Mexico: Underperformance should continue - BBH

According to analysts from Brown Brother Harriman, the fundamental outlook worsened in Mexico, with political uncertainty, lower oil prices and price pressures showing signs of picking up.

Key Quotes:

“President Pena Nieto is nearing the last third of his 6-year term.  The next elections will be held in 2018, and his PRI party faces growing problems.  Pena Nieto’s popularity is at an all-time low near 35%, and reflects widespread dissatisfaction.  The recent clash between police and the teachers’ union at a protest didn’t help matters.  Given these developments, he is likely to be a lame duck for the remainder of his term.”

“The economy remains sluggish. GDP growth is forecast to remain virtually unchanged at around 2.4% in 2016 before picking up a bit to 2.7% in 2017. GDP rose 2.4% y/y in Q1. This was as expected, and was boosted by a low basis for comparison. Base effects for the rest of the year are higher and so less favorable for y/y comparisons. This latest leg down in oil prices will also be a headwind on growth.”

“Price pressures are low, but are starting to accelerate.  CPI rose 2.7% y/y in mid-July.  While this is the highest rate since mid-February, it still remains in the lower half of the 2-4% target range. However, core CPI and PPI have been accelerating and so we see some upside risks to inflation.  The central bank next meets August 11, and no change is expected. We think it will be hard for the central bank to hike rates again this year due to the soft economy.  Much will depend on the peso.”

“USD/MXN has retraced over half of its post-Brexit drop.  A break above the 19 area would set up a test of the June 24 high near 19.52.  Banco de Mexico no longer has a regular FX intervention program, but instead acts with discretion as needed.  It has hiked rates 50 bp twice this year, with the stated aim of preventing speculative activity.  We note that net and gross peso shorts (as reported by the CFTC) remain well below the peaks in February.”