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The grim picture of Mexico’s current deficit

Mexico faces increasing risks to finance its current account deficit because weak growth and uncertainty about government policies discourage foreign investment, according to Goldman Sachs & Co LLC.

Goldman Sachs economist Alberto Ramos warned that the country is exposed to a shock that could affect its ability to attract foreign direct investment and capital inflows into its asset markets.

“The Mexican balance of payments remains strong, but the risks of the capital account are increasing,” Ramos wrote in a report. “The outlook for FDI is influenced by the weak growth outlook, internal and state-centered policies (particularly in mining and the fundamental oil and gas sectors) and an uncertain and stricter regulatory framework.”

Portfolio investments in the capital account are likely to remain modest due to uncertainty about government policies and the expectation of a smooth growth outlook, Ramos added.

Goldman issued its warning following the country’s current account deficit reduction to its lowest level since 1987. It is likely to expand slightly this year, although this is a lower risk than the country’s problems in attracting capital, Ramos wrote.

The country’s net trade measure was reduced to 0.2% by 2019, deputy governor of the Bank of Mexico, Jonathan Heath, said on Twitter.

Even so, analysts from firms such as ING Financial Markets or Natixis North America said the fall is not necessarily a cause for celebration since it is largely due to the weakness of domestic demand and the slowdown in imports, particularly in key capital goods.

The level of imports of capital goods or equipment in Mexico fell by 8.9%, the largest decrease since 2009. Capital goods, which include tangible assets used to produce other goods, such as machinery and equipment, are an indicator of the willingness of companies to invest in the long term.

“The fall in domestic demand, specifically the collapse of investment was a major driver for the improvement of the trade balance,” said Gustavo Rangel, chief economist for Latin America at ING in New York. “The Mexican economy lacks political stimulus. Given the binding fiscal constraints and strict monetary policy, Mexico’s growth strategy remains difficult to discern. ”

The relations between the Government of President Andrés Manuel López Obrador and the business community are uncertain since the president canceled the project for the construction of a $13 billion USD airport in Mexico City despite objections from bondholders even before he took office. López Obrador’s first year in the presidency of the Government was characterized by the contraction of economic growth and investment.

“The low current account deficit, in this case, is not a good thing,” said Benito Berber, chief economist for Latin America at Natixis in New York. “The overall picture is negative. Growth is low due to lack of investment, which also greatly reduced non-oil and capital intermediate imports. ”

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