Itaú BBA - NAFTA deal closer, but not certain

Scenario Review - Mexico

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NAFTA deal closer, but not certain

septiembre 5, 2018

More details about AMLO’s policy direction emerge

AMLO’s economic team is now focusing on 25 priorities to be included in the next budget, the cost of which is estimated at around 3.4% of GDP. Although we do not expect the incoming administration to change the nominal fiscal deficit target for next year (2.0% of GDP), the cost of the proposals highlights that the risk of fiscal slippage is high.  

On Monday, August 27, President Trump announced a trade deal (agreement of understanding) with Mexico in the White house, while Canada joined negotiations with the U.S. to reach a trilateral agreement). Canada’s key priorities are Chapter 19 (Dispute Settlement in Antidumping and Countervailing Duty Matters) and the supply management system for dairy. 

A successful renegotiation of NAFTA would likely mean an end to the monetary policy tightening cycle. In our view, the outcome of Canada joining the deal (or not) could still affect the Mexican peso and thus the next monetary policy decision. Expecting a successful NAFTA outcome, we revised our monetary policy rate for the end of 2018 to 7.75% (from 8.0%) and our exchange rate estimate (MXN/USD) for 2018 to 18.5 (from 19.5), also assuming a less turbulent external scenario for emerging markets.

Economic activity slowed in 2Q18, and we expect growth of 2.0% this year. For next year, we now expect growth of 2.2% (from 2.0% in our previous scenario), assuming that a NAFTA deal is successfully renegotiated.

João Pedro Bumachar
Julio Ruiz


 

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



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