Nov 28 / Alef Dias

Macroeconomics Weekly Report - 2023 11 27

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"The Mexican economy grew by 1.1% in the third quarter of 2023, compared to the previous quarter, beating INEGI's preliminary expectations of 0.9%, released in October. In the annual comparison, Mexico's GDP advanced by 3.3%, in line with Market expectations."

Economic growth remains strong in Mexico

  • Last week, the final figures for Mexico's GDP in the third quarter were released. In line with expectations, the data confirmed the continuation of a very positive scenario for the Mexican economy.
  • The Mexican economy has a virtually unique combination in a context of global economic slowdown that should continue to strengthen its currency: the country has shown resilient growth amid high interest rates and slowing inflation. This scenario leads to a combination of a strengthening economy and an extremely positive interest rate differential against the US.
  • However, the continued strength of the Mexican Peso also depends on the external scenario - that is, whether the main economies avoid some kind of deep recession and/or whether US yields continue to fall or at least stabilize.

Introduction

Last Friday, Mexico's National Statistics Agency (INEGI) released the final figures for Mexico's GDP in the third quarter. In line with expectations, the data confirmed the continuation of a very positive scenario in terms of economic growth for Latin America's second largest economy.

When we look at the performance of the Mexican Peso throughout the year, we can say that the currency has not reflected all of the very positive economic performance of its economy. Although it is appreciating in 2023, the currency has had some ups and downs related to the external scenario and, more recently, to less intervention by Banxico - Mexico's central bank - in the foreign exchange market.

Given this context, this report discusses recent data from the Mexican economy and how it should impact the trajectory of the Mexican Peso.

Image 1: MXN and Latam Currencies

Source: Refinitiv

Image 2: GDP Mexico (YoY)

Source: Bloomberg

A quarter of strong growth

The Mexican economy grew by 1.1% in the third quarter of 2023, compared to the previous quarter, beating INEGI's preliminary expectations of 0.9%, released in October. In the annual comparison, Mexico's GDP advanced by 3.3%, in line with Market expectations.

A breakdown of the GDP figures showed that all sectors grew on a quarter-on-quarter basis. Primary activities, such as agriculture, fishing and mining, recorded the most significant gain, of 2.6%. The secondary sector, which includes manufacturing, grew by 1.3% and the tertiary or service sector grew by 0.9%.

Image 3: Industrial Production (YoY)

Source: Bloomberg

The Mexican economy's performance in 2023 is admirable, especially considering the global scenario of high interest rates and economic slowdown. Domestic demand remains robust, even in the face of restrictive fiscal and monetary conditions, as well as negative market sentiment towards some government policies.

The economy has benefited from increased employment, rising wages, high remittances and positive consumer confidence. Investment is benefiting as Mexico attracts more capital inflows: the country has been one of the biggest beneficiaries of the relocation of global supply chains, given its proximity to the US. In July, for the first time in more than 20 years, Mexico overtook China as the main exporter to the US.

Image 4: Monthly exports to the US (Average 12 months - bi USD)

Source: Bloomberg

As Mexican economic data is coming in above the Mexican central bank's forecasts, signaling growth above potential, the likelihood of interest rate cuts this year is reduced.

Despite the slowdown in inflation in recent months, Banxico’s governor, Victoria Rodriguez, ruled out the possibility of cutting the basic interest rate until the end of 2023, but opened the door for the board to start discussing possible cuts in the future. As a result, the interest rate differential will probably remain high, favoring the Mexican peso.

However, the fiscal scenario is a point of attention for 2024. Gross federal borrowing requirements are likely to jump to 12.7% of GDP next year. This is a sharp increase from the government's estimates of 10.1% in 2023 and 11.1% of GDP in 2022, due to the wider fiscal deficit and higher amortization of domestic and foreign debt.

In Summary

As is common for emerging currencies, their movements are often the result of external factors rather than internal ones, given that the external sector is usually very important for these economies. Since the second half of October, the fall in US yields has provided a slightly better scenario for emerging currencies. The continuity of this movement depends on whether the main economies avoid some kind of deep recession and/or whether US yields continue to fall or at least stabilize

If the external scenario continues to help, the Mexican economy has a virtually unique combination in a context of global economic slowdown that should continue to strengthen its currency: the country has shown resilient growth amid high interest rates and slowing inflation. This scenario leads to a combination of a strengthening economy and an extremely positive interest rate differential against the US.

Image 1: 2-Y Inflation Indices Mexico (YoY)

Source:  Bloomberg

Image 2: Carry Trade Return Index

Source: Bloomberg

Weekly Report — Macro

Written by Alef Dias
[email protected]
Reviewed by Victor Arduin
[email protected]
www.hedgepointglobal.com

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