Mexico’s central bank governor Agustín Carstens expects his country can maintain its 2.4-2.5 per cent growth rate in 2016, in spite of economic headwinds and Brexit-related fallout.
Matching last year’s growth of 2.5 per cent will not be easy for a country battling a battered peso and inflationary pressures that last week prompted a surprise half-point rate rise.
Still, speaking at his office, he told the FT: “If subsequent [Brexit] developments are handled in an orderly, constructive fashion — that’s an important if — I think it [the impact] should be manageable.”
The central banker, who also chairs the governing body that advises the International Monetary Fund on how to respond to unfolding crises, appears as baffled by Brexit as many in Britain. A firm believer in globalisation, he says “economic collaboration and integration is of the essence” and the full impact of the UK leaving Europe is as yet hard to anticipate.
The Mexican peso has been in the line of fire. As the most liquid emerging market currency, it represents a convenient hedge and briefly touched an all-time low of just under 19.52 to the dollar on the UK referendum result. It rallied on the rate cut, but has since weakened again and is now trading at just above 18.6.
The US elections could pose even bigger risks if Republican Donald Trump, who wants a border wall and an end to US companies relocating to lower-cost Mexico, wins in November. “We have to be very cold-headed,” Mr Carstens said, noting “real gains of trade” in the bilateral US-Mexican relationship “that should be the leading consideration”.
For now, volatility looks set to continue — which can curb investors’ appetite to put money into Mexico, Mr Carstens said.
“I think what Mexico needs to do is to distinguish itself from other emerging markets, and the way of doing it is by having a consistent and congruent macro framework — adequate fiscal and monetary policy to accommodate the shocks we are facing,” he said.
As such, Banxico, as the central bank is known, “took the liberty . . . of reminding” the finance ministry on June 30 of the need to deliver a primary surplus next year when it raised its benchmark interest rate to 4.25 per cent. A surplus would be Mexico’s first since 2009.
The finance ministry had already announced additional 2016 budget cuts of 31.7bn pesos ($1.7bn), on top of a previously announced 132bn pesos in cuts this year and 175bn in 2017. The central bank, fearing peso weakness would stoke inflation already ticking up in some components, delivered its second half-point rate rise in four months, beating expectations of a 25-point rise.
While Mexican inflation, which has been at historic lows, is in no danger of spiralling and should end the year “slightly above 3 per cent”, Mr Carstens said Banxico “wanted to be ahead of the curve”.
Though Banxico raised rates in parallel with the US Federal Reserve last December and made clear it wanted to shadow the Fed, it has forked off on to a different path.
“The decisions of the Fed will still be very, very important,” Mr Carstens said. “But Brexit illustrates very clearly that there are events where the impact on inflationary expectations is very, very different.”
While the US dollar as a safe haven sparked dollar appreciation and reduced inflationary expectations in the US on Brexit, peso depreciation stoked them. While Mexico rose, the Fed’s tentative talk of another rate rise now looks to be on hold.
So will Banxico’s latest half-point increase be enough? “We will see,” Mr Carstens said, with a laugh because of all the imponderables on the horizon. “I would hope so.”
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