Mexican government announces measures to lure capital inflows

Mexico’s foreign trade (renegotiation of NAFTA) and immigration are likely to be impacted. Owing to the high budget deficit, fiscal policy has little leeway for economic stimuli.

The initial symptoms are visible in the balance of payments, with dwindling portfolio inflows and a likely slide in FDI putting downward pressure on the currency and domestic confidence. The Mexican peso slumped to nearly 22 pesos per USD which forced a direct intervention from Banxico.

Rating agencies have put Mexico’s sovereign-debt outlook into negative territory during 2016. Consequently the  federal government has put in place many measures to improve public finances. These include spending cuts and the recently announced increases in transportation fuel prices. These adjustments will reduce disposable income and have a significant impact on inflation. 

The Mexican government this week announced a plan to lure back undeclared capital held abroad. Individuals or companies with undeclared foreign holdings as of year-end 2016 will be able to repatriate funds at a preferential 8 percent tax rate. Prior to the announcement, individuals and companies repatriating resources were subject to income tax rates of 35 percent and 30 percent, respectively. The impact of such a measure is to be seen.