Peso's Decline Hits Mexican Economy, for Good and Bad

| Nov. 2, 2011 |

Published by Minyanville

Europe’s sovereign debt crisis—and the latest call for a referendum in Greece—has caused Mexico’s peso to weaken further against the US dollar. The currency has bobbed up and down in recent weeks, as Europe edges closer to deals before they collapse and the process repeats itself.


This has led to good and bad news for Mexico. Remittances are up; money sent back to Mexico from the US rose 21% to $2.08 billion in September, up from $1.72 billion during the same period last year.


However, thanks in part to exchange rate losses, state oil company Pemex posted its worst quarterly performance in nearly three years, with a third-quarter loss of $6.2 billion.


“The net loss ... was the result of exchange rate losses … derived from the depreciation of the peso against the dollar and the payment of taxes that represent 55% of total income," the company said in a statement to the Mexican stock exchange.


The period saw the peso lose upwards of 15% of its value against the US dollar and the company’s tax bill rise 35%.


In contrast to the oil company’s foreign exchange losses, Coca-Cola bottling behemoth Femsa (KOF) saw third-quarter profits up thanks to foreign exchange gains. Its profit rose 7.6% to $305 million during the period, compared to last year. Revenue was up 18.8%. The peso’s fall during the period resulted in a gain of $89.7 million for the company.


The third-quarter saw the Mexican economy grow around 3.7%, according to the Finance Ministry. Expectations by Mexican economists for 2011 growth fell to 3.72%, down from a 3.77% estimate in the previous survey, thanks to a downturn in the US as well as volatility in Europe.


Thanks to the currency’s sharp decline, the Central Bank left its interest rate at 4.5% last month. However, authorities insisted they would be keeping an eye on any inflationary pressure.


Analysts are now predicting that the rate will be left at 4.5% in December’s policy meeting.


Central Bank Governor Agustín Carstens expects inflation to cool in the coming months, despite last month’s slight rise which pushed the annual rate to 3.24%, up from September’s 3.14%.


Hedging Oil Bets

Every year, Pemex hedges oil output in one of the biggest operations of its kind in the market. In 2010, the company hedged this year’s output at $63 per barrel.


Bankers and brokers confirmed to the Financial Times that Mexico—and Qatar —bought put options over the summer. The brokers said Mexico hedged the bulk of net exports—around 800,000 barrels per day—at $75 per barrel. The government in Mexico relies on oil for around 40% of its annual income.


Authorities are still working on the exact details for this year, according to the Finance Ministry. “We have to be very careful performing hedging operations. If not, the instruments could become more expensive since we are a very important player in the market,” said the chief economist at the ministry, Miguel Messmacher.


Day of the Dead Draws Focus to Drug War

As the United States celebrates Halloween, Mexico brings in its own twist with its Day of the Dead, a uniquely colorful celebration for friends and relatives who have lost their lives.


However, with the ongoing war on drugs taking more and more lives, today’s important holiday has taken a new turn. "Every day is Day of the Dead now," a local told Associated Press. "We have 40,000 days of the dead."

That’s the number killed during President Felipe Calderón’s tenure, which began in December 2006. It is primarily thanks to the failure of his hardline tactics that Calderón’s National Action Party (or PAN) is unlikely to continue in power in next year’s elections.


Still, the party is fielding a candidate, though a name has not yet been confirmed. One front-runner, Santiago Creel, has pledged to change “everything” if he wins. “The direct, frontal, expansive strategy is a strategy that should end with this administration,” the former interior minister told Reuters.


The 56-year-old said that the state's priorities needed to shift to attacking gangs’ financial base—revenue streams and money laundering activities.


However, given his party leader’s record, Creel is unlikely to become president next year. That is most likely to be Enrique Peña Nieto, of the opposition Institutional Revolutionary Party (or PRI).