Trump/Brexit Potential Prompt Mexico to Extend Line of Credit with IMF

June 1, 2016Mexicoby EW News Desk Team

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Mexico surprised many analysts last week when it opted to increase financing it already had with the International Monetary Fund (IMF), increasing its loans by one third to $88 billion, and extending its term by another two years. The move suggests to many analysts that Mexico is feeling jittery about the prospects of a Trump administration in the United States’ White House and the possible implications of Britain’s possible exit from the European Union.

Prior to the record-breaking increase in financing last week, Mexico had only requested $67 billion from the IMF. According to Grupo Financiero Banorte SAB, Mexico’s largest publicly traded bank, the government is attempting to fortify itself against potential financial shocks originating from overseas. The government likely fears the results of the so-called Brexit or a victory by Donald Trump (who has run on a platform that includes policies that would harm Mexico’s economy).

Alejandro Padilla, of Banorte in Mexico City, said, “The Mexican authorities tried to negotiate the increase before a potentially volatile summer. There is big uncertainty surrounding Brexit and the potential effects for financial markets. The theme of Trump and the US elections is also something you need to consider, because he’s been very clear about his foreign policy.”

Donald Trump appears poised to take the Republican nomination for president in the US. If he wins, he has promised to do things like build a wall between the two nations to stop illegal immigrants, block millions of dollars in remittances that Mexicans working in the US send back to their families in Mexico, and renegotiate or terminate the North American Free Trade Agreement (NAFTA), calling it a “disaster” for the United States.

Mexico first obtained a line of credit from the IMF in 2009. Since that time, it has never tapped that pool of funds. In explaining why it would want to increase the line of credit, Mexican officials cited “risks coming from the exterior.”

When coupled between international reserves and the IMF credit line, Mexico has about $265 billion at its disposal. The requested $21 billion increase would help to offset the $25 billion that Banco de Mexico spent in 2015 in an effort to shore up the peso (which has so far slipped 7% in May, alone). The Mexican government believes the loan will help strengthen the peso by about 5% before the end of the year.

Gabriel Lozano, JPMorgan Chase & Co.’s chief Mexico economist described the situation: “It basically tells you that the Mexican authorities have a significant number of tools or ammunition to face important events going forward.”

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