Trump wants to stimulate the US economy and thus affect Mexico

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Few things in the world are as attractive in electoral times as Trump would try in the US economy. This would affect Mexico

This Tuesday the president of the United States, Donald Trump, gave what could possibly be one of the most important news in the coming months for his country in case of crystallization, with great impact for the world, and of course for Mexico.

The US president said his administration is exploring options to stimulate the growth of the largest economy on the planet ; Trump’s sayings are made regardless of the intense pressures he exerts on the Federal Reserve Bank of the United States (Fed) , so that he lowers his interest rate, Trump flatly said he has to lower that rate by one point, or 100 basis points, something that we will analyze in future installments because it also involves many consequences.

Back in the options that Trump and his team explore to stimulate the economy of his country, the president said that one of the most likely alternatives would be a tax cut to capital gains, what does this mean? What impact would it have? in our country ?, then we outline some scenarios.

Donald Trump in campaign
Reuters

Tax cut to capital gain, translation

This phrase that sounds very financial, and it is, does not mean anything other than the reduction of taxes on investments in some financial assets and direct investment such as real estate ; however, investments in assets such as machinery and equipment, real estate, injection of working capital to companies, and other additional elements can also be considered .

What Trump meant is that, if your country adopts such a measure, investors who provide resources in the US markets and for their companies (in this case only for their operations on US soil if the companies are multinationals), will have a stimulus In addition to investing in a country with a high return on capital, they will be able to compensate for capital risk with a lower government tax.

This strategy will complement what is in force since the tax reform that began on January 1, 2018, when corporate tax rates or corporate taxes fell from 35 to 21%, at the time it was the biggest adjustment of the modern era in terms of taxes for the business sector of that country, and which many associate with the strengthening of the economic expansion of the United States, which has just turned a decade.

While it is not yet known to what extent the Trump administration would cut capital gains taxes, the news alone is a positive factor for the most important economy on the planet.

dollar

Bad news for Mexico, and much of the world

A tax cut on capital gains, that is, a decrease in the rate that capital must pay for making financial and non-financial investments in the United States, is bad news for net capital importers, as is the case with Mexico; These countries, the net importers of capital, are nations that receive significant flows of foreign resources either indirect or financial investments, so it often happens that at the end of the year the arrival of foreign flows largely explains the stability of its currency and the growth of the so-called Foreign Direct Investment (FDI), plus a bulky dollar balance in its bond markets. Any resemblance to what happens in Mexico is no accident, it is the total reality.

We do not know to what extent it could impact Mexico, in fact in recent years our country has benefited from significant foreign direct investment flows (the first half reached just over 18,000 million dollars, 1.5% up compared to the same period ), and do not say the balance in dollars that exists in local financial markets .

But, from the outset, there is a threat that there may be fewer flows to Mexican markets if Trump imposes a measure of economic stimulus in his country, but at the same time and without intending it, aggressive for other economies, such as ours. We are not talking about a collapse in investments, definitely not, but of a scenario in which US investors will more evaluate the possibility of investing in or out of their country.

The interest rate will be a factor

Go crossroads where you could find the Mexican central bank, pressured to lower interest rates, but with the risk that doing so decreases the profitability of investments in Mexico and capitals lose interest in our country. This is certainly not favorable news for the Mexican peso, the national currency does not have a favorable outlook in the immediate months, Trump is campaigning, fully understands that he must offer something concrete and very attractive to the electorate; In that sense, few things are so attractive in the world that a tax reduction.

Source: altonivel

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