IMF Says Protectionism Threatens Mexico Economy

Protectionism from abroad threatens Mexico’s economy, but it is too early to say whether Donald Trump’s presidency will affect growth, the International Monetary Fund has said.

After posting 2.5% economic growth in 2015, Latin America’s second-biggest economy after Brazil is projected to slow to 2.1% this year, the IMF said on Tuesday in a report, leaving its previous forecast unchanged, AFP reported.

The IMF slightly lowered Mexico’s outlook for 2017, predicting the economy will grow by 2.2% in 2017, a 0.1 percentage point lower than previously thought. “Mexico continues to grow at a moderate pace despite a challenging external environment,” the IMF said in an annual report.

“However, the country remains exposed to external shocks, including risks of growing protectionism, given its strong financial and trade linkages with the rest of the world,” the report said.

The staff report, which was completed four days before the November 8 US election, did not directly mention Trump. The Republican US president-elect wants to renegotiate the North American Free Trade Agreement and threatens to impose tariffs to prevent US firms from outsourcing to Mexico.

  Wait for Actual Policies

IMF officials said they must wait and see which policies Trump’s administration will adopt before the Washington-based institution can revise its forecast for the Mexican economy. “We need to base our projection of actual policies that will be adopted,” Robert Rennhack, deputy director of the IMF’s Western Hemisphere department, told reporters.

“We need to wait and see what the new administration will actually do. Lots of things are said in the campaign, and I think it is important to avoid overreacting to those,” he said.

The Mexican peso was rocked by Trump’s victory in the US presidential election, depreciating by about 14 between November 8 and November 11 on fears that Trump will fulfill his protectionist policies.

In addition to renegotiating the 22-year-old NAFTA pact with Mexico and Canada, Trump, who takes office on January 20, announced Monday that his administration will withdraw from the 12-nation Trans-Pacific Partnership trade deal.

“A pause in monetary policy tightening appears warranted in the near term, given the moderation in economic activity, absence of second-round effects from the depreciation, and limited wage pressures,” the report said, noting that further moves by the central bank should be “data driven.”

Bank stress tests showed Mexican banks were resilient to severe shocks given high levels of capital, the IMF said in a special report on the banking system.

It recommended improvements in banking supervising agencies and noted authorities had no plan for a systemic banking crisis.

 $2.9b Windfall

Mexico is set to earn about $2.9 billion from its oil hedges for 2016, reaping a windfall from plummeting crude prices for a second straight year, according to IMF.

Mexico has spent an average of almost $1 billion a year over the past decade buying put options through deals with banks that have included Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co., according to government documents. The payout for 2016 will be about $2.9 billion, the IMF said in an e-mailed response to questions on Tuesday after completing its annual review of the nation’s economy.

Mexico earned $6.4 billion from hedging in 2015, its biggest payout so far, and $5.1 billion in 2009, in the aftermath of the global financial crisis. Since it started shielding its exposure to crude prices through derivatives contracts in 1990, the Latin American country had never collected a gain two years in a row.

The government spent $1.09 billion last year on put options allowing it to sell 2016 oil exports at $49 a barrel; that’s about 42% above the $34.43 average price for the nation’s crude mix over the past year.

“It’s been a tool that has helped the economy to smooth the negative shock from lower oil prices,” said Carlos Capistran, the chief Mexico economist at Bank of America Corp. “It has given the Finance Ministry breathing room to adjust other variables. It certainly has been a good tool.”