The superweight could fall dramatically if Mexico’s next government and Congress adopt an unorthodox agenda that undermines institutions, according to Morgan Stanley.
In a bearish case—which the wall street bank described as “institutional retreat”—the peso would weaken to 19.20 per dollar from around 17 units per dollar today. Even in a more likely scenario of monetary policy continuity after the June 2 election, the currency would weaken 5.6 percent against the dollar over a 12-month horizon, the bank said.
“Mexico was dealt a strong hand, benefiting from the strong link with the United States and the potential of nearshoring”, wrote strategists such as Ioana Zamfir and Eli Carter on Sunday, April 28 in a note. “However, significant reforms are needed to take full advantage of it.”
The candidate Claudia Sheinbaum, a former Mexico City mayor from the ruling Morena party, has a strong lead over opposition candidate Xóchitl Gálvez ahead of the June vote. In a recent interview with Bloomberg, Sheinbaum said that Andrés Manuel López Obrador’s fiscal austerity during the pandemic was one of the factors that helped prop up the peso.
Neither of the leading candidates is expected to implement major fiscal adjustments, at least in the short term. Sheinbaum has been vague about broader tax plans, while Gálvez said he would not carry out tax reform in the first phase of a potential government.
Morgan Stanley’s bleaker scenario is not based on any current proposals. It involves “moderate fiscal consolidation,” constitutional changes that create risks for institutions like the Supreme Court and electricity regulators, and stagnation in nearshoring efforts.
The bank only foresees “marginal” positive policy changes after the presidential election, and that the country will be able to address fiscal and infrastructure challenges. The dollar should peak against the peso amid US election noise in the fourth quarter and then consolidate around 18, he said.
Strategists point out that the country’s stock market and the bonds of Petróleos Mexicanos (Pemex) They offer a better risk-reward ratio to investors looking to operate in Mexico before the vote.
“On credit, we view sovereign debt spreads as fair with policy continuity, but Pemex bonds would continue to offer value,” they wrote. The Mexican peso “offers less upside relative to other asset classes.”
