Widely reported in the Latin American press, a report by Grupo Financiero Banamex warns of geopolitical and financial repercussions that it attributes to the possibility that Donald Trump may be elected may occur should the U.S. presidency. While the power at the disposal of a Trump presidency to limit trade is minimal, said the Mexican report, what the report cited as a “principal area of concern” is the effect his immigration policies may have on the value of the Mexican peso.
 
"It could translate into an ‘over-reaction’ in the type of exchange. We think that Mexican authorities are conscious that this scenario may require responses along political and economic lines,” wrote Sergio Luna and Joel Virgen of Banamex, a Citigroup subsidiary and the second largest bank in Mexico.
 
Trump has been reviled by Mexican politicians for his nationalist stands and his insistence on protecting American industry.
 
The Banamex analysts fear that should Trump put into place a policy of “protectionism” into place and what it called a “harsh tone” he may have towards the North American Trade Agreement (NAFTA), that volatility in the exchange rate of the Mexican peso against the dollar may result. The report expressed concern over Trump’s suggestion that a surcharge could be made on cash remittances sent from the U.S. to Mexico in order to pay for a wall along the shared border between the two countries. 
Given such a situation, Mexico could resort to instruments it has at hand such as injecting money into the market or asking for a bigger line of flexible credit from the International Monetary Fund, added the analysts.
 
Since January 1, the Mexican peso dropped by at least 4.5 percent, after dropping 17 points in 2015. This was the worst drop in value since 2008, and has come because of the drop in oil prices and continuing fears over the world economic situation.
 
However, Banamex indicated that the economic effects of the volatility of the peso would be moderated by trade with the U.S., given that restricting trade would be a difficult task for Trump. “The direct impact of the said policy would be reduced,” said the report.
 
An attempt to leave NAFTA behind would be difficult for a Trump administration, said the report. A Trump administration would have to comply with the guidelines set for tariffs by the World Trade Organization, thus making Trump’s announced 35 percent increase in tariffs on Mexican goods a non-starter.
 
Banco de Mexico governor Agustin Carstens said in an April interview with El Universal newspaper of Mexico "many things that Trump has said are not very friendly towards Mexico, and that could have an effect. He has interjected himself into remittances, protectionism, and NAFTA."
 
Effect on trade for Mexico
 
Despite assurances in Mexico that trade may increase with a falling peso, the slide in the value of the peso has not yet boosted the country’s manufacturing sector. According to the Wall Street Journal, this is because of sluggishness in the industrial sector in the U.S., coupled with close integration of supply chains across the U.S.-Mexico border.”
 
While economists say the peso’s 24% depreciation against the U.S. dollar in the past 18 months should make Mexican-made goods more competitive, the reaction has been slow because of close synchronization of U.S. and Mexican business cycles. Exports of manufactured goods fell 6.5% in March from the year-earlier month, according to the Mexican government. The drop was led by a 10% fall in auto industry exports.
 
After hitting an all-time low 19.4485 to the U.S. dollar in early February, the peso has since recovered and trading at 17.40 in April. However, as of today, the strength of the dollar and the drop in oil prices have hit the peso hard. The spot price for the dollar hit 18.1935 pesos today: the highest peso price for the dollar since February 26 of this year, according to the Bank of Mexico. At the banks, the dollar was going for 18.49 pesos, as opposed to 18.23 pesos at close of business yesterday, according to Banamex.


SHARE

Short Link

Spero News editor Martin Barillas is a former US diplomat, who also worked as a democracy advocate and election observer in Latin America. His first novel 'Shaken Earth', is available at Amazon.

Comments

RELATED NEWS