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Bank of America (BofA) released an analysis of Mexico’s economic strategy in response to a combination of domestic and external pressures. According to BofA, Mexico is prioritizing fiscal and monetary stability over economic growth, facing challenges such as constitutional reforms, uncertain US policies, and the negative impact of US tariffs.
These decisions are expected to dampen Mexico’s economic growth in the near term, but the Mexican Peso (MXN) may remain relatively stable. Despite the imposition of a 25% tariff by the US on certain Mexican products, BofA does not believe the United States-Mexico-Canada Agreement (USMCA) is at risk of collapse. They anticipate a potential renegotiation leading to a USMCA 2.0 that would continue to allow tariff-free trade across North America, supporting nearshoring activities.
In terms of fiscal policy, BofA forecasts that Mexico will undertake a significant fiscal consolidation this year, reducing its overall fiscal deficit to 4.5% of GDP from the previous year’s 5.7%. While this adjustment is less aggressive than the government’s target of 3.9% of GDP, it reflects a tight fiscal stance that BofA expects will contribute to economic stability at the cost of growth.
Regarding monetary policy, BofA predicts that the Bank of Mexico (Banxico) will persist in lowering its policy rate to 8.0% from the current 9.50%, despite inflation and inflation expectations running above the target. However, they anticipate that Banxico will maintain rates above the neutral range (estimated between 4.8% - 6.6%) to sustain a tight monetary posture, noting there are downside risks to this forecast.
BofA also suggests that Mexico is likely in a technical recession, with growth expected to be weak throughout the year. Following a contraction in the fourth quarter of 2024 and ongoing uncertainties, BofA has revised its GDP growth forecasts for Mexico to 0.0% for 2025, down from 0.8%, and to 1.4% for 2026, down from 1.8%. They anticipate another quarterly contraction in the first quarter of 2025, which would confirm a technical recession.
The analysis concluded with insights on the Mexican Peso’s resilience. BofA identified several factors contributing to the strength of MXN, including the low likelihood of prolonged tariffs and high real interest rates. As a result, BofA has adjusted its MXN projections to 20.5 for the end of 2025, an improvement from the previous forecast of 21.50, and to 22.0 for the end of 2026, from the earlier estimate of 22.50.
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