Two of Mexico’s Biggest Bugbears Surge Again

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Footloose hot money that has flooded Mexico can quickly dry up.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

After several consecutive months of predominantly positive developments, including the governing Institutional Revolutionary Party’s recent electoral victory in its key state, Estado de Mexico, the outlook for Mexico’s economy is no longer negative; it’s stable. That’s according to rating agencies, Fitch and Standard & Poor’s.

It’s a remarkable turnaround for a country that began the year in the most ominous fashion, with a crumbling currency, surging inflation and a popular revolt against gasoline price hikes.

But the peso, after plumbing to new depths of 22 pesos to the dollar on January 19, has clawed its way back to 17.8 pesos to the dollar– a 22% surge in just seven months.

Despite its fortifying currency, Mexico’s historic bugbear of inflation continues to grow. Consumer prices, as measured by the national consumer price index, soared 6.44% in July compared to a year ago. It was the sharpest annual inflation rate increase since December 2008. It has now accelerated for the thirteenth month in a row.

This is a big problem for regular Mexicans whose meager wages are failing to keep up. It’s also a big worry for the government and its financial and corporate backers, since widespread public resentment is likely to fuel support for the strongly leftist party Morena whose leader Andrés Manuel López Obrador, a former Mexico City mayor, came within 250,000 votes of winning the 2006 elections.

The government’s reelection prospects rest on two rather flimsy hopes: that the surge of the peso will hang on until the elections next summer, and that it will help curtail inflation. As Wolf Richter pointed out, given the peso’s long history of relentlessly zigzagging lower in fits and starts against the dollar, it’s not exactly a sure bet.

The peso has rebounded in part because the dollar is broadly weaker. A weaker dollar means that dollar-denominated financial instruments are cheaper for currencies that have risen against the dollar. And that means traders and investors are willing to take on more risks. It also means that corporations and governments, such as those in Mexico, have access to cheaper debt — an offer they rarely refuse.

In terms of peso debt, the 10-year yield of Mexican government debt is now around 7% — an indication of how concerned investors are about the prospect of rising inflation in Mexico. It’s a lot cheaper for Mexico and Mexican companies to borrow in euros and dollars.

Many of the companies listed on Mexico’s BNV index are once again issuing dollar-denominated debt like there’s no tomorrow, under the auspices of a cheaper dollar and positive market sentiment. And that could be a very big problem at some not so distant point in the future. From Latin America’s largest soft-drink bottler to the state-owned electricity utility, Mexican companies have issued about $12 billion of bonds this year, almost half of it in June alone, according to Bloomberg. Some $360 billion of bonds are currently outstanding.

This latest expansion of largely dollar-denominated debt, all made possible by central bank-engendered liquidity and the pangs of desperation it has triggered among yield-starved investors, has helped fuel another stock market renaissance — not just in Mexico but across the whole Latin America whose stock exchanges were the world’s biggest movers in July, with Brazil and Mexico’s benchmark indices leading the way.

Mexico’s government too is binging on foreign currency debt even as its public debt has reached unprecedented levels in recent years, having increased from 21% of GDP in 2012 to 47.9% in 2016. Mexico does not have a global reserve currency, and thus it risks running into its next debt or peso crisis — the last one having been the Tequila Crisis of 1994, for which Mexican taxpayers are still paying.

While issuing foreign denominated bonds may be cheaper at the moment, it’s also a lot riskier. If the peso falls against the dollar, the dollar-denominated debt held by the Mexican government and corporations with peso-denominated operating income becomes increasingly difficult to service. A recipe for a debt crisis.

Then there’s the money owed by Mexico’s shrinking state-owned (but to be privatized) oil giant Pemex, whose total debt at last count amounted to $98 billion. In July the company issued $5 billion of fresh bonds. Most of the investors came from the United States and Europe, according to Reuters.

Higher interest rates in the US and Europe would make other asset classes more attractive again, and the hot money in the US and Europe currently piling into foreign-currency-denominated Mexican debt might seek the greener grass elsewhere, all at the same time. Large capital outflows would ensue. And Mexican companies would have trouble securing funding.

This and inflation are the big classic bugbears for Mexico’s economy. Large amounts of external debt makes a country, its companies and residents even more exposed to the vagaries of the global markets. And the footloose hot money that had surged into emerging markets like Mexico will just as quickly dry up. By Don Quijones.

Inflation is becoming ugly before the elections and despite Bank of Mexico’s “monetary shock.” Read… Inflation Spikes Most since 2008 in Mexico. Bad Timing




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  12 comments for “Two of Mexico’s Biggest Bugbears Surge Again

  1. tony
    Aug 12, 2017 at 3:25 am

    california should take over mexico like the us has commonwealth of puerto rico nancy pelosi and barbara boxer could run it problem solved.

