March 26, 2020 / 7:38 PM / 10 days ago

Mexico's weak peso may buffer battered economy, lift exports

MEXICO CITY, March 26 (Reuters) - Mexico’s stricken peso could act as a shock absorber to limit damage to Latin America’s second largest economy from the coronavirus outbreak and a plunge in oil prices, if the currency’s weakness makes exports more competitive.

Mexico was in a mild recession and banks had slashed growth expectations for 2020 even before the quickly-spreading virus began hitting industry, travel and tourism.

Banks have forecast Mexican gross domestic product (GDP) could shrink by 4% or more this year as consumption and investment crumble.

But Mexico, which sends 80% of its exports to the United States, is likely to bounce back in 2021 lifted by trade, once the effects of the virus recede, economists say.

“The large depreciation of the peso, although likely contractionary in the short run, will eventually help Mexico recover faster,” said Carlos Capistran, chief economist for Mexico at Bank of America.

That process may be hampered by leftist President Andres Manuel Lopez Obrador’s taste for referendums to resolve knotty issues. Critics say the president uses referendums to mothball projects he does not like, and that the practice has undermined confidence in Mexico as a place to invest.

His government faced fierce criticism from business groups after residents of Mexicali, a city on the U.S. border, voted against completing a billion-dollar brewery being built by Constellation Brands Inc.

Also, the health of Mexico’s export sector will depend on the U.S. recovery.

The peso fell nearly 30% versus the dollar to an all-time low of 25.44 pesos per dollar on Tuesday, making it the worst-performing emerging market currency over the last month, data from Refinitiv Eikon show.

It has since recovered to 23.2 pesos per dollar as U.S. lawmakers move towards approving a massive stimulus package.

The peso’s last sharp depreciation was in early 2017, when it tumbled 20% over two months as U.S. President Donald Trump’s protectionist rhetoric clouded trade relations with Mexico.

Thereafter, exports grew at an average annual rate of 7%, compared to an average drop of 0.5% in the previous three years. Economists said the weaker peso had helped fuel that growth. Mexico posted record exports of more than $460 billion in 2019.

“In the context of a recession, it would be even worse to have a strong peso. In the long run, the peso will be competitive ... the fluctuation in the exchange rate works as a buffer,” said Goldman Sachs economist Alberto Ramos.

“The economy is expected to have a robust recovery in 2021, also because the (comparative) base will be very low.”

The ratification of a new trade deal between the United States, Mexico and Canada is also seen helping Mexico. (Reporting by Abraham Gonzalez; Writing by Anthony Esposito; editing by Diane Craft)

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