Mexico has been in the spotlight in the past couple of years, mainly due to Donald Trump’s tough stance against it in the run-up to the US Presidential elections. But, politics aside, let’s take a look and see if the recent extreme market movements are justified by the underlying fundamentals.
Mexico is one of the world’s most populous countries at 112 million people, with its GDP currently being the 15th largest in the world, in nominal terms. It has a rapidly growing electronics industry – currently sixth in the world – and it also has a huge automobile production capacity. Furthermore, it has a high income from tourism enjoying millions of tourists each year, ranking 23rd in the world and the highest in Latin America.
Its energy production is state-owned, and it stands at 3.7m barrels per day (6th largest oil producer in the world). It’s worth noting that oil export dependency has dropped from 60% to roughly 10% within two decades and that it also has the 3rd largest solar potential in the world. As such, it’s very well positioned for the changing energy requirements of the world.
Here are some of Mexico’s major economic indicators over the past decade:
- Stable GDP, averaging around +1% QoQ with a peak at 2% and trough at -1%.
- Unemployment between 3.5% and 6%, currently sitting at the low end of the range.
- Inflation dropped from 6% in 2009 to a low of 2% in 2015 and now on a slight rising path at 3.5%.
- Interest rates dropped in 2008-2009 along with the rest of the world, from 8.25% down to just over 4%. During the past year, Banxico has raised rates gradually to 5.75% to combat rising inflation and the depreciating Peso.
- The trade balance has oscillated around zero, registering not only deficits but often surpluses. Currently stands at ground zero.
- Govt debt / GDP ratio is low compared to other OECD countries. The ratio dropped from around 40% in the 1990s to a low of 17% in 2007 and has now risen back to over 40%.
Having considered all the above, the question that we need to ask is: is the recent MXN depreciation vs. the US Dollar justified or sustainable? After all, USDMXN has moved from 13 to nearly 22 – nearly 70%! – within two and a half years.
Mexico seems to have decent fundamentals overall, and its major economic indicators are healthy. It remains a relatively cheap country in terms of average GDP per capita and hourly wage costs, so local production of goods & services should continue to be strong.
On the negative side, it’s worth noting that Mexico has the second-highest economic disparity between extremely poor & extremely rich among OECD countries. However, the main reason why the Peso has been vulnerable in the past couple of years is Donald Trump. When it comes to corporate investment and jobs, his “war” on Mexico has been relentless. He made it one of his main campaign points to return jobs & production from Mexico back to the US. There have already been a couple of blockbuster announcements, the most notable one being Ford scrapping a $1.6bn plant in Mexico and opting instead to spend $700m in Michigan. This all sounds nice and patriotic; however, one must also look at the long-term feasibility of such corporate decisions and search the reasons why such seemingly uneconomic plans could be made. Could this be just a clever publicity stunt, or is it a legitimate long-term policy?
Following Trump’s inauguration speech, the markets were somewhat surprised by the lack of aggression against Mexico. The market feels like it’s overextended against the MXN and close to a turnaround. It will certainly be a volatile and choppy ride, but the Peso is probably on the verge of a long-overdue correction.
USD/MXN LONG (Buy)
ENTER AT: 19.19275