Since late 2014, the Mexican peso has dropped 25% against the USD in real terms; however this has not been seen in stronger exports. In contrast to this, manufacturing exports in the first quarter declined 4.1% y/y, while the negative trend is expected to continue, noted Barclays in a research report. In March, intermediate exports dropped 0.8% m/m sa.
This implies that the foreign demand has been subdued that is also seen in global manufacturing production, especially in the US. Hence, trade balance of Mexico fell by about USD 2 billion in the first quarter of 2016 from a year earlier. If this trend continues, the current account deficit might reach 3.6% if the GDP by the end of 2016 from 2.9% in 2015, according to Barclays.
Several macroeconomic adjustments or policy tools such as further aggressive fiscal consolidation, sharper depreciation of peso or more restrictive monetary policy can correct the potential imbalance, added Barclays. The Bank of Mexico, in its recent monetary policy minutes hinted that it is prepared to undertake measures to bolster monetary policy. The central bank might take action soon in a pre-emptive fashion by raising rates by 50bp in June or before that, and interfering in the FX market as productivity gains from structural reforms are not expected to be clear in the near term, said Barclays.
