Analysts from Morgan Stanley to UBS Group AG and Société Générale SA are taking an increasingly cautious stance on Mexico, warning that the necessary measures to boost growth may come at the expense of government finances.
They see a dying economy and little hope of recovery without fiscal stimulus, a situation that opposes the promises of President Andrés Manuel López Obrador to maintain a primary budget surplus. Already nervous about the populist tendencies of the president, they cite the dilemma of spending versus growth as one of the greatest tests for his government, which is already approaching its second year in power.
“The main risk for Mexico is at the end of next year, as we move towards mid-term elections and see how AMLO’s administration will deal with potential slow growth,” says Bertrand Delgado, strategist at Société Générale.
In Morgan Stanley’s opinion, the risks are too close to be comfortable. The bank closed its bullish buying option on the peso, rates, and bonds of the state oil company on Wednesday. UBS is cautious of Mexican fixed-income assets, citing the risk of worsening public finances and rating cuts. Foreign bondholders have already been withdrawing money from the country, and foreign holdings of Mexico’s domestic debt were reduced to 55% of the current total of a 66% peak in 2017.
Mexican assets staged a massive sale in the months prior to the long-awaited electoral victory of López Obrador in July 2018, due to concerns that it would boost state interference in the economy. But there has been a partial recovery since his inauguration in December. The peso has risen 2.8% this year, among the best-performing emerging market currencies, and average bond yields abroad have dropped a full percentage point. The benchmark stock index gained 5.4%, although that is less than half the jump for the MSCI emerging market stock index.
“It seems that for now, it is doing well in terms of conversations between the AMLO administration and the business and investor community,” said Delgado, who says earnings could continue for a while before the final trial for Mexico arrives.
For Alejo Czerwonko, a UBS strategist in New York, that calculation could come from a reduction in Mexico’s credit rating sometime during the next year, which makes him pessimistic about the long-term investment prospects for Mexico.
“Despite the commitment to fiscal responsibility, the risk of deterioration of public finances persists,” he said. “Sovereign qualification casualties remain a matter of when not yes.”
Moody’s Investors Service Inc. and S&P Global Ratings have negative prospects for sovereign credit, while Fitch is neutral. Petróleos Mexicanos, the state-owned oil company known as Pemex, is among the biggest inconveniences in government finances, and that burden will continue as the company struggles to increase production while facing more than $ 100,000 million of debt.
While López Obrador promised funds and a lower tax burden to rescue Pemex, Fitch reduced the company’s rating to trash in June, and a similar decision by Moody’s or S&P would almost certainly take its bonds off the main investment grade indices and generate a forced sale.
López Obrador has promised to preserve fiscal discipline, and the Secretary of the Treasury, Arturo Herrera, promised in July to have reached the primary budget surplus target of 1% for this year.
But fiscal pressure is expanding, amid weak growth. Gross domestic product rose only 0.1% in the third quarter after the economy barely avoided a technical recession in the second. The central bank of Mexico, known as Banxico, is expected to lower interest rates in the coming months to boost growth, which could reduce the attractiveness of the peso for investors who borrow in dollars to buy higher-yield currencies.
“Banxico has embarked on what is probably a prolonged cycle of relaxation, which would erode the weight advantage of the carry trade over time,” says Ilya Gofshteyn, Standard Chartered strategist in New York. “We expect this to be a drag on weight performance in the second half of 2020.”
Source: infobae, bloomberg
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