Mexico’s Momentary Modernization Muddle
Mexican shares swooned briefly just before a trip by US President Obama to hail the country’s “moment” as in the popular slogan as the multi-party structural reform pact signed post-election foundered on corruption allegations to stymie banking legislation. The tempest over local vote-buying passed to maintain the agreement especially vital for constitutional revisions accompanying private partnership and tax changes at state oil monopoly Pemex. Domestic demand weakness may limit GDP growth to 3 percent this year as the central bank cut rates for the first time since 2009 despite a food-induced inflation spike to almost 5 percent. The peso continues to strengthen around the 12 to the dollar level as foreign holdings of domestic government bonds have doubled to 55 percent of the total and external sovereign issues for liability management purposes command below 3 percent yields. Currency intervention remains off the table although authorities may consider reactivating a regular options facility. Private pension funds with over $150 billion in assets have moved increasingly into equities where special structured products are available and a trickle of IPOs are in the pipeline after a lengthy drought. Bank listings could be boosted by the new law intended to accelerate single-digit credit growth and small business access. However corporate debt continues to be a rocky area as defaults spread particularly among homebuilders like Homex caught in the aftermath of a subsidized apartment slump. Their problems widened high-yield spreads on JP Morgan’s CEMBI where the overall benchmark is now at 350 basis points over Treasuries.
Brazil’s banks led by state-run units continue to increase lending at an annual double-digit clip and the insurance arm of Bank of Brazil went public in a $5 billion transaction but the stock market remains down over 10 percent on a 12-month basis. NPLs are about 5 percent of the total as household debt stands now at almost half of disposable income and the giant government institutions BNDES and Caixa were recently downgraded by ratings firms on company and individual exposures. President Dilma Rousseff has not formally signaled her desire for another term in 2014 as the economy shows signs of stagflation. GDP growth is put at 2-3 percent this year and inflation at 6.5 percent in Q1 far breached the target and prompted a return to benchmark rate hikes. In fiscal policy the actual primary surplus may fall to 1 percent of output when adjusted for bookkeeping tactics, and the current account deficit is also up although the capital inflow tax will stay in place according to officials. Neighboring Argentina is also experiencing budget and balance of payment deterioration as it tightens its own capital controls, widening the divergence between the bank and parallel peso values against the dollar under the managed regime. The holdout saga is back in appeals court after a “convoluted offer of more IOUs” was rejected by the plaintiffs in a New York minute.
