No one is immune to the crippling effects of a crumbling currency.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
With Brazil going through a period of extreme political and economic turmoil, Venezuela taking the art of basket-case economics to a whole new level, and Argentina’s economy grinding to a stagflationary halt, Latin America — in particular its Southern Cone — is not having the best of times.
One exception is Mexico. Or was! According to the economic data forecaster World Economics, “recession looms” for Latin America’s second largest economy. World Economics’ Sales Managers’ Index (SMI) for Mexico was just 47.3 in May. Below 50 means contraction. And it has been below 50 since February. All five sub-components — confidence, market growth, sales, prices, and staffing — are now below 50.
None of this should be much of a surprise given how dependent Mexico’s economy is on the manufacturing exports it sends to the US, whose economy is beginning to show signs of strain.
For now, World Economics’ data are a statistical outlier. As the Financial Times points out, in March the Bank of Mexico foresaw solid growth of between 2% and 3% this year while the IMF forecast 2.4% growth in its April global economic outlook. In the same month, a panel of 22 banks and other organisations polled by data analysts Consensus Economics found a median gross domestic product growth forecast of 2.4% per cent for 2016.
But the omens are stacking up. Chief among them are the ever-worsening trials and tribulations of Mexico’s multi-generational sugar daddy, Pemex. At the beginning of March the state-owned oil giant reported its annual results for 2015. Even with expectations at the bottom of the barrel, so to speak, Pemex managed to shock with the sheer scale of its total annual loss: 522 billion pesos ($30 billion), almost double its loss in 2014. It was its biggest annual loss ever.
But those were just the preliminary results. On Wednesday, Pemex announced its definitive, revised results for 2015. Turns out that its total losses were actually 712 billion pesos (or $38.5 billion), a difference of 36%.
It’s another massive blow to a company that is continually bleeding losses while creaking under the weight of a total debt load that is almost certain to cross the $100 billion threshold later this year.
Pemex is already being bailed out. In early April, it was given a $4.2 billion cash injection to help tide it over, but it’s a tiny fraction of what will be needed, especially if losses continue to pile up anywhere near the rate experienced in 2015.
It’s not just Pemex that’s feeling the pain. Last week Mexico’s biggest construction company, ICA, announced that if it does not reach an agreement to refinance its debt soon, it faces a very bleak fate, as do its creditors and shareholders. “Our future depends on our ability to successfully refinance or restructure our debt,” the company said. “If we are forced to liquidate our operations, the holders of our debt and our shareholders could suffer substantial losses.”
ICA’s shareholders have already suffered considerable pain, having seen the stock lose 80% of its value last year and a further 40% this year. On Friday, when news began circulating that some lenders had closed ICA’s funding lines, the shares plunged 29.75% to 1.70 pesos, their lowest point ever, before being briefly suspended. When they came back, shares managed to recoup 37%, a dead-cat bounce. Today the shares are down a 17%.
ICA’s problems began long ago but were recently magnified by political problems at home, in particular President Enrique Peña Nieto’s blatant favoritism for two of ICA’s biggest rivals, the scandal-tarnished Spanish firm OHL and homegrown Grupo Higa, whose secretive owner, Juan Armando Hinojosa, a couple of years ago helped Peña Nieto’s wife and Mexico’s finance minister, Luis Videgaray Caso, purchase luxury homes in Mexico City, conflicts of interest be damned.
Global economic forces, in particular the strengthening dollar, have also added to ICA’s woes. Many Mexican corporations are acutely vulnerable to a strengthening dollar and rising U.S. interest rates. The sudden rise in central bank-engendered liquidity after the outbreak of the Global Financial Crisis enabled Mexico’s biggest companies to borrow from the international markets, in foreign currency, much larger amounts and for much longer periods than at any other time in history. And the slide of the peso against the dollar has significantly increased the amount of leverage (the pile of dollar-denominated debt) at some companies.
After firming somewhat in February and March, following a rate hike from Banco de Mexico, the peso is once again losing ground against the dollar – and at a worrying pace. So far in May alone, it has lost close to 8% against the dollar, stoking fears among the country’s senior central bankers of a “disorderly depreciation.”
The biggest risk is that the migration of foreign investors out of the peso becomes a stampede. According to BNP Paribas, “The market is asking for a higher premium for holding Mexican assets and Banxico will be forced to do it (with a further rate hike).”
The weak peso has even taken a toll on the fortune of Mexico’s (and once the world’s) richest man, Carlos Slim, whose ranking on Bloomberg’s Billionaire Index recently slid to 8th, after more than $20 billion of his paper wealth vanished into the ether over the last two years. Although increased competition in Mexico’s telecommunications sector, in which Slim’s América Movil and Telmex enjoyed unchallenged monopoly positions for decades, is largely to blame for Slim’s dwindling fortune, the weaker peso has also played an important part.
“It becomes a lot more expensive to operate,” said Jose Otero, director of Latin America and the Caribbean for trade group 5G Americas. “Anything from the equipment you use for infrastructure, to the mobile phones – it’s all paid by the company in hard currency” like dollars and euros. Which just goes to show that no-one, not even one of the richest men on the planet, is completely immune from the crippling effects of a crumbling currency. By Don Quijones, Raging Bull-Shit
For the broader Mexican economy, Pemex’s woes are just part of the problem. As the company’s oil production continues to crumble, Mexico will depend even more on its manufacturing sector. But that, too, is showing serious signs of strain. Even auto exports to the US. Read… A New Crisis Kicks off in Mexico
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