The Mexican Peso is plunging once again this morning – very close to all-time record lows – as fears spread that Ford’s decision yesterday may become the norm following president-elect Trump’s tweet that “this is just the beginning.”
Thank you to Ford for scrapping a new plant in Mexico and creating 700 new jobs in the U.S. This is just the beginning – much more to follow
— Donald J. Trump (@realDonaldTrump) January 4, 2017
Bloomberg notes that Ford’s move, which follows a similar decision by United Technologies Corp.’s Carrier in November, makes it all the more important for Mexican President Enrique Pena Nieto to dissuade other foreign companies from following suit in the face of Trump’s wrath. Mexico’s northern neighbor buys 80 percent of the Latin American nation’s exports, and luring U.S. companies is a cornerstone of the government’s plans to modernize industries from construction to oil.
“A lot’s at stake, considering that since 1999 close to 46 percent of foreign direct-investment flows into Mexico originated in the U.S.,” said Alonso Cervera, chief Latin America economist for Credit Suisse Group AG. “Investors will likely be anxious to see which other companies may do the same.”
The damage caused by companies buckling under political pressure offers a preview of the ripples that could jolt Mexico’s economy should Trump also follow through with threats to tear up free-trade agreements and to build a border wall. Economists in Bloomberg surveys have already cut their median forecasts for GDP growth in 2017 to 1.7 percent from an estimate of 2.3 percent before Trump was elected.
But, as Bloomberg details, the economic outlook for Mexico remains challenging after disappointing results in 2016. Tighter global financial conditions and uncertainty about the future of bilateral relations with the U.S. since the election of Donald Trump in November are a drag on investment. Potential trade and immigration-policy changes in the U.S. may prompt additional downside risks for activity and external accounts in 2017. Tight monetary and fiscal policy to contain accelerating inflation and rising public debt should also weigh on growth.
A weak and more competitive peso already support net exports, but the relief could be limited if bilateral trade with the U.S. comes under pressure from potential protectionist measures. Higher oil prices are also positive, but the upside is limited by falling output and lingering problems in Pemex.