Mexico’s Hedged Bet Hemming
Mexican shares continued to lead Latam indices as officials struck another oil hedge to guard against lower prices and Banco Santander completed a successful offering in part to satisfy Eurozone crisis and Basel III calls for increased local capital cushions at foreign-owned units. The moves coincide with preparations for PRI President Perez Nieto to assume the post at year-end with an immediate agenda of labor, fiscal and Pemex reforms which will require endorsement from the conservative PAN party to pass into law. GDP growth is expected at 4 percent despite recent US export and retail sale softness as foreign manufacturers have relocated from China’s higher wage and infrastructure costs. The PMI reading is 55, and the current account should be in rough balance as almost $10 billion in FDI was registered the first half. With the peso up 7.5 percent against the dollar bond investors have poured into the long-term 10-year plus segment with one-third ownership control. The central bank has refrained from currency intervention and changing the benchmark rate as food staples exert inflationary tendencies. It has heightened scrutiny of double-digit consumer lending growth despite a good banking industry review by S&P of asset, liquidity and profitability ratios. Homebuilders benefiting from mortgage takeoff have reported troubles which could raise the current 2.5 percent minimal NPL number. In Brazil, a handful of small personal lenders have already gone under and in the latest Banco Cruzeiro case the government trustee could not find a buyer as bondholders were forced to accept a 50 percent recovery value. There overdue consumer credit is at 8 percent of the total as housing prices jumped 100 percent on average the past five years in Rio and Sao Paulo according to Fitch Ratings. To maintain borrowing access the Finance Ministry has begun to lift capital controls but heavy reserve use has been deployed around the 2 real per dollar corridor.
In Argentina banks have been subject to greater state interference with orders to extend $3.5 billion to designated priorities including small companies over a three-year maturity at an interest ceiling of 15 percent. The IMF granted a 90-day extension to clean up inflation and growth statistics or face sanctions as private analysts assert that the economy is near recession on a 20-30 percent CPI rise. The equity market is the MSCI frontier laggard although bonds have gone positive on the EMBI with the announcement that reserves will again be earmarked for repayment. Chile has also seen double-digit loan expansion and the system relies on “moderate” external funding, according to S&P. Inflation is the region’s lowest at 2.5 percent and GDP growth should be 5 percent despite slowing copper demand from China and Europe. The monetary authority has been on hold despite 10 percent peso appreciation gambling with exporter margins.
