EMERGING MARKETS-Trump's Mexico threat sends peso tumbling, EM currencies slip

By Susan Mathew

* Mexican peso slumps to five-month low

* Indonesian rupiah shines on surprise S&P upgrade

* Lira down after GDP data reinforces recession

By Susan Mathew

May 31 (Reuters) - U.S. President Donald Trump's threat to slap tariffs on all Mexico imports put the country's peso on track for its worst day in seven months on Friday with global growth worries flaring up, but a surprise ratings upgrade saw Indonesia's rupiah surge 1%.

MSCI's emerging market currencies index slipped 0.2% and was on track for its worst monthly fall since the August rout with risk appetite taking a hit after Trump's surprise move on Mexico exacerbated trade worries and dismal China data stoked worries over a slowdown in global growth.

The Mexican peso slumped up to 3% to its lowest in five months and has weakened 0.5% this year.

"Trade barriers are coming back into play and while maybe the Mexican story is not important to the same extent as the Chinese story, its still adds to further uncertainty that plays into the backdrop of a more and more bearish market," said Trieu Pham, EM Credit Research at ING.

"It's just continuing to weigh on an already very weak external backdrop and obviously that plays into dollar strength and EMFX weakness and also into risk-off generally across other assets like credit and stock markets."

Enraged by illegal immigration of central Americans to the United States via the Mexican border, Trump vowed to impose a 5% tariff on all goods coming from Mexico starting June 10. This would rise by 5 percentage points per month till reaching 25% in October, unless Mexico takes immediate action.

Mexico's economy shrank in the first quarter and the central bank subsequently slashed its growth forecast for Latin America's No. 2 economy.

Trump's latest salvo comes amid worsening trade tensions between Washington and Beijing, and Trump's threat to impose tariffs on Japanese goods unless it agreed to even out a trade imbalance with the United States.

The flare up saw investors across global markets ditch riskier assets and scurry to safe havens such as U.S. and German bonds, the Japanese yen and gold.

Emerging currencies elsewhere also felt the heat from Trump's trade threats despite the dollar softening.

Turkey's lira slipped 0.2% as data showed the economy contracted 2.6% year-on-year in the first quarter, broadly in line with expectations.

An announcement by the foreign ministry that delivery schedule for Russia's S-400 missile defense systems is continuing as planned did little to soothe markets. Turkey's purchase of the Russian systems has strained already tense ties with NATO ally United States.

The Chinese yuan and stocks slipped after factory activity in May slumped into a deeper contraction than markets had expected, heaping pressure on Beijing to roll out more stimulus to support the economy amid a bruising trade war with the United States.

The yuan is on track for a 2.7% fall in May against the dollar, its worst monthly performance since last June.

Meanwhile, the Indonesian rupiah surged after ratings agency S&P said on Friday it had raised Indonesia's sovereign credit rating to 'BBB', citing the country's strong economic growth prospects and supportive policy dynamics.

This brings it on par with the ratings awarded by two other major credit rating agencies, Fitch and Moody's, and provides a boost to President Joko Widodo's government that was re-elected in April.

Emerging stock markets painted a mixed picture with some Asian indexes eking out gains, while bourses in Turkey, South Africa, Hungary and Poland all fell.

For GRAPHIC on emerging market FX performance 2019, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance 2019, see https://tmsnrt.rs/2OusNdX

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For RUSSIAN market report, see (Reporting by Susan Mathew in Bengaluru; Editing by Ros Russell)