The Mexican government this week announced a US$1.68 billion budget cut to counter deteriorating economic conditions resulting from the United Kingdom’s decision to leave the European Union.
The move was mostly “symbolic” and done to reassure investor confidence and help keep borrowing costs down, economic analysts suggested.
Speaking in Quebec this week, President Enrique Peña Nieto said that “Brexit” will only have a “moderate impact” on Mexico’s trade balance, given that trade with the United Kingdom is only 0.7 percent of the country’s total.
However, some economists suggested the sluggish international economy could see 2016 growth in Mexico fall to around 1.9 percent, from a projected rate of 2.5 percent, as a result of the U.K. vote. Exports are likely to drop around five percent this year, they say.
Continued pressure on the peso, which lost seven percent in May and fell to a record low a day after the referendum, forced Mexico’s central bank to raise its key interest rate by a half-point to 4.25 percent Thursday – the second such move in this year.
The move immediately eased the pressure on the Mexican currency, which had settled at around 18.30 to the dollar by Thursday afternoon.
Agustin Carstens, director of Mexico’s central bank, said that a “large deterioration” in external conditions could have an adverse effect on inflation that was already ticking up.
Mexico has a free trade agreement with the European Union that it signed in December 1997. Economy Minister Ildefonso Guajardo said that if Britain leaves the bloc, Mexico would be happy to sign a separate trade deal with the United Kingdom.