Latin Finance - September/October 2009 - 40

Mexico outlook $73.5 billion, down from $86.9 billion in July of 2008. The past decade, the Mexican sovereign and its wide range of nation’s currency exchange commission has sold close to $28 corporates are now firmly ensconced in the universe of risky billion to limit peso devaluation since last October. assets,” says Walter Molano, research director at BCP. “Any progress on structural reforms in the new congress Q1 2010 Bounce? is likely to be slow and modest,” says Citi in a late July equity report. “As a result, we expect a downgrade of Mexico’s credit Mexico is struggling to conserve spending amid a slowing economy and declining oil output. It is expected to run rating by one or more agencies before year-end,” it adds. Cheap and Attractive Nonetheless, data suggest that there a deficit of 1.8% of GDP this year, and the ratio is likely to is still a bid for Mexico, which Deutsche Bank analysts include climb in 2010, since Mexico will not be able to resort to nonrecurring income such as currency shifts and an oil hedge. in a bloc of solid emerging countries – including the BRICs A weakened currency has meant each dollar brings in and Korea – that it calls “the EM- 6.” Foreign investors have more pesos from oil, while put options purchased last year kept steady their share of Mexican government debt in recent locked in 330 million barrels of exports at $70 per barrel months, with total holdings of around $19 billion, according despite much lower market prices. to Mexico’s central bank. The government has also dipped into Observers acknowledge Mexico’s stabilization funds to preserve some urgent need to approve fiscal reform to spending. boost non-oil taxes. But investors and Miguel Messmacher, chief economists note that Mexico remains economist in Mexico’s finance an investment-grade nation with ministry, tells LatinFinance the responsible economic stewards. government wants to maintain 2010 “Rightly or wrongly I think most spending at levels similar to 2009. of the media spin on developments in Following budget cuts, the federal Mexico has been negative year to date, government is expected to spend 2.2 and that contributes to a worsening trillion pesos this year. It spent just of investor sentiment,” says Alonso under 2.0 trillion pesos in 2008 and Cervera, economist with Credit almost 1.9 trillion pesos in 2007. Suisse. While others spurn Mexico, “We are clearly going to face an Cervera thinks the peso is “cheap” important challenge from the point of and longdated interest rates are view of public finances,” Messmacher “attractive.” says. “On the growth side, the impact Guillermo Osses, who helps manage has also been stronger here than $47 billion in emerging market assets elsewhere given our links to the at Pimco, says the peso “is one of the Rebounding faster than expected: Messmacher US and our production and export cheapest currencies among emerging structure.” Mexico sells 80% of market countries and it’s also among its exports to the US – down from 90% in 2000, but still the higher yielding currencies.” uncomfortably high. Mexico’s government clearly has the capacity to repay Messmacher predicts Mexico’s economy will track a US debt, despite the downturn and fiscal pressure. This shows rebound and accelerate faster than expected. He and most “the remarkable improvement that the economy has economists anticipate Mexico will continue to contract this undergone in the last few years,” Osses says. year but at a lesser pace, before turning a corner in early “It’s easy to lose perspective of the magnitude of the 2010. “In the first quarter, I think that without doubt we slowdown that the global economy has experienced. But I should be seeing a positive annual growth rate,” he says. would say that in light of that, Mexico has fared pretty well,” Meanwhile, finance minister Agustín Carstens says Mexico Osses tells LatinFinance. He cites Mexico as “one of the will have a balanced budget by 2012, president Felipe few” emerging markets that can run a fiscal deficit during such a deep recession – a factor that should inspire confidence Calderón’s last year in office. However, talk of deficit unnerves bond markets, says despite the wide array of serious problems. Salvador Orozco, deputy director of fixed income strategy at Sarvjeev Sidhu, global head of emerging market debt at Santander in Mexico City. Investors and fund managers are AEGON, notes that “the sustainability of the fiscal accounts pulling out of long-term debt. over the medium term is of concern.” “We saw this recently,” Orozco says in a July interview, However, “ample international reserve levels and referring to the government’s announcement July 23 that support from both the IMF and the US Federal Reserve will it will cut 2009 spending by 50 billion pesos. “What was it be positive,” he adds. Mexico has access to a $30 billion that dropped? The long part of the curve. Why? Because swap line from the Fed and a $47 billion loan from the IMF, investors are worried the deficit could grow and so this will although finance officials say they do not plan to use the IMF pressure the government to put more paper in the domestic funds. AEGON manages $2.5 billion in emerging market debt. market.” Late July, Mexico’s total international reserves stood at 40 LatinFinance September/October 2009

Latin Finance - September/October 2009

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