November 28, 2018 / 7:17 PM / 11 days ago

Mexico central bank warns economy faces risk of 'loss of confidence'

MEXICO CITY (Reuters) - Mexico’s central bank on Wednesday warned the economy could suffer long-lasting damage if new policies spark a “loss of confidence” in the country, and the bank’s chief pleaded for “clarity” from the incoming leftist government.

The Bank of Mexico logo is seen on the facade of an office building in downtown Mexico City, Mexico, June 22, 2017. REUTERS/Edgard Garrido

Mexico’s financial markets were battered in November over concerns that President-elect Andres Manuel Lopez Obrador, who takes office on Dec. 1, could move Mexico away from the orthodox policies backed by the central bank.

In its quarterly report, the bank cited risks that Mexico’s medium and long-term growth prospects could be affected by “public policies that create worry in markets and a loss of confidence in Mexico as a destination for investment.”

Asked about that warning by a reporter at a news conference, Central Bank Governor Alejandro Diaz de Leon said, “We must promote certainty, clarity.”

“Investment commits resources over distant horizons and because of this it is important to have clarity,” he said. “A clear strategy and a clear execution contributes to generate an environment more conducive to investment.”

Mexican markets slumped after Lopez Obrador scrapped a partly built airport at the start of the month following a referendum that drew a voter turnout of only around 1 percent.

Unexpected bills that lawmakers in his party presented on bank fees and mining rights added to uncertainty, even though Lopez Obrador’s economic team has not backed the legislation.

Analysts have been concerned that Lopez Obrador could significantly raise spending or pass more radical economic reforms than he has detailed so far. On Tuesday he said he would respect “macroeconomic equilibria.”

Diaz de Leon said increased uncertainty in financial markets over the last month has affected bond trading volumes.

He said the central bank was closely monitoring markets and had the “instruments” to act, if needed.

Mexico’s central bank has a long-standing commitment to a freely floating currency and only intervenes in cases of severely restricted liquidity.

In its report released on Wednesday, the central bank slightly revised downward its economic growth forecast for next year to between 1.7 percent and 2.7 percent.

The bank also raised its 2019 inflation forecast, projecting that the annual rate would remain above 4 percent in the first half of the year.

The central bank highlighted risks to its inflation outlook from possible policy changes, saying it was necessary to protect economic “fundamentals.”

Reporting by Michael O'Boyle; Editing by Chizu Nomiyama and Richard Chang

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