Mexico – Peña Nieto Has a Trump Problem

( ) Indicates change in rating.                                     *  Indicates forecast of a new regime.

Mexico Political Risk Update

• President Enrique Peña Nieto had a plateful of problems even before the shocking result of the US presidential election in early November, and with Donald Trump now occupying the White House, the Mexican leader’s already substantial political challenges have become all the more daunting.  Disparaging comments about Mexicans and threats to impose economic penalties on Mexico were a regular feature of Trump’s campaign, and Peña Nieto’s ineffectual attempts to defend his nation’s honor reinforced the erosion of his popular support.
• During Trump’s first week in office, he affirmed his commitment to moving forward with plans to construct a 2,000-mile border wall and to renegotiate NAFTA, and he threatened to slap punitive tariffs on imports produced by American companies that relocate to Mexico.  More recently, the Trump administration has stepped up enforcement of immigration rules, and announced that citizens of Central American countries would be deported to the country from which they had illegally entered the US, which for the vast majority is Mexico.
• Former Finance Minister Luis Videgaray has been pressed back into service, this time as minister of Foreign Affairs, in the hope that his relationship with some members of the Trump team might enable him to persuade the new administration in Washington to adopt a more cooperative posture.  In a best-case scenario, meetings with Secretary of State Rex Tillerson and Secretary of Homeland Security John Kelly will have produced an understanding that creates a basis for constructive engagement going forward.  However, unless President Trump manages to refrain from subjecting Peña Nieto to public humiliation, which is how the US leader’s pronouncements are perceived by Mexicans, that may prove to be an elusive goal.
• Not surprisingly, given the negative implications for Mexico’s economic outlook, Trump’s victory immediately sent the peso tumbling to a new record low.  Although the inflationary impact of the steep currency depreciation was mitigated by low oil prices, a more recent lifting of price controls on fuel produced the biggest jump in the consumer price index in four years in January, while the consumer confidence index fell by 26% compared to January 2016, representing the largest year-on-year drop ever recorded.
• The combination of fiscal tightening and the erosion of confidence will produce weak real GDP growth of just 2% in 2017, and downside risks are pronounced.  Falling crude oil production will limit any positive impact of an increase in oil prices on the external balances; in fact, the near-term effect would be negative, as higher crude prices would increase the cost of imported fuels.

Economic Forecasts for the Three Alternative Regimes

 
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