its Latin American counterparts, leaving the currency with one of the best volatility-adjusted carry profiles in the region. Carry Return Index, 1999 = 100 Remittance volumes keep setting new records. Remittances from workers outside Mexico, millions USD And – although reshoring flows are likely overhyped – the country is well-placed for sustained economic gains as supply chains are re-routed through geographically-proximate and politically-compatible parts of the world. We think the peso could...

We think a sustained period of outperformance in the US economy will fade in the coming months, with the peso likely to come under selling pressure in early 2024 as investors brace for a slowing in exogenous capital flows. Inbound investment looks vulnerable, with large multinationals likely to soft-pedal the realignment of global manufacturing footprints in response to a reversion in American consumer demand, and a relatively mild rise in Hispanic unemployment rates could take a serious toll on monthly remittance volumes. Historically, episodes of Mexican peso weakness have been associated with sharp slowdowns in the US economy – illustrated...