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Increased US consumer spending is a boon for Mexico

The performance of Mexico’s economy is closely tied to that of the US. The recent monthly rise in US consumer spending is likely to have a direct impact on the Mexican economy and boost investor sentiment around the latter at a time when questions are being raised about the long term performance of its markets.

Jun 3, 2016 // 4:14PM

Mexico’s economy has performed proportionally better than not only those of other Latin American countries but also emerging markets across the world, in part due to its proximity to the US.

The strong manufacturing ties and export ties between the two countries have contributed significantly to the Mexican economy’s performance and have stoked capital inflows from the US.

“More than 70% of Mexican exports are destined for the US. Similarly, millions of people of Mexican origin live in the US and send back remittances to Mexico, a flow of US dollars that is over 2% of GDP on an annual basis,” said Shelly Shetty, Head of Latin American Sovereigns at Fitch Ratings.

She noted that although the country has been diversifying its trading partners over the years, the close proximity to the US, entrenched investment from the US companies, and access to one of the largest economies in the world through the NAFTA agreement will mean strong ties are likely to remain.

That US consumer spending rose 1% from March to April this year (0.6% after adjusting for inflation) is likely to have a positive effect on the Mexican economy.

“Increased consumer spending in the US should definitely have a favourable impact on Mexico’s economy, especially as many of the country’s companies export products to the US,” said Michel Galvez, Head of Credit Research at Grupo Bursatil Mexicano. He added that many Mexican companies had long term contracts with their US counterparts.

Shetty added that the close integration of the industrial sectors of the two countries highlights how US economic performance can affect the outlook for the Mexican economy. This in turn means that the performance of the US economy could affect investor sentiment regarding Mexico.

“Although the fundamentals of the Mexican sovereign and its corporates will determine their ability to access the markets and affect the cost of foreign funding, investors may evaluate the performance of the US economy as an indicator of how the Mexican export sector or broader economic trends may evolve in Mexico.”

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