This has definitely NOT been a boring summer. Summers usually bring a level of doldrums in market activity as participants are on vacation, but this year has seen a very busy summer, with Greece almost imploding and China trying to engineer a hard landing for its economy rather than a crash.
Putting those other issues aside for a moment, we have another major development going on just south of the border. The Mexican peso hit an all-time low this week. It is now more than 11 percent down from the beginning of the year. Interestingly, that is the same amount of damage that was done to the Canadian dollar, and the cause of the pain is the same — low oil prices. This has been a tough year for Mexico. In addition to low oil prices, there has been a decent amount of social unrest, corruption scandals and violence. The “El Chapo” jailbreak was another setback on several levels.
Mexico also suffers from high expectations. Back in 2012 when Enrique Pena Nieto was elected president, Mexico was riding a wave of 4 percent GDP with the potential for more as Mr. Nieto set out to reform many institutions, particularly Pemex — the country’s government-owned oil company. GDP expectations have diminished to the low 2 percent range as the country’s economic prospects sagged along with oil prices. Poverty conditions are such that nearly four out of five Mexicans are either poor or vulnerable to being poor. What is particularly disheartening for Mexico is that these low oil prices come at a time when the reformation of Pemex really needed higher prices and revenues to fund system improvements.
The country does have a respite from inflation, which has been very tame owing to a variety of factors. This respite has allowed Mexico’s central bank to stay with a very easy monetary policy to help contain the economic downturn, but this has been part of the reason we have seen such a weak peso. Those easy days may be numbered though, as once the Fed starts raising rates there is an expectation that Mexico will have to raise rates as well to keep its currency from getting whacked even further.
My View: There is a difference between economic mismanagement and just finding yourself in a tough spot. Realistically the government of Mexico has done the best it can, having been dealt a tough hand. It is generally on the right track economically though, and will be doing better when oil recovers.
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