Mexico officials are planning for economic turmoil if Trump wins

By Joshua Partlow for the Washington Post.

MEXICO CITY — The Mexican government is holding last-minute meetings to game-plan their response to what many here see as a possible economic catastrophe for this country: a victory by Republican presidential nominee Donald Trump.

The narrowing poll results in the U.S. presidential race have intensified fears in the Mexican government that a Trump win might shake world confidence in this country’s economy and lead to lasting damage in the relationship with its largest trading partner.

Economists predict a short-term shock in Mexican financial markets if Trump emerges victorious Tuesday night. The value of Mexico’s currency and the domestic stock market would probably plunge, they say. Currency traders here predict that the peso, running at about 19 to the dollar, could fall to between 21 and 29 pesos if Trump wins.

“We will wake up in Mexico on Wednesday morning [facing] tremendous volatility,” said Alfredo Coutiño, Latin America director for Moody’s Analytics. “Investors are going to be scared, and the ones who didn’t protect themselves in advance, they will run away.”

Mexico’s Central Bank governor, Agustin Carstens, told a television station this week that economic officials have been meeting to craft a “contingency plan” in case of an “adverse” result in the election.

“We hope we don’t have to use it,” he said.

A spokesman for the Central Bank said that he could not elaborate on how Mexico would react but that meetings are taking place with the Finance Ministry to plan for either a Trump or a Clinton win.

Trump has angered Mexicans throughout his campaign by slinging insults about immigrants and vowing to build a giant wall across the border. But it’s his economic proposals — to renegotiate the North American Free Trade Agreement, restrict remittances that Mexicans send home to their families, and block American companies from moving factories south of the border — that have caused genuine alarm among top government officials.

The presidential race has already had an impact here. In the past few months, the movements of the peso have reflected Trump’s performance in the campaign — plunging when he has ticked up in the polls, and rising when the Democratic nominee, Hillary Clinton, has had a strong performance in a debate.

The Central Bank has raised interest rates repeatedly over the past year to try to shore up the value of the peso and contain inflation.

The prospect of a steep drop in the peso revives painful memories in Mexico. During the 1994 peso crisis, the value of the currency plummeted because of political and economic instability, leading to soaring inflation and a deep recession.

The swings in the currency during the run-up to the U.S. election have allowed Mexican government to study how the vote might affect their economy. The movement has “given us the chance to not only model how banks, corporations and different economic variables are reacting, but to see it in real time with scenarios of great volatility,” Finance Minister José Antonio Meade told local radio on Friday.

Meade said Mexico would not act hastily following the vote.

“We are alert and we have instruments to act, depending on what we see,” Meade said.

In response to questions, the Finance Ministry said in a statement that Mexico, like any open economy, would be affected by “whatever protectionist policy” might be adopted by the United States.

“In the case of our region, if there is a hindering of the North American synergies that make us, together, much more competitive against the rest of the world, you would see” lower productivity, the ministry said. But it added that Mexico has enacted reforms in recent years to make the country less dependent on oil, keep inflation stable and spur growth.

Economists say that the Mexican government could raise interest rates to try to contain a loss of value in the peso and could also eventually tinker with taxes and federal spending to protect government finances. The government would also probably launch a diplomatic effort to convince a Trump administration that NAFTA would not need to be scrapped, and that perhaps only minor points could be renegotiated, said Marco Oviedo, Barclays chief economist for Mexico.

If Trump wanted to pull the United States out of NAFTA, “sadly, there will be a trade war,” he said. “But I believe that the United States has more to lose because the tariffs before NAFTA were much higher on this side of the border.”

Trump has blamed NAFTA for the loss of U.S. manufacturing jobs in the past two decades.

Beyond the initial market shock after a Trump victory, economists predict a period of uncertainty as the world waits to see which campaign proposals he would try to implement. That climate would likely discourage foreign investment as companies would be wary of making commitments if they might be penalized for starting projects in Mexico, the experts said. Thousands of trucks cross the U.S.-Mexico border and more than $1 billion in trade occurs each day, making any new limitations potentially significant.

“There is still the possibility that Mexico could go into recession because of the restrictive measures imposed in the U.S.,” Coutiño said.

At a conference in Mexico City on Friday, a top official at the U.S. Federal Reserve touted the economic benefits of American trade with Mexico. Dallas Fed President Robert Kaplan emphasized that policy shifts in one country can quickly spill over into another and argued that deepening ties with Mexico has made Texas in particular more competitive.

“Cross-border investment is a key element of economic development in our region,” he said.

The automobile industry, electronics makers, and other types of export-oriented manufacturers would be particularly vulnerable in the event of new trade restrictions, economists said.

“The hurricane will be of such magnitude that no matter how armor-clad we try to be, we will suffer a severe impact to exports, in the exchange rate, in capital flows,” said Juan Carlos Moreno Brid, an economics professor at the National Autonomous University of Mexico.

“We should pray that Trump doesn’t win,” he added. “And I’m an atheist.”