The $ 1.9 trillion fiscal stimulus package signed by Joe Biden is good news for Mexico as it will boost demand for exports but at the same time pose financial challenges to the country, said Alejandro Díaz de León, governor of the Bank of China. Mexico.
In an interview with MILENIO, the head of Banxico explained that this increased economic activity has already led to an increase in yields on US Treasuries and other government instruments, putting pressure on interest rates and exchange rates in emerging economies such as Mexico.
These increases, he added, have already resulted in peso adjustments against the dollar and volatility in financial markets in recent weeks; The challenge, however, is that those adjustments are ordered.
What does it take to boost recovery?
In the face of the pandemic, infections need to be reduced Increasing vaccines and their availability are two key elements in accelerating the move towards a more normal behavior of the economy, especially in sectors such as services, which are face-to-face and hardest hit.
The fiscal stimulus in the United States will stimulate the growth of our country. There is some doubt in the United States as to how much these expenditures could already be reflected in the following months and quarters or whether they will be in a longer period of time, but to what extent they are spent and more concentrated in the short term, this could be a have an additional effect or stimulus on economic activity.
These two elements, along with the fact that banks have strong balance sheets, are well capitalized and with the ability to initiate financing, can also help support an economic recovery.
The president said he will increase the minimum wage and pensions through a law, what impact will this have on the economy and inflation?
We understand that the minimum wage has been lagging far behind for years and we think it desirable that the minimum wage is linked to the necessary purchasing power for a family. In this sense, we find that moving in that direction is useful.
There can always be several alternatives in terms of the pace of closing that gap, but we believe it is appropriate to set a minimum wage that better reflects the needs of households.
The challenge is to find a rhythm that on the one hand reconciles two desirable things, namely job creation and strengthening purchasing power for those who receive that salary.
Banxico stated that the increase in the minimum wage must be combined with an increase in productivity.
I will emphasize that salary revisions in an economy must be consistent with labor productivity growth or they are not sustainable. This is a principle that must be in place, but there may also be times and circumstances where wages do not necessarily reflect productivity gains over a relatively long period and are delayed.
That’s part of the challenge: identifying the size of the lag and the space you have to close that gap without exceeding the productivity of the workforce. This is an element to look for or identify and therefore a gradual wage recovery strategy can also be more sustainable.
What is your appreciation for the business and investment climate?
It is very important to try to steer elements of clarity in terms of incentives for long-term investment, to the most profitable projects, this is always a challenge, and more after the shock of the pandemic, where many sectors that might have been profitable got them not anymore.
There are resources that need to be transferred from one sector to another, so this reallocation of funding between projects and sectors, the more agile it can be implemented, the better. In this sense, banks play a key factor in identifying the most profitable projects and restructuring projects that may have impacted their income.
Will the rise in US Treasury yields affect Mexico?
The prospect of higher spending in the North American economy (thanks to the $ 1.9 trillion stimulus package signed by President Joe Biden) also implies an expectation of greater economic growth and a possible rise in inflation over the next 18 months. or even a little more. .
This is leading to an upward revision of medium and long-term interest rates in the United States and is also putting pressure on interest rates and exchange rates in emerging economies.
In Mexico, government bond yields have also increased, will this affect financing costs?
There is no denying that having a US economy that is recovering at a significant pace can have a financial effect, but I would like to emphasize that this greater fiscal stimulus will also lead to increased demand for the products that Mexico exports, higher export earnings and more economic activity.
The process has two components: one is increased activity and the other is an increase in interest rates; This combination is good news on the one hand, but financially challenging on the other.
The challenge is to make this adjustment (in interest rates) as orderly and as small as possible. In this sense, maintaining low risk premiums, both inflationary and others, will help to limit this increase as much as possible.
It was said tariffs would drop in Mexico, what will Banxico do in this new environment?
In terms of monetary policy, we try not to compromise or promote possible actions. In an environment as volatile as we’ve been exposed, especially last year, you need to have as much information as possible. This enables us to make a decision under better circumstances.
Will there be a greater depreciation of the peso in the future?
The peso, which is a currency with a liquid, deep, and free-floating market, usually reflects adjustments, upward in this case.
The challenge is that the exchange rate process is orderly. In 2020, the dollar hit 25 pesos and then returned to 19.90 at the end of the year, so we see this adjustment and hope that as US yield curves normalize, the national currency will also normalize.
Are there any inflation risks?
As long as the adjustments are temporary, they will have no significant impact. To the extent that they are more persistent, it will have some sort of transfer to the prices of imported goods or prices subject to international prices. The more orderly the adjustment process is, the less pressure we will put on inflation.