Mexico's growth likely to see significant slowdown in 2017, longer-term prospects remain favourable

The Mexican peso slumped to nearly 22 pesos per USD which forced a direct intervention from Banxico. Shifts in monetary and trade policies by the US government will likely affect Mexico’s outlook.

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.  There is also a significant risk that inflation dynamics could be affected further in the coming years owing also to the lagged impact of the depreciation of the peso.

Mexican central bank may therefore rely mostly on higher interest rates to keep a further depreciation of the peso within limits.  This too will dampen growth.

"We now expect growth of 1.5% in 2017, a significant slowing from the 2.1% pace registered in 2016. Despite slower growth in 2017, longer-term Mexican growth prospects remain favourable," said Scotiabank in a report.