| | |  Business News | February 2009 
Mexico Hurt By Vulnerability To US Economic Downturn
 Claudia Assis - Dow Jones
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New York - Discouraging economic forecasts out of Mexico have heightened fears that difficult times in the U.S. will translate into greater pain south of the border.
Of the emerging markets, Mexico is one of the most vulnerable to the U.S. recession, due to the two countries' multi-layered economic ties.
Mexico's exports, worker remittances, and foreign direct investment all hinge on how prolonged the U.S. recession will be. And for Mexico, it seems the rich neighbor can't be on the mend soon enough.
On Tuesday, Mexico's Institute of Finance Executives said its manufacturing and services indexes both fell to new lows in January, pointing to a "drastic deterioration" in the economy and "significant and prolonged" downturn in output.
The Finance Ministry, meanwhile, acknowledged that an economic contraction rather than flat gross domestic product is now in the cards this year after GDP growth of an estimated 1.5% in 2008. The Bank of Mexico last week said it expects output to shrink between 0.8% and 1.8% this year.
Confirmation of expectations that the Mexican economy will probably contract, and anticipation of further monetary easing by the central bank to counter the downturn have put the peso under pressure in the past week.
The currency closed at an all-time low MXN14.57 against the dollar Tuesday, weaker than its MXN14.3650 Friday and down 5.2% from its 2008 close.
The picture is looking progressively difficult. Last year some believed Mexico could escape the worst of the global slowdown on its prudent fiscal policies and the strength of its domestic trends - but not anymore.
Following the central bank's lead, market participants are betting on anything from a 0.5% to a 2% contraction for Mexico in 2009.
It "would depend on how deep the U.S. falls in the first half of this year, and how fast it recovers in the second half of the year," said Alfredo Coutino, senior Latin America economist at Moody's Economy.com. "Mexico has not been able to offset the negative effects" of the U.S. and global stumbles, he said, calling for a 0.5% economic contraction this year.
Concerns about the health of the Mexican economy are reflected in asset prices beyond peso weakness. So far this year, Mexican equities are down 13% in dollar terms on MSCI Barra, only ahead of smaller Peru, which was down 14%. In contrast, Latin America's other giant, Brazil, has eked out a 2% gain this year, also in dollar terms on MSCI Barra. The broader index has lost 8.8% in the same period.
Mexican bonds are down nearly 4% on JPMorgan's Emerging Market Bond Index Global, while the broader market has gained 0.6% year-to-date. Brazilian bonds lost 4.2%, but Brazil hasn't enjoyed investment-grade status for as long as Mexico has.
Mexico Hurt By Vulnerability
On the brighter side, Mexico is now much more able to handle the bad times. Inflation, a big concern in previous years, is largely under control. The government hedged the price of Mexico's export crude oil around $70 a barrel, protecting its budget revenue since state oil monopoly Petroleos Mexicanos is currently selling crude below $40.
Mexico has also announced its own stimulus programs, which include a boost in government spending, particularly on infrastructure.
The government has frozen gasoline prices and lowered other energy prices, and devised several plans to protect employment in a year when, according to the central bank, the economy could lose from 160,000 to 340,000 formal jobs.
Concerns remain about the implementation of some programs.
Benito Berber, an economist at the Royal Bank of Scotland, said the lion's share of the infrastructure projects are hard to pull off.
Berber said RBS will lower its 2009 GDP forecast for Mexico in the next few days, from a contraction of 0.5% to one as big as 2%.
In one crucial aspect, Mexicans haven't learned from past troubles. They haven't promoted competition, or dealt with monopolies in key sectors of the economy, Berber said. "Inflation could be lower" if that were to be addressed, he added.
But so far, investors haven't particularly shunned Mexico.
Mexico-dedicated stock funds saw $94 million in net outflows so far this year, according to fund flow tracker EPFR. That compares to outflows of $208 million in the same period last year, when trouble was only brewing in the U.S.
Developing-world investors can ill afford to be out of Mexico, a major emerging market, said Urban Larson, a Latin America stock fund manager with F&C Investments in London.
Its stock market has a few defensive qualities that make it still attractive despite the crisis, such as equities geared to domestic demand and those still enjoying strong cash flows, including media conglomerate Grupo Televisa (TV) and mobile phone giant America Movil (AMX), he said.
claudia.assis(at)dowjones.com |
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