How Will the Peso’s Fall Affect Mexico’s Economy?

Mexico’s peso has been battered in recent weeks and weakened further on the news Thursday that central bank chief Agustín Carstens was stepping down. // File Photo: Mexican Government.

Mexico’s peso has been trading at record lows against the dollar following Donald Trump’s election as U.S. president on Nov. 8. On Thursday, it weakened more than 1 percent on the news that central bank chief Agustín Carstens was resigning. How will a weaker currency affect Mexico’s economy, and how should Mexico’s legislators, president and central bank respond? What are the biggest uncertainties going forward for Mexico’s economy? What is the outlook for foreign investment in Mexico in the year ahead?

Alfredo Coutiño, director for Latin America at Moody’s Analytics: “As largely expected, the Mexican peso has reacted negatively to the U.S. election results, given market fears regarding Trump’s threats about trade, immigration and investment. However, the peso has its own domestic weakness since Mexico’s vulnerability has increased in the past four years: fiscal and external imbalances widened, public debt accelerated, there has been persistent low growth, and most recently, increasing inflation. A currency is more subject to the negative impacts of an external shock if the economy faces wider imbalances. This explains why the Mexican peso has been hit harder than the Chinese currency, even though both countries are subject to Trump’s threats. The peso’s fall is the reflection of investors abandoning it and finding refuge in the dollar. The uncertainty produced by potential U.S. policies is generating not only capital flight but also delay and postponement of investment and consumption decisions in Mexico. These are the factors that will affect the real economy in Mexico, in addition to the market volatility that will make financial planning more difficult. Unfortunately, Mexico faces the external shock with a weak position, given its economic vulnerability. In terms of the wall, Mexico has almost nothing to…”

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