| | |  Business News | November 2009 
Mexico Peso to Gain Up to 20% After Fitch Downgrade
 Jose Enrique Arrioja - Bloomberg
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November 24, 2009
| | Stocks and bonds also rose yesterday after the downgrade as Fitch’s shift back to a stable outlook quelled speculation that the company may look to lower the rating again. | |
Mexico’s peso is poised to rise as much as 20 percent against the dollar over the next year because the currency is one of the cheapest in emerging markets and exports to the U.S. are set to grow, according to Pacific Investment Management Co.
The rally will pick up after Fitch Ratings yesterday cut the country’s rating one level to BBB, a move investors had anticipated for months, said Guillermo Osses, who helps oversee about $50 billion in emerging-market assets at Pimco, manager of the world’s biggest bond fund. The peso jumped 0.8 percent yesterday, the most in over a week, after the Fitch cut.
The gain shows some investors were “awaiting the downgrade to take positions in Mexico,” Osses said in a telephone interview from Newport Beach, California. “The peso is one of the cheapest currencies in emerging markets. External accounts will improve and the government’s efforts on the fiscal side are reasonable.”
Pimco’s call on the peso - the second-worst performer among the 16 major currencies in the past year after the Taiwanese dollar - is more bullish than the consensus analyst forecast. Economists predict the peso will rise 3.7 percent to 12.5 per dollar by the end of 2010 from 12.9632 yesterday, according to the median forecast in a Bloomberg survey.
Osses predicts the peso will advance between 10 percent to 20 percent in one to two years amid a recovery in the U.S., the buyer of about 80 percent of Mexican exports. He said Pimco may add to its holdings of Mexican assets.
Failed Tax Bill
“We now have the positions that we want, but it’s possible we’ll increase our positions,” Osses said.
Fitch cut Mexico’s rating, a year after putting it on negative outlook, from BBB+ as tumbling oil output and the worst recession since the 1930s swell the budget deficit. The downgrade to BBB, the second-lowest investment grade rating, was the first by Fitch since it gave Mexico an initial rating of BB in 1995 and was the first by any ratings company since Standard & Poor’s cut it in the wake of the 1994 peso devaluation.
Mexico, which in 2000 became the second country in Latin America to win an investment-grade rating as the North American Free Trade Agreement boosted exports, has been the hardest hit in the region by the global recession that began in the U.S. President Felipe Calderon failed to pass a consumption tax aimed at offsetting declining oil proceeds and stemming a deficit that JPMorgan Chase & Co. says will reach the widest in two decades.
‘Serious Call’
“This is the first serious call for congress to see that the decisions they make have consequences,” said Marcelo Canales, part owner of airline Grupo Aeromexico SA and the president of the Nuevo Leon chapter of the business group Coparmex. “We urgently need a true tax reform, not the bad tax budget law they approved.”
Stocks and bonds also rose yesterday after the downgrade as Fitch’s shift back to a stable outlook quelled speculation that the company may look to lower the rating again.
The Bolsa advanced 1.5 percent while yields on the government’s benchmark peso bond due in 2024 fell five basis points, or 0.05 percentage point, to 8.17 percent, according to Banco Santander SA.
‘Out of Our Misery’
“Thanks to Fitch for putting us out of our misery with the long overdue and already priced-in” downgrade decision, Benito Berber, an economist at RBS Securities Inc. in Stamford, Connecticut, wrote in a note to clients. The shifting to a stable outlook was “positive” because it signals “the chances for yet another downgrade are slim,” Berber wrote.
In the credit-default swaps market, where investors buy contracts to protect against non-payment of debt, Mexico has been trading at a higher cost than countries with lower ratings, including Panama, Brazil and Peru.
The cost of protecting Mexican debt against default for five years was 1.4 percentage points at the end of last week while it cost 1.34 points to protect Panama’s debt, according to data compiled by CMA Datavision. Mexico’s cost held at 1.4 points yesterday while Panama’s dropped to 1.32.
“Mexico trades like a BBB country and has done so since the beginning of the year,” Berber wrote.
Standard & Poor’s also has had Mexico’s BBB+ rating on negative outlook since May. Moody’s Investors Service has a stable outlook on the country’s Baa1 rating, which is also the third-lowest investment grade rating.
Brazil Real
Gray Newman, chief Latin America economist at Morgan Stanley, said that a downgrade by S&P could spark some “initial currency weakness.”
The peso’s 5.8 percent gain over the past 12 months ranks only ahead of the Taiwan dollar’s 3.6 percent advance among the 16 major currencies traded against the dollar. The peso’s gain is dwarfed by the 43 percent surge in the Brazilian real over that time.
“The question going forward is had the market already digested two moves or is there another shoe about to fall,” Newman said in a telephone interview from New York. That’s the “tension we’re likely to see,” he said.
Lawmakers approved on Nov. 1 a permanent 1 percentage- point increase in the sales tax to 16 percent after rejecting Calderon’s proposal for a 2 percent consumption tax that would have generated more than double the revenue. The sales tax increase was a “less optimal solution” than the creation of a consumption tax, Shelly Shetty, an analyst with Fitch, said in a Nov. 2 interview.
2010 Budget
The 2010 budget approved last week by congress calls for spending of 3.18 trillion pesos and forecasts a budget deficit of 0.75 percent of gross domestic product. Including spending by state-owned oil company Petroleos Mexicanos, the deficit will reach 2.75 percent of GDP, the widest since 1989, according to JPMorgan.
“The reforms implemented by this administration represent an important advance to deal with the different structural weaknesses pointed out by the ratings agency,” Mexico’s Finance Ministry said in a statement today.
Mexico’s $1.09 trillion economy will shrink as much as 7.5 percent this year, the most since the 1930s, according to the central bank. Oil, which funds 38 percent of Mexico’s budget, has fallen 47 percent from a high of $147.27 a barrel in July 2008. Output at state-owned Petroleos Mexicanos fell for the 39th month on a year-over-year-basis to 2.602 million barrels a day in October, the company said Nov. 20.
To contact the reporter on this story: Jose Enrique Arrioja in Mexico City at jarrioja(at)bloomberg.net
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