Moody’s says death of NAFTA could see 27 peso to the dollar

According to a report by Moody’s, the Mexican peso could reach as high as 27 peso to the US dollar in the event of a failed NAFTA agreement.

The company says if the North American Free Trade Agreement does not continue and the United States and Mexico fail to establish a new bilateral trade agreement, generating punitive tariffs on the part of the countries, the exchange rate could go up to 27 pesos per dollar this year.

“The short-term variables, of course, would be the most affected. We would be talking about the exchange rate,” said Jaime Reusche, sovereign analyst at Moody’s for Mexico.

He explained that 27 peso could be reached this year then go back to 24 or 25 peso for next year. Currently, it sits around 19 peso to the dollar.

“This moves you to more medium-term variables such as inflation, interest rates and the growth we would be seeing,” he added.

This situation would lead the Bank of Mexico to raise its interest rate to between 8 and 9 percent in 2018 and between 7 and 8 percent in 2019, and would place inflation between 6 and 7 percent this year and in between 4 and 5 percent in the next.

“How much could you feel beyond 2019? Undoubtedly we see a negative effect where future growth may not be as high as the one we see at this moment, that growth potential would be corrected a bit towards the downside, which complicates the fiscal photo, and in that meaning yes, it is possible that one could speak of a reduction of the rating,” Reusche added.

According to Moody’s analyst Matthew Walter, this would cause a general economic recession in Mexico. It would be expected that growth of the financial participation of the states would slow down similar to the financial year of 2009 or when oil prices fell in 2014 and 2015.

“Also the other effect is going to be more concentrated in the states that have dependency (…) In the trade and the economic relationship with the United States, there are certain states, many in the north of the country (…) where much of its local economy depends, not only on exports, but on foreign direct investment from the United States,” noted Walter.

The states that depend most on the United States are Baja California, Sonora, Chihuahua, Coahuila, Tamaulipas and Guanajuato, whose sums of exports coupled with US foreign investment represent more than 50 percent of their nominal GDP.