Mexico is an important North American economy that neighbors the US to the south. The country has a population of more than 112 million people and a GDP of more than $1.12 trillion. The country is famous for the volumes of trade it carries with the United States. In 2018, the two countries had trade worth more than $670 billion. Of this, it exported goods worth more than $371 billion and imported goods worth more than $299 billion.
Nine months ago, President Lopez Obrador came to power, with a promise of stopping corruption and revitalizing the economy. His leftwing populism strategy appeared to win more support. While he has support from the population, a lot of optimism that was there has weakened.
Yesterday, he was dealt a major blow when Carlos Urzua, his American-educated Finance Minister resigned. In a letter to the president, Urzua said that he had faced many disputes with the team. He also said that many officials who had no prior experience in public finance. His resignation is a major blow to Obrador’s government because many investors had trusted Urzua’s experience and expertise. He was seen as a guarantor of fiscal prudence. He won the markets confidence when he presented a fiscally prudent budget that promised a 1% surplus. He has however disagreed with the government on the construction of a $8 billion refinery and a bailout for Pemex,
His resignation came at a time when the Mexican economy has weakened significantly. The unemployment rate has increased and the productivity rate has weakened. The country has also received a credit rating downgrade that cited the problems going on at Pemex. Pemex is a giant state-owned oil company that is highly indebted. Fitch downgraded the country’s debt to BBB, which is a step above junk status while Moody’s has threatened a rate downgrade.
The resignation also comes at a time when there are some tensions between the country and the United States. Just last month, Donald Trump threatened the country with additional tariffs if the country failed to stop illegal immigration to the US. While the two countries made an agreement, the cloud over immigration is still around. Further there are concerns that the US congress will not pass the USMCA agreement, which could force the Trump administration to add tariffs on Mexico.
In response to the resignation, the Mexican peso fell sharply as shown on the chart below. The USD/MXN pair rose sharply to a high of 19.36, which was the highest level since June this year. The price then stabilized, and as of this writing is trading at 19.16. While the minister resignation was a big deal, his exit will not have any major impact. He will likely be replaced by another experienced person. Therefore, the pair could resume the previous downward trend.