Mexican Investors Troubled as Bernanke Dashes Hopes for Stimulus

| Sept. 9, 2011 |

Published by Minyanville

Mexico’s ebb and flow in the wake of the United States’ economy became ever more apparent this week as the peso and IPC index went up and down in line with both anticipation and disappointment at news from the northern neighbor.

The peso fell against the US dollar after US Federal Reserve Chairman Ben Bernanke failed to mention any stimulus measures in a speech on Thursday, worrying Mexican exporters who see 80% of their product head to the United States. The currency was also hit by an increase in US jobless claims earlier this week.

Yet the previous day, stocks rallied alongside those in the US, thanks to optimism for a stimulus and for support for a struggling European economy. The IPC fell 1,254 points on Monday as US markets closed for Labor Day.

The global crisis is hitting Mexico hard. The country’s Central Bank governor, Agustin Carstens, has said that it may be necessary to adjust its monetary policy in light of worrying news from the US and global markets.

“If the global economic slowdown worsens or if monetary policy becomes more lax in advanced economies, we (would) be in a position to adjust our monetary policy stance without putting the goal of price stability at risk,” he said in a release on the bank’s website.

The country’s benchmark interest rate is at 4.5%. However, a rate cut is now looking likely. This is contrary to many investors’ predictions for a steady rate for the next couple of years. Mexican economists are predicting GDP will expand 3.81% in 2011, down from previous expectations of 4.24%.

Inflation did rise a little lower than expected in August, with the consumer price index rising just 0.16%, compared to July. This is lower than the expected figure of 0.21%, according to a Dow Jones survey. The figures bring annual inflation down to 3.42% from 3.55% at the end of July.

Reasons To Be Cheerful

While the IPC index is being hit hard by world markets, the country’s debt market has “plenty of reasons to be cheerful,” according to Adam Thomson, writing in the Financial Times. Chilean bank BCI issued $170 million worth of bonds in Mexico this week. This, writes Thomson, “could mark the start of a new era for the country as Latin American companies look to raise debt in alternative markets to those of Europe and the US.”

The bank’s chief executive, Eugenio Von Chrismar, claimed that the three-year maturity available on the Mexican market is much greater than what the bank would have been able to obtain in either Europe or the United States. It seems many Latin American companies are looking to Mexico as a finance source, thanks, claims Thomson, to the “impressive stewardship” of Mexican Stock Market President Luis Téllez.

“The Mexican Stock Market has worked to develop new products, develop new markets and bring in the latest trading technology and best international practice in what has amounted over the last couple of years to little short of a revolution at the Mexican bourse,” writes Thomson. “BCI’s issuance won’t be the last.”

Laws restricting full foreign ownership of certain companies are likely to be restructured, as Mexico attempts to milk interest in, as well as diversify, its economy. Many analysts attribute the country’s generally weak growth over the past decades to a lack of competition—epitomized by world’s richest man Carlos Slim’s companies—as well as the restrictive foreign ownership laws.

For example, foreign investors are only allowed to own up to 25% of an airline, 49% of a fixed-line phone company or, intriguingly, 100% of a cellular one. “These are barriers to entry,” Alejandro Faya, who heads foreign investment at the country’s economy ministry, told the Financial Times. “We have to ask ourselves why we have them.”

The country has, however, risen eight places, to 58th, in the World Economic Forum’s competitiveness index this year.

The government is being asked to bring about a 20% tax on soft drinks, as it is revealed that Mexico is the world’s biggest consumer. Per capita consumption is a staggering 40% higher than in the United States. Indeed, even Anapra, among the poorest neighborhoods in Ciudad Juárez—one of the world’s most dangerous cities, plagued by drug violence—is used to a big red Coca-Cola (KO) truck driving down its dusty streets.