IMF Expands Mexico's Credit Line Amid Ongoing Drug Violence

| Jan. 14, 2011 |

Published by Minyanville

The peso climbed to its highest point since 2008 this week as the IMF approved a $72 billion flexible credit line for two years, replacing the $48 billion line that expires in April.

The announcement on Monday pushed the peso up to 12.14 pesos to the dollar the following day. This is the currency’s highest value since 2008, when the global financial crisis scuppered the peso’s value from less than 10 pesos to the dollar to nearly 14.

Mexico’s GDP is now expected to expand by 4.8% in 2011, compared with Banamex’s initial estimate of 3.9%.

The two year credit line is the largest committed in the IMF’s history. Mexico was encouraged to turn to the fund before a possible crisis developed in December. IMF support was first sought in 2009 when Mexico found itself in the deepest recession since the 1930s.

The IMF has said however, that it expects growth in Mexico to slow to 3.9% in 2011 from an estimated 5% in 2010 as the US recovery acts to “drag on external demand”; 80% of Mexico’s exports heading north of its border.

There was further less-than-positive news as the front page of Reforma, one of Mexico’s largest and most influential newspapers, screamed about the threat of inflation on Wednesday. Price hikes in tortillas and gasoline drove the increase. Annual inflation has now accelerated for five months in a row.

Stocks in Mexico dipped slightly this week, with the IPC index closing at 37,963 on Wednesday, down 0.2%. America Movil (AMX) stocks fell 1.9% while copper mining Grupo Mexico saw shares slip 0.2%. Eurozone debt fears on a Portuguese bond auction are thought to have affected the fluctuation in Mexican shares.

Investors have kept a keen eye on the launch of Carlos Slim’s Grupo Carso spin-off companies on Mexico City’s stock market last week. Mining company Frisco saw shares rise 1.8%, steadying after a 26% rise in their initial few days. The company expects four new mines to come online towards the end of 2011, producing gold, silver, zinc, and lead.

Cemex (CX) shares rose 1.3% after the company was forced to pay $1.5 million in overtime to 1,705 ready-mix drivers in eight US states. The US Department of Labor investigated drivers who claimed that they were not compensated for overtime between September 2006 and September 2008.

After the forced expropriation of its Venezuela business in 2008, Cemex says it is in constructive negotiations with the Venezuelan government. The company had begun an arbitration process in order to claim compensation for assets, however, this will not be necessary if talks are successful, it says.

Based in Monterrey, the company is one of Mexico’s most successful. However, the country’s richest city is being hit hard by drug cartels. Many police officers and bystanders have been killed in the city this year alone. A US company executive was abducted, beaten and robbed of his armoured car in the city last week, forcing many companies to rethink investment in the region and even the country.

Mexican authorities dramatically revised their figure for the 2010 death toll due to drug-related violence to 15,273, up 60% on 2009. This comes days after the gruesome discovery of 15 decapitated corpses in the popular tourist-resort of Acapulco over the weekend, in one of the most deadly finds of the country’s history.

Ratings agency Fitch warned this week that the ongoing violence had begun to tarnish the country’s image in capital markets. Fitch and Standard & Poor’s both downgraded the country’s credit rating at the end of 2009, arguing the drug war slows growth and investment.

Mexico’s car industry had some positive news this week with Chrysler announcing it will export the Fiat 500 from its plant in Toluca, just outside Mexico City, to China. Half of the 120,000 vehicles produced annually will head to the US with the other half earmarked for Brazil and China. Car output rose in 2010 after its 2009 downturn. Exports soared by 52% to nearly 1.86 million vehicles, according to the Mexican Automobile Industry Association.

Production rose 50% to over 2.26 million units. Exports were strong with domestic sales rising 8.7%. In further demonstration of the US economy leading Mexico’s, exports north of the border fed the rebound with the purchase of nearly 1.28 million cars.

President Felipe Calderón shuffled his Cabinet last week, changing the minister in charge of communications and transportation in a bid to make his government the “infrastructure administration”, wanting to create a sense of competition in the highly concentrated communications sector. The minister of energy has also been replaced.

The reshuffle comes as Center for Private Sector Economic Studies blamed a “lack of reform” as the main factor in inhibiting economc growth and social welfare in Mexico.