Mexico’s Gross Simplified Salvage
Mexican local bonds sold off suddenly with the departure of PIMCO founder Gross after he talked up the peso and was a large holder of long-term instruments reflecting overall one-third foreign ownership, as equity outflows tracked by EPFR persisted on a flat MSCI result. The correction followed a post-sovereign rating upgrade and state oil company reform rally coinciding with better 2.5 percent GDP growth on inflation just over the 3 percent goal. The budget deficit will fall to 1 percent of GDP next year while the current account gap may widen on consumer imports picking up after taxes hit early 2014 demand. The Pemex legislation contained a new formula for federal revenue distribution capped at 4.7 percent of output with the remainder to go into a sovereign wealth fund. Outside Chile the concept has not caught on with Brazil’s modest version diverted for fiscal and currency support. The extra FDI and savings from the constitutional petroleum shift will not be applied until 2015 when the first field tenders are launched. President Pena Nieto has also stressed education and training and antitrust changes to boost productivity and competitiveness, and has tackled the powerful teachers union and forced the Slim conglomerate to divest telecom assets. Election overhaul is designed to bring transparency to campaign finance and ease fresh and independent candidate entry, but the political opening was overshadowed by reports of student drug conflict killings as law and order dominates provincial agendas. The President’s popularity in turn has plummeted after initial euphoria as ruling PRI factions and rival parties revert to opposition and the immediate positive effects of the structural fixes are minimal. At the annual IMF/World Bank gathering the Finance Minister repeated the mantra of waiting for medium term progress and central bank chief Carstens won media awards as he broke with Latin American counterparts with a no currency intervention stance despite cyclical difficulties. The Fund’s backup contingent credit line remains in place and dollar swap facilities are also available from the Federal Reserve.
Chile’s Finance Minister despite praise over “rainy day” fund use was forced to defend the Bachelet government’s early tax and other moves as they relate to the longstanding market-friendly investment-grade model. Short term external corporate debt/ reserves is on the fringes of the “fragile five” category and copper dependence still at half of exports prompted Moody’s to cite “structural weakness” in its latest report. The peso was down 15 percent against the dollar at end-September amid a chronic current account deficit. Economic expansion is only 2 percent as the central bank continues to cut rates on inflation double that figure. State-owned miner Codelco received an appropriation for modernization and cross-border partnership pursuit but industry worker wage strikes have dragged on and turned violent. Corporate taxes were hiked to help pay for increased social spending with income inequality stubborn after gross anti-poverty gains a decade ago.
