The $ 1.9 trillion fiscal stimulus package signed by Joe Biden is good news for Mexico, as it will increase demand for export products but at the same time impose financial challenges on the country, said Alejandro Díaz de León, the Bank’s governor. Mexico.
In an interview with MILENIO, the head of Banxico explained that this increase in 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 the exchange rate of emerging economies such as Mexico. .
These increases, he added, have already caused weight adjustments against the dollar and volatility in financial markets in recent weeks; however, the challenge is that these adjustments are orderly.
What will be needed to stimulate recovery?
In the face of the pandemic, infections need to be reduced Rising vaccines and their availability are two key elements to accelerate the transition to more normal economic behavior, 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 as to how much these expenditures may already be reflected in the coming months and quarters or whether they will be in a longer period, but to the extent that they are spent and are more concentrated in the short term. this can have an additional effect or a stimulus on economic activity.
These two elements, together with the fact that banks have strong, well-capitalized balance sheets and the possibility of initiating financing, can also contribute to supporting 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 gap in the minimum wage for many years and we believe that it is desirable that the minimum wage be linked to the purchasing power needed for a family. In this regard, we identify that moving in that direction is convenient.
There may always be different alternatives in terms of reducing this 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 things that are desirable, which is both job creation and strengthening purchasing power for those who receive that salary.
Banxico said the increase in the minimum wage should be combined with an increase in productivity.
I will point out that wage revisions in an economy must be in line with increasing 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 productivity gains over a relatively long period of time and accumulate a gap.
This is part of the challenge: identifying the size of the gap and the space you need to eliminate, without exceeding labor productivity. This is an element to look for or identify and that is why a gradual wage recovery strategy can also be more sustainable.
What is your appreciation of the business and investment environment?
It is very important to try to send clarity on long-term investment incentives to the most profitable projects, this is always a challenge even more so after the shock of the pandemic, where many profitable sectors no longer have them. .
There are resources that need to be redirected from one sector to another, so that this rearrangement of funding between projects and sectors, the more agile it can be, the better. In this regard, banks play a key factor in identifying the most profitable projects and restructuring those that could have affected their revenues.
Does the increase in the yield on US Treasury bonds affect Mexico?
The outlook for higher spending in the North American economy (thanks to 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 over the next 18 months. or even a little more.
This leads to an 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, increased government bond yields will also have an impact on the cost of financing?
It is undeniable that a U.S. economy that is recovering at a significant pace may have a financial effect, but I would point out that this higher fiscal stimulus will also bring in greater demand for products exported from Mexico, higher revenues from exports and higher 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 low as possible. In this sense, maintaining low risk premiums, both inflationary and otherwise, will contribute to the limited growth possible.
It has been said that rates will fall in Mexico, what will Banxico do in this new environment?
As far as monetary policy is concerned, we try not to compromise or take possible action. In an equally volatile environment we have been subjected to, especially last year, you need to have as much information as possible. This allows us to make a better decision.
Will there be a greater depreciation of the peso in the future?
The peso, being a currency with a liquid, deep and free market, usually reflects adjustments, in this case upwards.
The challenge is that the exchange rate process is orderly. In 2020, the dollar reached 25 pesos and then returned to 19.90 at the end of the year, so we see this adjustment and hope that as the yield curves in the US normalize, the national currency will normalize.
Will there be risks of inflation?
As long as the adjustments are temporary, they will not have a significant impact. To the extent that they are more persistent, it will have a certain type 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.