Economic Analysis - US Will Drive External Account Improvement, In Shadow Of NAFTA Talks - DEC 2017

BMI View: Mexico's current account deficit will narrow in 2017 on the back of a surge in manufactured good exports and remittance s s from the US . Although Mexico remains exposed to risks from a shift in US trade policy, these risks will likely abate , leaving external accounts broadly stable over the coming years.

  • We expect Mexico's current account deficit will narrow in 2017 and 2018, and have revised up our forecasts as manufacturing exports benefit from stronger US demand.

  • Mexico will continue to run a modest current account deficit, but we expect capital inflows will cover this shortfall.

  • We do not expect the NAFTA renegotiation currently under way will threaten Mexico's preferential trade status with the US, its largest trade partner ( see ' NAFTA Renegotiation: Fears Likely Overblown ' , August 4).

Export Growth Improves Current Account
Mexico - Current Account
f = BMI forecast. Source: Banxico, BMI

We have upgraded our forecast for Mexico's current account deficit, and now anticipate a shortfall of 1.4% of GDP in both 2017 and 2018, compared to 2.1% and 2.0% previously. Exports and remittances inflows have both been stronger than we anticipated, driving the upward revision. Manufacturing exports, which account for by far the largest component of Mexican goods exports, grew 9.0% over the first seven months of 2017. Auto exports, one of Mexico's largest industries, grew by 11.1% through August. This surge was driven by strong US demand, which benefited from solid economic growth, rising wages in the US, and a weaker peso. While we expect a modest slowdown in manufacturing exports in the latter half of 2017 on weaker growth and retail sales in the US ( see ' Weak Data Releases Point To Q3 Slowdown ' , September 20), the longer-term outlook for exports into 2018 remains strong.

Manufacturing Exports Spiking On US Demand, Weak Peso
Mexico - Manufactured Goods Exports
Source: INEGI, BMI

US demand will continue to support Mexico's external position. The US is the primary recipient of Mexican exports, accounting for approximately 80%. Furthermore, the US is the primary source of capital flows to Mexico, in the form of investment and worker's remittances. Through July 2017, remittances into Mexico totalled USD16.4bn, representing an increase of 6.4% over the same period in 2016. Our broadly constructive view on the US economy over the coming years will see these inflows continue and ensure stability in Mexico's external accounts ( see ' Investment To Play More Prominent Role In Near-Term Growth Outlook ' , April 3).

Non-Petroleum Exports Driving Trade Balance Improvement
Mexico - Trade Balance, USDmn, 6mma
Source: INEGI, BMI

Mexico will maintain its preferential trade status with the US. While the official positions initially outlined by the US Trade Representative were relatively non-confrontational, the US has since presented some positions that are non-starters for Mexico and Canada, such as the 'sunset clause'. While this makes the negotiation more challenging, we maintain our broad view that the key provisions of the agreement will remain intact. As a result, we expect Mexico's external account will remain largely stable over the coming years, benefiting from continued strong export growth to the US.