Economics: Current Account Bump a One-Off

MEXICO - Report 09 Mar 2017 by Mauricio Gonzalez and Esteban Manteca

Banco de México recently published its balance of payments results for 2016, which showed a 27.9 billion dollar current account deficit, a result considerably less pronounced than that of 2015. Mexico was able to reduce its deficit thanks to less negative balances of services and non petroleum goods, which along with a stronger performance in the case of the balance of transfers (remittances), compensated for a further deterioration on the level of petroleum products.

Although these results might lead one to conclude that there has been a narrowing of the current account gap between earnings and payments, and that it was possible to “finance” the difference, it is important to analyze the specific flows that affect the exchange rate in the free market. In this sense it is important to consider that some areas of the trade balance and the private sector current account that recently have served as a major source of foreign currency might be playing that role only in response to transitory effects.

A case in point is the possibility that the surge in remittance flows reflects Mexicans living in the United States taking precautions as they face a heightened risk of deportation or potential measures aimed at impeding such transfers. In the same way, a rise late last year in US demand for Mexican automotive exports may have been fueled by a one-off effort to accumulate inventories before Washington adopts new trade and fiscal policies. If this should prove to be the case, we would expect these waves of foreign currency income to dissipate in the medium term.

In this week’s Economic Outlook, we analyze current account components and trends and their possible repercussions on the exchange rate.

Other economic news in recent days point to a deterioration of Mexico’s economic prospects for the current year and next.

In its most recent quarterly inflation report (October-December of 2016), Banco de México lowered its GDP growth estimate range for 2017 to 1.3-2.3%, down from the 1.5-2.5% forecast of its report for the third quarter. For 2018 it scaled back its growth estimate to 1.7-2.7% from the 2.2-3.2% range it had anticipated the previous quarter.

In its monthly survey of private sector economists, the central bank reported that the market maintained its 2017 GDP growth consensus of the previous month (1.49%), even as analysts scaled back their estimate for 2018 to 2.09% from a previous 2.17%.

Banxico calculates that inflation will run above 4% in 2017, well beyond the 3% target the monetary authority has pursued for many years. The market expects even higher inflation this year, and recently raised its consensus to 5.39% from a previous 5.25% estimate. For 2018 they tweaked their inflation projection to 3.86%, a scant basis point higher than in the previous survey.

One of the main downside risks to economic growth in Mexico is the possibility that companies will put off their investment plans owing to the uncertainty emanating from the United States, according to Banco de México. Evidence corroborating those concerns was apparent in the latest installment of the ongoing free-fall in producer sentiment, which was especially pronounced among business owners linked to specific segments of manufacturing such as machinery and equipment, and basic metals. Furthermore, in 2016, the 12-month rate of growth in gross fixed investment slowed to a mere 0.4%, including a 0.1% drop in such expenditures in the construction sector and a mere 1.2% increase in the case of machinery and equipment.

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