Latin Finance.-In 2019, we saw a slump in strategic sectors such as oil production, construction and sectors closely related to government spending and investment. As a result, the mexican economy flatlined, but the slump was not generalized. Despite the lack of growth, labor markets have been resilient.
Evidence of the latter is the 1.7% growth of formal private employment and the low unemployment rate. For 2020, we anticipate a mild economic recovery in Mexico.
We believe that the government will deploy resources in a more effective way this year, thus bolstering current spending and investment. As the US economy is expected to continue growing, the Mexican economy should therefore be able to expand between 1% to 1.5% y/y. For 2020 we expect a 3.5% inflation rate well under control.
The main risks for this forecast are a poor budget execution and a further slowdown of US manufacturing. Never the less with the USMCA deal signed by President Trump, and a phase one deal between China and USA agreed, we see a constructive environment for local financial markets.
On the local front, Banco de México has ample leeway to continue cutting rates this year, even though the Board will most likely proceed at a cautious pace. In this context, we remain constructive on the MXN Peso and see scope for an appreciation to $18.5 against the USD in the first half of the year. In the second half, we cannot rule out periods of higher volatility triggered by the US election.
Mexico’s credit rating remains at risk, as two of the main rating agencies have a negative outlook for both the sovereign and Pemex. This story is not new, however, and in all likelihood it has been mostly priced into Mexico’s risk premium. 2)
The Mazatlan Post