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Investors Bolt Mexico As Peso Enters Free Fall

Investors Bolt Mexico As Peso Enters Free Fall

The Wall Street Journal --

Global investors are fleeing Mexico’s financial markets, sending the peso to record lows on mounting concerns that Donald Trump’s trade policy could end the country’s privileged status among developing countries.

The peso on Wednesday tumbled to another all-time low against the dollar as Mr. Trump pledged to change U.S. trade policy with Mexico. “Mexico has taken advantage of the United States,” he said during his press conference. “It’s not going to happen anymore.”

The Mexican currency weakened 0.3%—at 21.8609 from 21.8009 late Tuesday—again frustrating Mexican central-bank efforts to slow the currency’s decline. Bank officials said Tuesday that they spent $2 billion last week to prop up the peso, which has weakened 16% against the dollar since the U.S. election.

The selloff underscores fears that the economic gains Mexico has made over the past two decades could reverse, as the incoming Trump administration takes a confrontational stance that could bring tariffs and border-control measures that once appeared unthinkable.

The North American Free Trade Agreement, which in 1994 created a free-trade zone among Mexico, the U.S. and Canada, cracked open the American consumer market to Mexican businesses in a way no other emerging market has ever enjoyed. Nafta has also brought relative stability to the peso after a series of currency crises, a crucial factor in reassuring foreign buyers of Mexican bonds and other assets.

Now, that advantage could be in jeopardy if Mr. Trump follows through on pledges to renegotiate the agreement. Mexico’s benchmark stock index has dropped 5.2% since the U.S. election through Wednesday. Yields on 10-year Mexican government debt, which move in the opposite direction of price, jumped to 7.689% from about 6% before Mr. Trump’s victory. Mexican asset prices could come under further pressure in coming weeks, analysts and investors said, as the administration’s nominees to government positions spell out their positions in testimony before Congress.

“A renegotiation of Nafta would basically kill Mexico’s growth model,” said Juan Carlos Rodado, director of Latin American research at investment bank Natixis. “This would be very bad for investor confidence.”

This reversal of fortune shows how Mexico may be paying a price for becoming so dependent on one strong trading partner. About 80% of Mexican exports go to the U.S.

Foreign investors were net sellers of $1.4 billion in Mexican short-term debt in December, reducing holdings by 11%, according to data from Natixis and Banco de Mexico. That was the biggest one-month selloff in nearly 10 years, in percentage terms.

Mexico’s economy could fall into recession, shrinking by as much 3.3% in 2017, if the U.S. imposes tougher trade terms, Mr. Rodado said. The International Monetary Fund estimates that Mexico’s economy expanded 2.1% in 2016. Almost 30% of the country’s gross domestic product comes from trade with the U.S., Natixis estimates.

Fitch Ratings in early December cut its rating outlook on Mexico’s long-term debt to negative from stable, a sign that currency depreciation resulting from Mr. Trump’s victory had increased uncertainty to the point that it could hurt Mexico’s public finances.

“No one is willing to stick their neck out and take a shot on Mexican assets right now,” said Win Thin, an emerging-markets strategist at Brown Brothers Harriman & Co.

The peso’s instability has already sparked inflation in Mexico and caused headaches for small-business owners such as Abraham Bleier, founder of the Garabatos chain of restaurants and bakeries. Mr. Bleier, who has about 35 locations in Mexico City and the central Mexican city of Queretaro, said he wanted to open two new locations each year.

He has put his plans on hold because currency fluctuations boosted costs. Prices of butter and chocolate that he imports from New Zealand and Switzerland—and pays for in dollars—rose more than 40% over four months last year, making his cookies and cakes more costly to produce.

“I can raise prices, but if people don’t have the money, they won’t pay. It’s a negative spiral,” he said. “To see the value of your business devalued in dollar terms 40% or 50%—and I didn’t have anything to do with it, I didn’t make any mistake—it’s very frustrating.”

Fund managers that deal in peso-denominated assets are spooked, too. Macquarie Infrastructure & Real Assets, an Australian-owned company that invests in Mexican roads, power plants and wind farms, filed paperwork to raise as much as 10 billion pesos ($457 million) from pension funds and other investors in September.

Ernesto González, head of the Mexico office for Macquarie Infrastructure & Real Assets Mexico, said there was a pause in fundraising immediately after Mr. Trump’s election, and he expects to have a harder time raising money after the peso’s further weakening. Keep reading...



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