Above, the Mexican President shows Trump how the Mexican eagle is squealing
Global investors are fleeing Mexico’s
financial markets, sending the peso to record lows on mounting concerns that
Donald Trump’s trade policy could end the country’s privileged status among
developing countries.
The peso on Wednesday tumbled to
another all-time low against the dollar as Mr. Trump pledged to change U.S.
trade policy with Mexico. “Mexico has taken advantage of the United States,” he
said during his press conference. “It’s not going to happen anymore.”
The Mexican currency weakened 0.3%—at
21.8609 from 21.8009 late Tuesday—again frustrating Mexican central-bank
efforts to slow the currency’s decline. Bank officials said Tuesday that they
spent $2 billion last week to prop up the peso, which has weakened 16% against
the dollar since the U.S. election.
The selloff underscores fears that the
economic gains Mexico has made over the past two decades could reverse, as the
incoming Trump administration takes a confrontational stance that could bring
tariffs and border-control measures that once appeared unthinkable.
The North American Free Trade Agreement,
which in 1994 created a free-trade zone among Mexico, the U.S. and Canada,
cracked open the American consumer market to Mexican businesses in a way no
other emerging market has ever enjoyed. Nafta has also brought relative
stability to the peso after a series of currency crises, a crucial factor in
reassuring foreign buyers of Mexican bonds and other assets.
Now, that advantage could be in
jeopardy if Mr. Trump follows through on pledges to renegotiate the agreement.
Mexico’s benchmark stock index has dropped 5.2% since the U.S. election through
Wednesday. Yields on 10-year Mexican government debt, which move in the
opposite direction of price, jumped to 7.689% from about 6% before Mr. Trump’s
victory. Mexican asset prices could come under further pressure in coming
weeks, analysts and investors said, as the administration’s nominees to
government positions spell out their positions in testimony before Congress.
“A renegotiation of
Nafta would basically kill Mexico’s growth model,” said Juan Carlos
Rodado, director of Latin American research at investment bank Natixis. “This would be
very bad for investor confidence.”
This reversal of fortune shows how
Mexico may be paying a price for becoming so dependent on one strong trading
partner. About 80% of Mexican exports go to the U.S.
Foreign investors were net sellers of
$1.4 billion in Mexican short-term debt in December, reducing holdings by 11%,
according to data from Natixis and Banco de Mexico. That was the biggest
one-month selloff in nearly 10 years, in percentage terms.
Mexico’s economy could fall into
recession, shrinking by as much 3.3% in 2017, if the U.S. imposes tougher trade
terms, Mr. Rodado said. The International Monetary Fund estimates that Mexico’s
economy expanded 2.1% in 2016. Almost 30% of the country’s gross domestic
product comes from trade with the U.S., Natixis estimates.
Fitch Ratings in early December cut its
rating outlook on Mexico’s long-term debt to negative from stable, a sign that
currency depreciation resulting from Mr. Trump’s victory had increased
uncertainty to the point that it could hurt Mexico’s public finances.
“No one is willing to stick their neck
out and take a shot on Mexican assets right now,” said Win Thin, an emerging-markets
strategist at Brown Brothers Harriman & Co.
The peso’s instability has already
sparked inflation in Mexico and caused headaches for small-business owners such
as Abraham Bleier, founder of the Garabatos chain of restaurants and
bakeries. Mr. Bleier, who has about 35 locations in Mexico City and the central
Mexican city of Queretaro, said he wanted to open two new locations each year.
He has put his plans on hold because
currency fluctuations boosted costs. Prices of butter and chocolate that he imports
from New Zealand and Switzerland—and pays for in dollars—rose more than 40%
over four months last year, making his cookies and cakes more costly to
produce.
“I can raise prices, but if people
don’t have the money, they won’t pay. It’s a negative spiral,” he said. “To see
the value of your business devalued in dollar terms 40% or 50%—and I didn’t
have anything to do with it, I didn’t make any mistake—it’s very frustrating.”
Fund managers that deal in
peso-denominated assets are spooked, too. Macquarie Infrastructure & Real
Assets, an Australian-owned company that invests in Mexican roads, power plants
and wind farms, filed paperwork to raise as much as 10 billion pesos ($457
million) from pension funds and other investors in September.
Ernesto González, head of the
Mexico office for Macquarie Infrastructure & Real Assets Mexico, said there
was a pause in fundraising immediately after Mr. Trump’s election, and he
expects to have a harder time raising money after the peso’s further weakening.
“It’s definitely in the back of my mind
that people will want to delay large investment decisions,” he said.
Above, Mexican Presidente Trumpez; Below Presidente Trumpez talks about Mexico building a wall.
A weak currency often
comes with benefits by making a country’s exports more competitive. But a
falling peso may not boost the Mexican economy as much as a weakened currency
did for other developing countries. If Mr. Trump carries out his threat to put
tariffs on Mexican goods if the country doesn’t revise trade terms, duties on
Mexican products could partially offset the competitive advantage from a weaker
peso, economists said. “If you impose tariffs, Mexican exporters will be less
profitable,” said Alberto Ramos, chief Latin American economist at Goldman Sachs Group Inc., adding,
“It’s not going to price them out.”
Luis de la Calle, a former top Mexican
trade official, said Mr. Trump’s statements and policies that have caused the
peso to decline could backfire. They would dent Mexicans’ ability to buy U.S.
goods, which could expand the U.S. trade deficit. A weaker peso is also likely
to spur more illegal immigration if Mexico’s economy falters.
“Trump is manipulating Mexico’s
currency through his tweets, against the U.S. interest,” Mr. de la Calle said.
Gorky Urquieta, co-head of
emerging-markets debt at Neuberger Berman, said the Mexican central bank will
eventually be able to slow the currency’s declines. He recently canceled his
negative bets on the peso, believing it is undervalued.
Still, he added, “until we have a better
grasp of what trade and U.S. policy are going to be like, it will be difficult
to see a meaningful recovery.”
For decades, Mexico’s economy careened
between booms and busts, like many other emerging markets. That began to change
in 1994 with Nafta, which boosted Mexico’s export revenue and made companies
less vulnerable than those in countries like Brazil and Chile to China’s
slowing appetite for raw goods.
In 1995, the U.S. coordinated a $50
billion bailout of Mexico after the country’s botched currency devaluation
caused the peso to plunge. Mexico received a $20 billion credit line from
Washington but tapped only about $12.5 billion and repaid the loan early.
But Mr. Thin at Brown Brothers Harriman
said investors shouldn’t count on the U.S. coming to Mexico’s aid under the
next administration.
“Trump has a very adversarial
relationship with Mexico and would likely be much less cooperative in terms of
bilateral aid,” he said.
Below, uncle Beto says Trump's tacos are "huge!"
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