Mexico’s Halfway Trust Temptation

Mexican stocks were flat as President Pena Nieto at the midpoint of his term pledged to “restore trust” as the GDP growth forecast was shaved to under 3 percent with weak oil and manufacturing exports. The peso has drifted toward 13/dollar as short positions on the Chicago Mercantile Exchange remain heavy, and inflation pass-through may keep the central bank on indefinite hold.  He named an outside investigator for his family’s real estate deals with a developer getting government contracts, and Finance Minister Videgaray also expressed regret for questionable but “not illegal” luxury property transactions and supported a push for greater public official asset and relationship disclosure. The President’s dismal popularity ratings barely budged eve after the capture of the notorious Knights Templar drug gang boss as the law and order situation still has not brought killers of 45 students to justice and recently prompted Coca-Cola to suspend operations in aptly-named Guerrero state. The business community after cheering early energy and other reforms has demanded a clear anti-narcotics and violence strategy as the worst Central American tendencies implant cross-border. The corruption whiff also reprises claims that the ruling PRI cannot clean out its historic baggage and opposition parties have seized on the taint for upcoming governor races which may further dent the Administration’s strength. Deficit spending on infrastructure and social programs was due to reach 3.5 percent of GDP and may increase in the months ahead to garner political support. Shaky domestic demand is reinforced by a 20 percent projected drop in FDI this year to $25 billion to cover the trade gap as PEMEX-driven interest is unlikely to materialize in the near term despite liberal initial bidding guidelines. Portfolio flows are skewed toward long-term bonds with a near 60 percent foreign ownership share as fund managers have started to fret about overexposure.

Chile was the sole regional gainer up 2 percent on the MSCI as improving terms of trade lifted the economic growth forecast toward 3 percent despite the peso’s 20 percent depreciation against the dollar. President Bachelet’s reputation was marred by quick approval of a government small business loan to her son as she campaigned on reducing elite privileges and income inequality. The controversy erupted as election and labor law changes were debated, with employers arguing that the latter will further entrench union power. Peru was down on the MSCI by the same amount as proposed work rule liberalization failed there as President Humala entered his last year in office with 30 percent opinion approval. Growth in 2014 was just 2.5 percent and the currency is at a post-crisis low sending inflation above the 3 percent target ceiling. Colombia off 12 percent has been the laggard with a whopping 6 percent of GDP current account deficit on course with struggling oil and mineral exports. State-run Ecopetrol has turned to the syndicated loan market for funding as local government bonds are spurned after index reweighting on currency rebellion amid the sputtering guerilla talks.