    • Ambrose Bierce
      Aug 12, 2017 at 10:34 am

      Boxer retired, she was replaced by Kamala Harris, former AG of the state.

  2. R Davis
    Aug 12, 2017 at 4:40 am

    I’m sorry to hear all this – could any part of this falling wall be promotional activity to sway the election results ?
    It is rumored that – of late – Mexican citizens are looking in the direction of Australia for a new start in life – this is good news to me – the population in Australia needs to be balanced out – we have many persons from the Asia Pacific Region & the Middle East is beating a path to our door & now so are the people of Mexico – hooray.

    • R Davis
      Aug 12, 2017 at 4:44 am

      Hey – a few hundred thousand less Mexican’s – should assist the Mexican government to get it’s act together – in no uncertain terms.

  3. Petunia
    Aug 12, 2017 at 8:01 am

    How much of the stabilization of the economy and the peso is due to the decriminalization/legalization of drugs. This must be drawing tourists and others to the country, as well as, lowering their overall govt expenses. Is this helping them control crime at all? Just curious as to how this contributes to the economic situation.

  4. Don Quijones
    Aug 12, 2017 at 8:40 am

    I wish that were the case, Petunia, but unfortunately violence in Mexico appears to be getting worse rather than better, which is pretty common during an election year. But this time even parts of the country that had escaped most of the bloodshed of the early years of Calderon’s disastrous war on the cartels, such as Puebla, Quintana Roo and even Mexico City, are no longer immune to it.

    Despite that, the country’s tourist industry seems to be hanging on pretty well, it seems. Am travelling with La Doña to Mexico for a month tomorrow and we plan to visit a number of places. I will try to keep WS readers posted on developments (when not lying in a hammock sipping on a Margherita).

    • Ambrose Bierce
      Aug 12, 2017 at 10:36 am

      Don’t drink the tequila, several tourists have died drinking poison mescal, and at trendy resorts.

  5. Shawn
    Aug 12, 2017 at 10:04 am

    While Mexican corporates (and those around the world) have indeed been issuing a ton of usd debt, I disagree that the government has been binging on external debt, and that it is a recipe for a debt crisis.

    First, 75% of Mexico’s debt stock is in pesos. That is dramatically different than in the 90s and 00s. Second, while it is true the debt/gdp ratio has increased markedly, the cost of financing is dramatically lower and the duration of the debt is dramatically higher. So servicing the debt is cheaper (in mxn or usd) and there is virtually zero rollover risk.

    In addition to all that, foreign reserves are huge compared to the 90s and 00s. When you back out that asset side, external debt doesn’t look threatening at all.

    Pemex does indeed have an infatuation with usd debt, and their balance sheet is a rat’s nest. But their revenues are in usd, so there is a significant offset there.

    Lastly, there is recent history. MXN sustained a huge depreciation from 2014 to 2017. The economy dealt with it pretty well, and the government implemented austerity measures to cut spending, and actually strengthened fiscal rules to get back to a primary surplus. If a move from 13 to 22 in usd/mxn over two and a half years and a halving of the oil price amid declining production doesn’t push Mexico into a debt-driven death spiral, I’m not sure what will.

    Mexico is far from perfect but I see little evidence to suggest it is on the cusp of a return to the old days.

  6. Ambrose Bierce
    Aug 12, 2017 at 10:59 am

    Once before Mexico got the bait and switch, the maquiladoras, along the border, were switched off when the hot money danced to China. Now it might be dancing back for geopolitical reasons. Exporting products to the US has the effect of causing inflation in those same products for domestic consumers. It may be the global economy will settle into feudal and vertical economies. There are logistical reasons for this as well. In a world of razor thin margins transportation costs are a deal breaker, better to go with the neighbor you know and trust and not a communist centrally planned economy half a world away.

  7. raxadian
    Aug 12, 2017 at 12:15 pm

    Tequila is only good if it’s the one that’s exported. Trendy resorts in Latin America tend to end, at least about 1/3 of them, as scams. Even Center America isn’t safe from that.

    Now back on topic; South America governments seem to love debt since they reason is the next guy who will have to take the fall, not the fuys currently in charge. But that logic falls flat when the same party keeps winning elections.

  8. Nicko2
    Aug 12, 2017 at 2:44 pm

    Mexico just discovered over a billion barrels of oil in the Gulf (with other discoveries possible), that will help.

    • MC
      Aug 13, 2017 at 2:46 am

      Venezuela has the stuff literally boil to the surface in some oilfields, and this is not to mention they have more shale than they can use in a lifetime.
      It isn’t helping them that much.

Comments are closed.