Mexico said on Wednesday it will not pay for a border wall after Donald Trump’s surprise U.S. presidential election win and officials held back from taking any action to support the peso despite the currency hitting lifetime lows overnight. As Trump forged toward victory, the peso plunged 13 percent in its biggest fall since the Tequila Crisis devaluation 22 years ago, before paring losses to trade down 8.7 percent at 19.91 per dollar.
Trump’s threats to amend the NAFTA trade agreement with Mexico, and to tax money sent home by migrants to pay for building a wall on the southern U.S. border, have made the peso particularly vulnerable to events in the U.S. presidential race.
“Very hard times are coming to Mexico,” said analyst Gabriela Siller of Mexican bank BASE.
President Enrique Pena Nieto said on Twitter he was ready to work with Trump, calling the neighboring countries friends who “should continue to work together for the competitiveness and development of North America”.
But Foreign Minister Claudia Ruiz Massieu reiterated that Mexico would not pay for Trump’s proposed wall along the U.S. border. The threat that Mexico will pay for the wall was a key feature of his stump speeches.
Ratings agency Fitch said Trump’s victory may add downside risks to Mexico’s economic growth, while Moody’s warned the government may not meet its goals of cutting its budget deficit if flows of trade or foreign investment wilt under Trump.
“While policy direction from the Trump administration is not yet clear, any changes that materially disrupt trade or financial flows would be credit negative for Mexico,” said Jaime Reusche, senior sovereign analyst at Moody’s.
Both Moody’s and Standard & Poor’s rating agencies put Mexico’s credit rating on a negative view earlier this year.
Gabriel Casillas, an economist at Banorte, predicted Trump’s victory will shave 0.3 percentage points from 2016 economic growth, and said the peso could suffer for months as the market tries to figure out what Trump could do in office.
“Because of the uncertainty of what Trump could do, consumers will postpone purchases, companies will postpone investments,” Casillas said but added that he thought Trump’s actual policies will fall short of his rhetoric, not least because unwinding trade with Mexico is easier said than done.
“I don’t think Trump will do a lot of the things he said he will do,” he said.
Others were more pessimistic. Morgan Stanley analysts said in a note that the fallout from a Trump presidency would have “deep ramifications” for the equity market and that foreign investment could stall.
“Risks of a hard landing in Mexico have clearly risen,” the bank’s analysts said.
But for now the market pulled back from its initial panic. The peso recovered from its low after Trump took a measured tone in his victory speech and did not invoke any of his threats against Mexico, analysts said.
Mexico’s benchmark IPC stock index fell more than 3.0 percent initially, but pared losses and were down around 2.00 percent by afternoon.
“The market has calmed down a bit and given the benefit of doubt to a more conciliatory Trump,” said Marco Oviedo, an economist at Barclays in Mexico City.
Mexican-based economists had expected a snap interest rate rise, but central bank Governor Agustin Carstens told a news conference on Wednesday morning the bank would take any necessary measures pending market conditions.
He said it would hold a monetary policy meeting as scheduled on Nov. 17, but did not announce any immediate steps to support the currency.
Mexico has already raised its benchmark interest rate three times this year to support the peso.
Finance Minister Jose Antonio Meade said authorities were monitoring the situation and that they would act if needed. “It is important to recognize that market operations have remained ordered. This has been seen in the last hours,” Meade said.
The central bank last hiked its key interest rate in September by 50 basis points, lifting it to 4.75 percent to anchor inflation expectations following a sharp depreciation of the peso.
Mexico has more than $175 billion in foreign reserves, and Carstens said last month he would consider using a $90 billion International Monetary Fund flexible credit line “in the event of an external shock.