Itaú BBA - Hopes of a NAFTA deal amid fiscal policy risks

Scenario Review - Mexico

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Hopes of a NAFTA deal amid fiscal policy risks

August 9, 2018

AMLO’s extra spending promises could jeopardize public finance stability

During the transition period, president-elect Andrés Manuel López Obrador (AMLO) has been outlining his economic policy. He is promising extra public expenditure, to be offset by 2% of GDP savings from reducing inefficiencies and attacking corruption (a figure that looks optimistic). Thus, if significant extra spending is included in the 2019 budget, the risk that the government misses the fiscal deficit target for next year (a nominal deficit of 2.0% of GDP) would be high. 
 

NAFTA negotiations are regaining momentum after the elections. Recent comments from key players have indicated that a deal “in principle” is likely before August. However, caution is necessary. Although the incentives for the U.S. to reach a deal during the first half of the year were in place, no deal was reached and it is not clear what conditions changed since then to allow for an agreement at this time. 

Still, with the renewed momentum of NAFTA negotiations, the Mexican peso continued to strengthen, outperforming all the other major currencies since early July. Likely as a result, the central bank decided to leave its policy rate unchanged in August, while maintaining a vigilant tone (meaning rate hikes continue on the table). 

If a NAFTA deal is actually reached, the currency will likely end this year stronger than our current forecast (19.5 pesos to the dollar) and the central bank is unlikely to deliver the additional 25-bp rate hike we have in our scenario.

João Pedro Bumachar
Julio Ruiz


 

For the full version with all charts and tables, please open the attached pdf file 



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