lunes, 29 de septiembre de 2014

Ouch: the peso returns to beginning of year highs...

The fix rate peso jumped to $13.49 today, matching its January 24 high for the year. The  monthly fix rate averaged $13.23 with just a day left in September, in line with its first quarter average. Just two months ago, in July, the fix rate averaged $12.98. What's going on?

The explanation undoubtedly lies in portfolio investment flows and the impact of a stronger dollar on the attractiveness of carry trade investments. The carry trade entails borrowing in a strong currency (like the dollar) and investing the proceeds of the loan in bonds in a weaker currency (like the peso) that pay a higher interest rate than that charged on the dollar loan. So long as the dollar doesn't strengthen (or, the flip side, the peso doesn't weaken), investors reap the yield differential. If the dollar weakens (or the peso strengthens), the currency losses can swamp the gains from the interest rate differential.

The size of the carry trade in emerging markets isn't really known. However, one estimate puts it at a very hefty US$2 trillion. The Bank for International Settlements indicates that foreign ownership of emerging markets' debt rose from 8% in 2007 to 17% in 2012.

Mexico was an early beneficiary of carry trade inflows. The relative size and depth of its bond markets mean that peso-denominated bonds remain an important destination for foreign investors. In Mexico, along with Poland, Hungary and Indonesia, foreign investors hold 35% or more of government bonds.

The strength of the dollar translates into weaker currencies around the world, including the peso. Today's Financial Times presents three reasons why the dollar will remain strong: the recovery of the US economy, the end of QE, and the ECB's adherence to a more dovish monetary policy. (See the complete article at http://www.ft.com/intl/cms/s/0/27a516d8-47e4-11e4-be7b-00144feab7de.html#axzz3EjWzUWOC)

Unless peso interest rates rise or the peso strengthens, portfolio investment is not likely to flow into Mexico in the massive quantities we saw in 2011 and 2012.

lunes, 15 de septiembre de 2014

Mexico exports terrorists?

There are people in the US who believe that ISIS (or ISIL, aka Islamic State) terrorists are about to or have infiltrated the US from Mexico, amongst them Texas Governor Rick Perry. The Department of Homeland Security isn't amongst them.

For the story, see http://www.nytimes.com/2014/09/16/us/us-pushes-back-against-warnings-that-isis-plans-to-enter-from-mexico.html?emc=edit_tnt_20140915&nlid=20064986&tntemail0=y&_r=0

miércoles, 3 de septiembre de 2014

All in favor of borrowing abroad...


Mexico’s net foreign debt rose US$22.3 billion in the first half of 2014. The 56.3% increase over the same period of 2013 was thanks to the enormous jump in net indebtedness that occurred in the second quarter. In the second quarter of this year, Mexico borrowed abroad (net) US$20.5 billion, a sharp contrast to the (net) repayment of US$4.5 billion in the second quarter of 2013.

Public sector borrowing drove the jump in foreign debt. The net public sector foreign debt crept up US$0.1 billion in the first half of 2013. In the first half of 2014, it soared US$12.6 billion. Borrowing by the non-banking public sector drove the jump. Development banks’ net borrowing was imperceptible. Public sector companies took on US$12.5 billion in the first six months of 2014; in the first six months of 2013, their net borrowing inched up US$0.7 billion.

The private sector continued to borrow abroad in the first six months of this year but at a slower pace: the US$9.8 billion net increase was 31.0% less than in the first half of 2013. Companies and banks’ net foreign debt in the first half of 2014 rose, respectively, by US$5.6 billion (30.0% more than in the first six months of 2013) and US$4.2 billion (57.6% less). 

martes, 2 de septiembre de 2014

Some foreign investors returned to Mexico in the second quarter...


Foreign direct investment (FDI) in the first half of this year totaled US$9.7 billion, slightly more than half the amount of portfolio investment and just a third of its level in the first six months of 2013. Europe supplanted the US as the principal sources of FDI in the first half of this year, with 26.1% of the total coming from Spain, 20.1% from the Netherlands, and 13.0% from Belgium. Only a tenth came from the US while Japan, Canada, and Germany were the sources, respectively, of 7.2%, 4.9% and 3.9% of the total. Most of FDI (71.8%) in the first six months of 2014 went into manufacturing. Financial services attracted a fifth of the total and the remaining 7.9%, into all other sectors. 

FDI totaled US$20.2 billion in the second quarter of last year; in this year's second quarter, FDI was just US$2.3 billion. Obviously the AB INBev/Modelo transaction swelled last year’s number. However, a very unusual occurrence also affected FDI in this year’s second quarter: new investments were negative. Reinvested profits totaled US$4.0 billion in Q2 2014 while net liabilities with parent companies rose US$1.4 billion, offsetting the US$3.2 billion reduction in new investments. (There is an outflow of the same amount registered in the current account for reinvested profits. Neither new investments nor changes in inter-company liabilities have a current account counterpart.)

Portfolio investment in the first half of this year was US$18.2 billion, nearly three times its level in the first half of 2013 when the “taper tantrum” hit portfolio investment in emerging markets in the second quarter. The big change was in foreign investment in equities, which constituted a whopping 35.9% of portfolio investment in the first half of the year. The US$6.6 billion of foreign investment in equities really occurred in the second quarter; only US$0.3 billion flowed in during the first. It’s a sea change from the first half of last year, when foreigners cut their investments in Mexican equities by US$4.9 billion. Foreign investment in money market instruments was US$11.7 billion, 5.5% above its level in the first half of 2013.