Mexico is no hotbed of new SARS coronavirus cases, but its economy is dealing with a neighbor on near total lockdown. The peso is at its worse level in over five years, now trading over 25 pesos to the dollar. The stock market is down 43.6% from its peak on January 17. Now what?
Mexico’s central bank cut its interest rate to 6.5% on Friday, moving forward their monetary policy meeting by three days.
Despite that high interest in a world where the wealthy countries have zero interest, no one is rushing into buy peso denominated debt. The carry trade isn’t helping Mexico anymore. Mexico will be no exception; portfolio money invested there is selling out to preserve cash.
The Mexican economy is beginning to buckle under the strain of the global pandemic, with Barclays forecasting economic contraction there this year.
The rate cut matches the emergency cuts made by the Federal Reserve, which cut the overnight lending rate to between 0% and 0.25% recently. Mexico’s real rate (after inflation) is around 3%, giving Banxico room to cut again as the economy most certainly will falter in the weeks ahead.
The longer the most important economic states in the U.S. remain in quarantine, the longer Mexico takes to recover.
“We expect further rate cuts in the coming weeks or months in order to match the Fed’s moves, as well as fiscal stimulus although none has so far been announced,” says Mark Keller, analyst at The Economist Intelligence Unit.
Keller says they we will be making further downward adjustments to their 2020 GDP growth forecast in the days ahead.
See: Latin America Hunkers Down As Coronavirus Cases Ramp Up — Forbes
In Brazil, The Crisis Begins Again — Forbes
The Mexico City government ordered all popular outdoor events canceled along with social distancing recommendations even as president Andres Manuel Lopez Obrador has so far avoided taking any quarantine actions to contain the spreading of the disease.
Obrador said he was working with hospitals to prepare for more cases.
The border with the U.S. was closed last week, with the exception of essential traffic like goods and services, and American citizens returning home. Anyone caught crossing the border illegally will not be sent to a U.S. detention center but will immediately be deported back to Mexico.
At least 8% of Mexico’s economy is in trouble as Americans stay home.
This is particularly true for the travel and tourism industry, now whacked by the cancellation of college Spring Break.
Hotel occupancy in the state of Quintana Roo, home to popular Caribbean beach getaways including Cancun and Playa del Carmen, is now below 60%, Reuters reported today from Mexico City.
More cancellations are expected in the days ahead as non-Spring Breakers also cancel trips to a country that, for now, has only 220 cases of COVID-19, the disease caused by the SARS-CoV-2 virus, aka the new coronavirus.
“We think U.S. GDP could decline by 10% or more in the second quarter, edging close to the record 13% decline seen in 1932,” says Joseph Amato, chief investment officer for equities at Neuberger Berman in New York.
A U.S. recession will also crush Trump’s stock and job markets, meaning less demand for goods made in Mexico.
The current demand shock also requires companies to hold cash to prepare for emergency revenue destruction; and requires governments to spend, often giving up on any promises made to investors of fiscal conservatism.
“It is going to be a long couple of months and maybe even quarters,” says Amato. “But we also see the potential for a powerful recovery given this deep decline.”
It will be a huge headwind for Mexico to start mandating quarantines. The economy is not doing well. A more severe downturn is probable if the coronavirus forces such actions on the Mexican government.
Because of all these unknowns, investors are bailing on Mexico.
No one is willing yet to call a bottom. The iShares MSCI Mexico (EWW) exchange traded fund is down 15.8% in the last five trading days alone, making it worse than Brazil, down just under 12% over the same period as the country is further along in the ongoing coronavirus pandemic.