Mexico is not a safe option for investors fleeing Argentina

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With attentions focused on the market reaction to a potential electoral defeat later this year for Argentina’s president Mauricio Macri, investors eyeing Mexico as a suitable alternative would do well to take heed of the warnings.

Lying 38th in Euromoney’s global risk survey rankings, one place higher than Portugal and one below Spain, Mexico is still safer than every other Latin American country bar Chile.

Yet the fact analysts remain negative on Mexico’s prospects is underlined by its risk score declining in the first half of this year, to extend moderately declining five- and 10-year trends.

Mexico’s failure to impress is partly down to its infrastructure and demographics remaining high on the list of structural risks, but mainly relates to its politics and economic performance.

The country only narrowly escaped recession in the first half of this year owing to a barely perceptible 0.1% quarterly rise in real GDP, according to the preliminary release, after shrinking 0.2% in the first quarter.

It caused GDP to grow on a real-terms basis by just 0.3% year on year in the first half of the year, below the forecasts of leading institutions, and signalling the prospect of an interest-rate cut against the backdrop of low inflation falling throughout July below 3.8%.

Struggling peso

All five of Mexico’s economic risk indicators have been downgraded by analysts this year, notably monetary policy/currency stability, with the peso struggling for support, given the prevailing global trade risks and poor execution of reforms to bolster productivity and investment.

With lower borrowing rates deterring capital inflows, political risks are also heightened with little or no improvement to indicators, including government stability, the regulatory and policymaking environment, and corruption – the lowest scoring of all.

“Domestic policy uncertainties and the perception of an anti-business bias by the government are continuing to weigh on Mexico’s economic prospects,” says ING’s LatAm chief economist Gustavo Rangel and emerging markets sovereign debt strategist, Trieu Pham, in a recent research note.

The authors note, among the various negative factors, a deterioration in the outlook for investment and GDP growth.

They point to financial market instability plus possible credit rating downgrades for the sovereign, and for the state-owned petroleum company Pemex, after receiving fiscal support and putting a halt on future rounds of oil exploration auctions.

We see a sharply higher risk for a technical recession and have revised our 2019 GDP growth forecast down to 0.7% 

 – ING

In public, finance ministry officials are claiming the target for a 1% of GDP primary budget surplus – a narrow fiscal measure excluding debt interest – is achievable, but analysts have their doubts, despite previously expressing faith in a credible fiscal programme.

The resignation of finance minister Carlos Urzúa has hardly helped after he in effect accused the government of making up policy on the hop – though he also seemed to have his nose put out of joint by the fact some ministerial appointments were imposed on him, signalling a bigger falling out with president Andrés Manuel López Obrador.

His replacement, Arturo Herrera, gained experience as Urzúa’s deputy, and is considered a safe pair of hands.

However, he is gambling with a counter-cyclical fiscal policy, as investors remain nervous over recent decisions to terminate construction of a new Mexico City airport and seek arbitration to renegotiate natural gas pipeline contracts, contradicting the president’s vows to honour existing contracts and provide certainty by respecting the rule of law.

The finance minister’s task is a formidable one, too, with the economy struggling, the fiscal deficit widening last year to 2.5% of GDP and credit-rating agencies contemplating downgrades, despite ratification of a new Canada-Mexico-US trade deal.

Moody’s A3 rating is certainly questionable in view of Fitch recently lowering its BBB+ rating a notch to BBB in June, and the fact Portugal is no higher than BBB, and given their similar Euromoney risk scores.

Stimulus package

A $25 billion package of measures to stimulate the economy partly financed by accelerating some spending programmes and drawing down on infrastructure investment funds could give the economy a lift, but it hasn’t assuaged economists’ fears. 

“We see a sharply higher risk for a technical recession and have revised our 2019 GDP growth forecast down to 0.7%,” says ING, and other prominent forecasters seem to agree.

BBVA Research is predicting 0.7% growth, down from 2% in 2018, while the IMF has tempered its enthusiasm by recently downgrading its April forecast for 1.6% growth to 0.9%, resulting in a scolding from Obrador, whose government is sticking to its outdated prediction of 2%.

Other countries are similarly struggling with increased global trade risks, but it is notable that as Brazil, Chile, Colombia, Peru and Uruguay held up in Euromoney’s risk survey in the first half of the year, Mexico’s contributors were more fidgety.

With bond markets once again flagging up the risk of recession in the US and Europe, and oil prices sliding, nervous economists are the last thing that investors would want.

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