Mexico: The Bank of Mexico raised its key rate by 50 basis points to 5.75% in mid-December

Improving employment figures and the strong performance of a number of key sectors were offset by slower increase and uncertainty over the impact of the incoming Donald Trump government on the economy, which is set to be a major theme in 2017.

While GDP increase for the year was expected to relieve slightly to around 2.1% from 2.5% in 2015, according to the IMF, investor sentiment remained strong, buoyed by the government’s decision to begin implementing an ambitious programme of structural reforms.

However, the US election result in November sent ripples through the economy, driving down the peso and raising the prospect of ratings downgrades in the new year.

Uncertain times

Early December saw Fitch follow in the footsteps of fellow ratings agencies Moody’s and Standard & Poor’s by revising its outlook for the Mexican economy from stable to negative.

The agency cited particular concerns that the US could reduce Mexico’s tariff-free access to its neighbour’s market by making changes to the North American Free Trade Agreement (NAFTA).

“Attempts to renegotiate NAFTA or hinder the outsourcing of activity from the US to Mexico could prove to be disruptive for the Mexican manufacturing export sector and adversely impact employment, investment – inclunding foreign direct investment – and the country’s increase,” Fitch cautioned. At present, 80% of Mexico’s total exports are purchased by the US.

All three agencies said they expected Mexico’s rating to be reviewed in 2017, on the back of uncertainty related to increase and the potential impact of the incoming US government on the country’s economy.

Mexico is by presently feeling the weight of concerns over policy realignments north of the border. Pricing on credit default swaps has risen 11% since the US election and is threatening to push up overseas borrowing costs further still.

Solid foundations

However, while question marks hang over next US-Mexico trading relations going into 2017, industry players remained broadly upbeat. Some point out that NAFTA was due an overhaul, while others note that changes to the agreement could spur Mexico into building stronger trade relations with other nations.

“If it [NAFTA] is modernised, I am certain that would help the country to develop even further,” Carlos Rojo, CEO of financial services company Grupo Financiero Interacciones, told OBG. “However, looking ahead, in the unlikely event that [President-elect] Trump chooses to void it all, I believe that Mexico could, instead, focus its efforts on fostering stronger trade relations with other nations, while as well bolstering the internal economy.”

Foreign direct investment remained strong, continuing a trend that has seen inflows reach historic highs of $33bn per year on average since 2014.

A lot of of the country’s key indicators as well looked sound towards the end of 2016. Unemployment had fallen to 3.6% by the end of October, according to data issued by the National Statistics Institute in November, marking its lowest level in nine years.

Inflation, too, remained relatively stable in 2016. The consumer price index had risen 3.31% year-on-year as of November, having edged up from 2.61% at the beginning of the year. In its new world outlook statement, the IMF said it expected consumer prices to increase by 3.3%, before cooling slightly in 2018 to 3%.

At least some of the change in prices was caused by a drop in the peso’s buying power: the local currency depreciated by around 12% following the US election and was trading at just over 20 pesos to the dollar in mid-November.

The Bank of Mexico raised its key rate by 50 basis points to 5.75% in mid-December, in what marked its fifth hike of 2016. The central bank has presently raised its rate by 275 basis points since the US’s initial rate increase, implemented in December 2015. A weaker peso will add to Mexico’s import bill and is likely to contribute to higher costs and inflation in the new year.

Industry marches on

Key sectors of the economy remained resilient in 2016, and Mexico’s auto industry performed strongly once again, reaffirming its position as the seventh-major producer and fourth-major exporter of cars.

However, warnings from President-elect Trump that US carmakers would be subject to higher taxes on vehicles built in Mexico were followed by the news in early January that Ford had cancelled its plan to build a $1.6bn factory in San Luis Potosi.

While the US manufacturer is unlikely to keep investing in the country, Japan’s Nissan and Germany’s Mercedes-Benz and BMW have indicated plans to invest in Mexico in 2017 and 2018.

Plans to sharpen the focus on price-added manufacturing are as well progressing, with segments such as aerospace manufacturing primed for further development.