Mexico’s Repeated Knockout Rounds

Mexican stocks further slid and the peso was off almost 20 percent the past twelve months approaching 16/dollar, as the first private hydrocarbon company bidding round was a disappointment with only two out of fifteen fields soliciting interest. Eight auctions were spurned altogether and participation was half the demand predicted by officials even as breakeven prices for the deposits were $20-25/barrel. Pemex stayed away as it tries to conserve cash after a $6.5 billion Q1 loss, and its one-third budget contribution will be absorbed by $8.5 billion in spending cuts winning plaudits from bondholders but anger from voters who reduced the ruling PRI take in state elections to 29 percent and backed an independent as governor.  Construction and manufacturing weakness linger for 2 percent GDP growth, and 3 percent inflation is within the central bank target but the central bank could hike the benchmark rate to 3.5 percent by year-end in mirroring US Federal Reserve direction. The teachers union has fought back against reforms and law and order missteps were reinforced with the jailbreak of a notorious drug lord for a second time. Currency short positions are at a record in weekly commodity futures data as daily local spot and forward volume average $10 billion at the same level as Brazil.

There Petrobras will loosen rules for the pre-salt fields to invite foreign and private investment as it scaled back its 5-year capital outlay plan by one-third to $130 billion with the “laundry” investigation now implicating the CEO of construction giant Odebrecht as influence peddling suspicion also reaches former President Lula. Prosecutors charge that the bribery balance sheet write-down to date is too small as overseas pension funds pursue class action suits in US courts. President Rousseff’s approval rating is in single digits and parties may withdraw coalition support and consider impeachment if allegations relate to her decade-long Petrobras leadership. She visited Washington and New York with her economic team as fiscal adjustment was downgraded to the likelihood of no primary surplus with 1.5 percent output contraction this year. Gross public debt may head to 70 percent of GDP as ratings agencies contemplate sovereign demotion to junk. Corporate downgrades led the emerging market pack as Fitch warned the country was a main source of global contagion. Monetary policy has also failed to quell 9 percent inflation despite the 14 percent Selic rate as the real moves to 3.5/dollar with new swap intervention limits.

 Consumption and fixed investment have followed commodity exports into the tank as unemployment and bad retail loans worsen.  State savings giant Caixa is in talks to sell part of an estimated $7.5 billion distressed portfolio to foreign funds including JP Morgan after its partnership with Gavea, founded by a former central bank head, was rearranged. Finance Minister Levy had a heart scare before travel abroad sparking speculation about a replacement as a $70 billion medium term infrastructure program was unveiled to minimal response in advance of the 2016 Olympics. FDI may be only half last year’s at $50 billion despite incentives for transport engagement. Electricity remains a protected sector even as the securities regulator fined Electrobras for flagrant corporate governance lapses. According to their professional association debt and equity activity is at a 5-year low as credit boom and scandal shocks suffuse the network.