Mexico braces for ‘Hurricane Trump’ landfall, snubs call to build wall as peso falls

AFP-JIJI, Reuters

Mexico’s central bank chief warned back in September that a Donald Trump victory in the U.S. election would hit his country like a powerful storm.

After Hurricane Trump made landfall, the peso fell to an all-time low Wednesday and the Mexican stock market plunged on fears Trump would make good on his promises to upend economic ties.

But, clearly striving to project a sense of stability, the government said Wednesday it did not need to take any immediate economic actions, and President Enrique Pena Nieto extended a hand to the Republican billionaire.

Pena Nieto said he had congratulated Trump for his victory over Democrat Hillary Clinton during a “cordial, friendly and respectful” phone conversation.

“I agreed with the president-elect to meet, preferably during the transition period, to define with clarity the direction that the relationship between both countries should take,” he said from his official residence.

“We both agreed that we must work for a relationship of trust, of a shared future, because our countries are very important to each other,” he said.

“I am optimistic. It’s clear that a new phase in relations opens with the arrival of a new government, but I also think that there is a great opportunity” for the development of both countries, said Pena Nieto, who once said Trump’s rhetoric recalled the rise of Adolf Hitler.

The stakes are high for Mexico.

Trump has vowed to deport millions of undocumented immigrants, to force the Mexican government to pay for a giant border wall and to renegotiate the North American Free Trade Agreement (NAFTA).

Pena Nieto angered many in his country for meeting with Trump, who has described Mexican migrants as rapists, at his official residence in Mexico City on Aug. 31.

The president later conceded that the invitation had been too hasty but insisted he was right to open dialogue with a potential future U.S. president.

While Pena Nieto privately told Trump at that meeting that Mexico would not pay for the wall, it was not discussed again on Wednesday, a Mexican official said.

Foreign Minister Claudia Ruiz Massieu, however, reiterated to the Televisa network that “paying for a wall is not part of our vision.”

Mexicans were thunderstruck by Trump’s victory.

“I feel very sad. It’s a nightmare, with a lot of uncertainty about what’s going to happen,” said Erick Sauri, a 35-year-old architect who watched the election in dismay at an American barbecue restaurant in Mexico City.

The Mexican currency weakened to 20.20 pesos to the dollar, a 7.18 percent drop from the previous day, according to private bank Citibanamex, while stocks closed 2.23 percent lower.

But Finance Minister Jose Antonio Meade said there was no need for “premature actions” as Mexico has inflation under control, holds international reserves total $175.1 billion and enjoys macroeconomic stability.

“Mexico has lived through challenges of volatility in the past that we faced with unity, seizing on our economic strength and taking correct and prudent policy decisions, and this won’t be an exception,” Meade said.

Central bank chief Agustin Carstens, who in September had compared Trump to a maximum Category 5 hurricane, said bank governors would meet next week for a monetary policy meeting.

The likelihood of Trump pursuing his Mexico policies is unclear, according to ratings agency Fitch.

“But the advent of a Trump administration increases economic uncertainty in Mexico given its very close economic ties to the US,” Fitch said in a note.

Jonathan Heath, a prominent Mexico City-based economist, said the peso would continue to fall in the near term.

“We are in shock and in a way the markets are reflecting that,” Heath told AFP.

But he said the main threat is the structural changes that could befall Mexico if Trump tries to scrap NAFTA.

Two-way trade in goods totaled $531 billion in 2015, and 80 percent of Mexico’s exports goes to the United States.

“Mexico is the country that stands most to lose at a global level,” Heath said.

The money Mexican immigrants send home from the United States provides another important economic lifeline: such remittances totaled $17.7 billion in the first eight months of the year.

“In the very short term, we could see an increase in remittances,” Heath said, “as many families take advantage of the exchange rate in the face of the uncertainty that they may no longer be able to do so.”

Mexico said on Wednesday it will not pay for a border wall after Trump’s surprise U.S. presidential election win and officials held back from taking any action to support the peso despite the currency hitting lifetime lows overnight.

As Trump forged toward victory, the peso plunged 13 percent in its biggest fall in 22 years before paring losses to trade down 7.9 percent at 19.76 per dollar.

Trump’s threats to amend the NAFTA trade agreement with Mexico, and to tax money sent home by migrants to pay for building a wall on the southern U.S. border, have made the peso particularly vulnerable to events in the U.S. presidential race.

“Very hard times are coming to Mexico,” said analyst Gabriela Siller of Mexican bank BASE.

President Pena Nieto said on Twitter he was ready to work with Trump, calling the neighboring countries friends who “should continue to work together for the competitiveness and development of North America”.

But Foreign Minister Ruiz Massieu reiterated that Mexico would not pay for Trump’s proposed wall along the U.S. border. The threat that Mexico will pay for the wall was a key feature of his stump speeches.

Ratings agency Fitch said Trump’s victory may add downside risks to Mexico’s economic growth, while Moody’s warned the government may not meet its goals of cutting its budget deficit if flows of trade or foreign investment wilt under Trump.

“While policy direction from the Trump administration is not yet clear, any changes that materially disrupt trade or financial flows would be credit negative for Mexico,” said Jaime Reusche, senior sovereign analyst at Moody’s.

Both Moody’s and Standard & Poor’s rating agencies put Mexico’s credit rating on a negative view earlier this year.

Gabriel Casillas, an economist at Banorte, predicted Trump’s victory will shave 0.3 percentage points from 2016 economic growth, and said the peso could suffer for months as the market tries to figure out what Trump could do in office.

“Because of the uncertainty of what Trump could do, consumers will postpone purchases, companies will postpone investments,” Casillas said but added that he thought Trump’s actual policies will fall short of his rhetoric, not least because unwinding trade with Mexico is easier said than done.

“I don’t think Trump will do a lot of the things he said he will do,” he said.

Analysts said the peso had been able to recover from its record low after Trump took a measured tone in his victory speech and did not invoke any of his threats against Mexico.

Mexico’s benchmark IPC stock index fell more than 3.0 percent initially, but pared losses to sit down 2.00 percent to 47,500 by early afternoon.

“The market has calmed down a bit and given the benefit of doubt to a more conciliatory Trump,” said Marco Oviedo, an economist at Barclays in Mexico City.

Mexican-based economists had expected a snap interest rate rise, but central bank Gov. Agustin Carstens told a news conference on Wednesday morning the bank would take any necessary measures pending market conditions.

He said it would hold a monetary policy meeting as scheduled on Nov. 17, but did not announce any immediate steps to support the currency.

Mexico has already raised its benchmark interest rate three times this year to support the peso.

Mexican Finance Minister Meade said that authorities were monitoring the situation and that they would act if needed. “It is important to recognize that market operations have remained ordered. This has been seen in the last hours,” Meade said.

The central bank last hiked its key interest rate in September by 50 basis points, lifting it to 4.75 percent to anchor inflation expectations following a sharp depreciation of the peso.

Mexico has more than $175 billion in foreign reserves, and Carstens said last month he would consider using a $90 billion International Monetary Fund flexible credit line “in the event of an external shock.”