Pictet: Reformen und Erneuerungen in Mexiko

Mexico’s economic growth has been disappointing and the MXN has hit record lows against the USD after a slump in global oil prices and a worsening of the country’s drug-related violence. But investors in Mexican bonds should be encouraged by the longer-term outlook, says Mary-Therese Barton, recently returned from a research trip to Latin America’s second largest economy.

Social unrest has caused headaches for President Enrique Peña Nieto, who took office two years ago pledging to end drug-related violence that is estimated to have cost the economy more than 17 per cent of GDP and killed around 100,000 people since 2007.

Now, however, both he and emerging market fixed income investors may be just as preoccupied with the impact of falling oil prices on the economy. The lower oil price has hit Mexico particularly hard as a third of its government budget is funded by energy exports. According to our economists, a 50 per cent decline in oil prices reduces the country’s GDP by 0.9 percentage points. The MXN, as a result, has lost around 3 per cent this year.There are other factors that bond investors might find equally unsettling.

The prospect of higher US interest rates and tighter fiscal policy seem to be setting the stage for an extended period of volatility in financial markets. The fact that some 40 per cent of the country’s sovereign bonds are owned by foreign investors – who are less loyal than domestic institutions – simply reinforces that impression.

However, having met a number of corporate executives, central bank and finance officials as well as local investors during my recent trip there, I do not believe Mexico deserves to be penalised by the markets.

After the trip, I’m more convinced that the government’s determination in implementing an array of structural reforms and maintaining economic stability would help Mexico’s local currency bonds weather short-term volatility and outperform other markets in the long run. This year, the yield on Mexico’s local currency bonds remained stable at around 5.8 per cent.

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