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 Business News | February 2006 
Mexican Central Bank Cuts Key Interest Rate
 Greg Brosnan - Reuters
| | As the spread between U.S. and Mexican government bonds decline, investors are seen moving their money into what is considered the safer haven of U.S. Treasuries.
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Mexico City - Mexico's central bank cut interest rates on Friday and must now decide whether to give a weak economy another boost despite risks posed by potentially volatile elections and a restless U.S. Federal Reserve.
The central bank said it would allow the key overnight lending rate to fall another 25 basis points to 7.50 percent. The rate stood at 9.75 percent when the bank started easing monetary policy in August.
In an accompanying statement the bank warned for the second consecutive month there was limited space to push rates lower.
The bank said a recent spike in agricultural prices may ease in coming weeks, which would gradually bring down headline inflation. Mexico's 12-month inflation rate stood at 3.94 percent in mid-February.
It said core inflation, which strips out volatile food and energy prices, would hold steady at around 3 percent.
The bank cut rates by half a percentage point at its monetary policy meetings in December and January.
But the warning that further rate cuts would be limited - which first accompanied January's monetary policy decision - combined with a recent spike in headline inflation, had led the market to see only a 25-basis-point cut on Friday.
With an end to monetary policy loosening probably near, few in the market see any more 50 basis point cuts soon and debate centers on how many more quarter percentage-point cuts the bank will make ahead of presidential elections on July 2.
"We think the central bank is considering a similar move in March," said David Franco, an analyst at JP Morgan in Mexico City. "It's April which is in doubt, but ... we're inclined to think that the rate will drop to 7 percent that month."
The bank must now decide how much further it can afford to walk along what will be an increasingly narrow monetary tightrope in its quest to boost lackluster growth, estimated at about 3.5 percent this year despite signs of a recovery.
Benign inflation, further tamed by a strong peso which keeps imports cheap, gives leeway for further cuts.
But analysts say the bank does not want to be tweaking monetary policy too close to July 2 elections, when markets may be more volatile than normal.
Economists also say that further cutting rates while an inflation-wary U.S. Federal Reserve raises its benchmark rate will eventually provoke selling of Mexican government bonds.
As the spread between U.S. and Mexican government bonds decline, investors are seen moving their money into what is considered the safer haven of U.S. Treasuries.
"The inflation side looks good," said John Welch a Lehman Brothers economist who predicts only one more central bank rate cut before the elections. "I think they're just worried about the elections and about what spreads over the U.S. they need to maintain."
(With additional reporting by Luis Rojas Mena)
Mexican Airport Operator Jumps 34% in 1st Trading Day
Bloomberg
Shares of Grupo Aeroportuario del Pacifico SA, Mexico's largest airport operator, surged in their first day of trading after the government raised at least $870 million by selling a stake in the company last night.
The Guadalajara-based company's American depositary shares rose 34 percent to $28.05 at 11:44 a.m. New York time from last night's initial sale price of $21. Shares in Mexico climbed 32 percent to 29.15 pesos.
The company, which operates 12 airports in the country, sold 29 million American depositary shares at $21 each and 124 million B shares in Mexico at 22.03 pesos apiece. An ADS is equivalent to 10 Mexican shares. Mexico's government will get the proceeds from the sale. The ADS price was higher than the $18-$20 range that company executives gave during presentations to investors earlier this month.
Prospective growth in Mexico's airline industry made the valuation "very attractive," said Rupert Brandt, director of emerging market equities at London-based F&C Management Plc, who planned to buy the shares. "It has an extremely strong balance sheet, generates plenty of free cash flow and is well positioned to grow its cash flow in the low double digits."
Airline prices among all carriers have already begun to fall with the startup of two low-cost carriers in Mexico and two more that plan to begin flying this year, including a venture backed by Ryanair Holdings Plc founder Tony Ryan. The government sold its controlling share in Mexicana airline in December and plans to sell AeroMexico airline this year to boost competition.
Underwriters have thirty days to exercise an option of selling an additional 4.35 million ADS and 18.66 million Mexican shares. The sale of those shares would bring the government's proceeds to about $1 billion.
The remaining 15 percent of Grupo Aeroportuario is owned by a group of four companies, including Spain's Aeropuertos Espanoles y Navegacion Aerea SA and Actividades de Construcciones y Servicios SA. They bought the stake from the government in 1999.
"The investment makes a lot of sense because some airports are going to become commercial corridors in Mexico," said Rogelio Gallegos, who helps manage about $100 million at Actinver SA in Mexico City. Gallegos said he bought an undisclosed amount of Grupo Aeroportuario's shares.
In the 12 months ending in September, GAP had revenue of $233 million and earnings before interest, taxes, depreciation and amortization of $156 million, the company said. Credit Suisse Group is leading the share sale outside Mexico.
Thomas Black at in Mexico City at tblack@bloomberg.net |
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