Trump threat­ens Mex­ico’s econ­omy, but it could be on the rise

The Niagara Falls Review - - BUSINESS - JOE CHIDLEY

A sur­face read­ing of the Don­ald Trump’s im­pact on the global econ­omy sug­gests that there is one clear and present loser: Mex­ico.

The new Amer­i­can pres­i­dent has hurled so many threats down Mex­ico way, it’s ac­tu­ally hard to re­mem­ber all of them. Let’s see, there’s the wall (for which he’ll get Mex­ico to pay, some­how), and the “big border tax” on Mex­i­can im­ports, and also the broader border ad­just­ment tax on all im­ports. There’s NAFTA rene­go­ti­a­tion (which, we Cana­di­ans like to think, will hurt Mex­ico more than us) and the crack­down on un­doc­u­mented im­mi­grants, and the snubs to Mex­ico’s lead­er­ship.

I’m prob­a­bly miss­ing some­thing, but even that short list adds up to bad news for NAFTA’s third amigo, right? You would think in­vestors must be run­ning for the hills.

And for a time, they did: In the 10 days fol­low­ing Trump’s Nov. 8 vic­tory, the Mex­i­can Bolsa IPC in­dex, or Mexbol, fell off a cliff, plum­met­ing 8.5 per cent and seal­ing Mex­ico’s fate as one of the 10 worst-per­form­ing mar­kets in the world in 2016. The story since then, how­ever, pro­vides an in­ter­est­ing counter-story to all the bad news for Mex­ico. In fact, de­spite all the doom-and-gloom and the threats from the White House, in­vestors in the Mex­i­can market have been do­ing rather well, thank you.

Since Nov. 18, the Mexbol has gained about 9.5 per cent. Over the past three months, it has risen by more than eight per cent – out­per­form­ing the S&P/TSX com­pos­ite, the S&P 500 and the vaunted Dow Jones in­dus­trial av­er­age. On Fri­day, the Mex­i­can market ended a pretty re­mark­able week in which it gained 3.1 per cent, in­clud­ing a one-per-cent rise on Fri­day alone. On the same Fri­day, the iShares MSCI Mex­ico ETF (NYSE:EWW) — a pop­u­lar en­try point to the Mex­i­can market for out­side in­vestors — rose 1.5 per cent, putting the fund’s three-month re­turn near 13 per cent.

More re­mark­able, per­haps, was that the Mexbol hit (and then sur­passed) 48,470 — where it sat at end of day on Nov. 8, 2016, when Hil­lary Clin­ton was still widely ex­pected to be­come the next pres­i­dent of the United States.

So, you might ask your­self, what hap­pened to the Trump ef­fect? Well, this might be in part a case where the dis­ease is part of the cure — namely, the im­pact on the Mex­i­can peso and the boost it has given to Mex­ico’s ex­port com­pet­i­tive­ness.

Only the Turk­ish lira has per­formed worse than the peso since Nov. 8, as cur­rency mar­kets re­sponded to an in­jec­tion of U.S. trade pol­icy un­cer­tainty. But Trump’s wall — ei­ther the phys­i­cal or the fig­u­ra­tive (tar­iff ) one — hasn’t been built yet, and the peso’s fall has only made it more at­trac­tive for U.S. com­pa­nies and con­sumers to buy Mex­i­can. Last Novem­ber, Mex­ico’s to­tal ex­ports were the high­est on record for that month. De­cem­ber 2016 ex­ports to the U.S. were 1.5 per cent higher than the year pre­vi­ous; Jan­uary 2017 ex­ports were up 4.8 per cent over Jan­uary 2016.

All things be­ing equal, Mex­ico seems poised to cap­i­tal­ize on the twin ben­e­fits of a surg­ing U.S. econ­omy and a weak cur­rency. You could say much the same for Canada: Since mid-2014 our cur­rency has been in a long-term slide against the green­back, too. But the peso’s more re­cent drop has been sharper. In fact, since Novem­ber, the loonie’s real broad ef­fec­tive ex­change rate (ad­justed for rel­a­tive con­sumer prices) has in­creased rel­a­tive to the U.S. dol­lar, while the peso’s ef­fec­tive ex­change rate has de­clined. On a cur­rency ba­sis, then, Mex­ico has be­come more trade com­pet­i­tive in its largest ex­port market, while Canada has fallen be­hind.

Of course, you might ar­gue, but all things aren’t equal: Mex­ico still faces huge un­cer­tainty over trade. That’s true. But the first few months of the Trump ad­min­is­tra­tion have al­ready demon­strated that “get­ting things done” is a lot harder to achieve in of­fice than to prom­ise on the cam­paign trail.

From its re­versible im­mi­gra­tion ban to its mud­dled han­dling of health­care re­form, the new ad­min­is­tra­tion is run­ning into road­block af­ter road­block on the im­ple­men­ta­tion of some of its key poli­cies. On oth­ers, it has been strangely ret­i­cent.

So sure, things might look pretty bad south of the Rio Grande when the Trump ad­min­is­tra­tion finally man­ages to get things done. But Mex­ico might prove the doubters wrong, at least while dither­ing and de­lay re­main the rule in Washington — and that could be a very long while.


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