The $ 1.9 trillion fiscal stimulus package signed by Joe Biden is good news for Mexico because it will boost demand for export products, but at the same time impose financial challenges on the country, said Alejandro Díaz de León, governor of the Bank of Mexico.
In an interview with MILLENNIUM, the head of Banxico explained that this increased economic activity has already led to increases in the yield on US Treasury bonds and other government instruments, which puts pressure on interest rates and exchange rates of emerging economies such as Mexico.
These rises, he added, have already caused in recent weeks adjustments of the peso against the dollar and volatility in financial markets; however, the challenge is to make these adjustments orderly.
What is needed to drive recovery?
In the face of the pandemic, it is necessary to reduce infections. Increasing vaccines and their availability are two key elements to accelerate the transition to a more normal behavior of the economy, especially in sectors such as services, which have face-to-face contact and have been among the most affected.
The fiscal stimulus in the United States will be an incentive for the growth of our country. There is some doubt in the United States that both this expenditure may be reflected in the coming months and quarters or whether it will be over a longer period, but to the extent that it is spent and concentrated more in the short term. it may have an additional effect or stimulus on economic activity.
These two elements, together with the fact that banks have solid, well-capitalized balance sheets with the possibility of initiating financing, can also contribute to sustaining an economic recovery.
The president said he will increase the minimum wage and pensions through a law, what impact will it have on the economy and inflation?
We understand that there has been a very significant delay in the minimum wage for many years and we considered it desirable that the minimum wage be tied to a purchasing power necessary for a family. In this sense, we identify that moving in this direction is convenient.
There may always be different alternatives in terms of the pace to close this gap, but we believe that determining a minimum wage that best reflects the needs of households is appropriate.
The challenge is to find a rhythm that, on the one hand, reconciles two things that are desirable, which is both the generation of employment and the strengthening of purchasing power for those who receive this wage.
Banxico argued that the rise in the minimum wage should be coupled with an increase in productivity.
I will stress that wage revisions in an economy must be consistent with growth in labor productivity, otherwise they will not be sustainable. This is a principle that must be present, but there may also be times and circumstances when wages do not necessarily reflect gains in productivity over a relatively long period of time and accumulate a lag.
This is part of the challenge: to identify the size of the delay and the space available to close this gap without exceeding labor productivity. This is an element to look for or identify and therefore a strategy of gradual recovery in wages may also be more sustainable.
What is your appreciation of the business and investment climate?
It is very important to try to send elements of clarity in terms of incentives for long-term investment, the most profitable projects, this is always a challenge, and more after the shock of the pandemic, where many sectors that had profitability perhaps they no longer have them.
There are resources that need to be reoriented from one sector to another, so this readjustment of funding between projects and sectors, the more agile it can be done, the better. In this sense, banking plays a key factor in identifying the most profitable projects and restructuring those that may have affected their revenue.
Does the rise in yield on US Treasury bonds affect Mexico?
The outlook for higher spending in the US economy (by the $ 1.9 trillion stimulus package signed by President Joe Biden) also brings the expectation of higher economic growth and a possible rise in inflation in the following 18 months or even a little longer.
This leads to the upward revision of medium- and long-term rates in the United States and also puts pressure on interest rates and exchange rates in emerging economies.
In Mexico also rose the yield on government bonds, will it impact the cost of financing?
It is undeniable that having a US economy recovering at a significant pace may have a financial effect, but I would emphasize that this greater fiscal stimulus will also lead to greater demand for products that Mexico exports, higher export earnings and higher economic activity.
The process has two components, one is the increased activity and the other that of an increase in interest rates; this combination on the one hand is good news, but on the other hand it has a financial challenge.
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 make this increase as contained as possible.
It was said that in Mexico rates would go down. What will Banxico do in the face of this new environment?
In terms of monetary policy we try not to compromise or advance possible actions. In an environment as volatile as we have been subjected to, especially last year, we need to have as much information as possible. This allows us to make a decision in better conditions.
Will there be a further depreciation of the peso in the future?
The weight of being a currency with a liquid market, deep and free-floating usually reflects adjustments, in this case upward.
The challenge is to keep the exchange rate process in order. In 2020 the dollar traded at 25 pesos and then had a return to 19.90 at the end of the year, so we are seeing this adjustment and we hope that as the yield curves normalize in the US the normalization will also normalize. national currency.
Will there be inflation risks?
To the extent that the adjustments are transient it will not have a significant impact. To the extent that they are more persistent, you will have some sort of transfer to the prices of imported goods or prices subject to international prices. The more orderly the adjustment process, the less pressure we will have on inflation.