Ever since Andrés Manuel López Obrador (Amlo) assumed the Mexican presidency in December 2018, international investors have been watching for signs that he would adopt populist economic policies.
With no early signs of fiscal looseness, the arguments from some locals who had been pointing to the fiscal orthodoxy that characterized his time as mayor of Mexico City began to ease some jitters.
It convinced few: just wait, many said, for a crisis, and then we’ll see Amlo’s true colours.
But it turns out we have been witnessing Amlo’s true colours all along. If the global pandemic hasn’t tempted him to move to an expansionary setting with the public accounts, surely nothing will.
Even the IMF has been critical of Mexico’s rigid emphasis on balancing the books in the midst of a global demand and supply shock: Mexico expects a 0.2% public sector surplus this year and a balanced budget next year, with an increase of between just 1% and 2% in expenditure.
Meanwhile, monetary policy has eased, but at 4% still offers a juicy positive compared with the rest of large emerging markets, which have converged towards their zero lower bounds.
Safe haven
The upshot is that Mexico has become something of an EM safe haven. The Mexican peso has fallen by 11.7% between March 1 and October 1.
For context, the Brazilian real has fallen by 61.3% during that time.
Mexican banks have been quick to take advantage of strong (and very liquid) investor appetite for Mexican debt.
In the first nine months of 2020, the banks issued 44.8% more bonds by volume – 15 trades, worth a combined $5.59 billion – than in the same period of 2019.
The 2020 issuances also had an average yield of 5.95%, down from 6.24% in 2019, according to Standard & Poor’s.
By contrast, banks in Latin America’s six largest economies combined issued 5.8% lower volume and saw an increase in average coupon to 5.14% from 4.88%.
So, what’s driving the Mexican banks’ activity – including one eye-popping $1.75 billion five-year note from Banco Santander?
Sadly, it’s not to fund loan-book expansion – Mexico’s austerity has caused greater negative growth then elsewhere. GDP is expected to fall by about 10% in 2020 and credit demand is depressed.
Rather, the flurry of Mexican bank debt is being driven by rising expectations that Mexico will lose its investment grade rating despite its orthodoxy.
A recent Credit Suisse survey of EM institutional investors found that 74% of respondents expect Mexico to lose its investment grade rating in the near future.
The banks are front-running the pricing implications of the downgrade.
As many emerging markets are realizing with regards to the trade-offs between releasing fiscal stimulus, economic growth dynamics and financial sustainability: ultimately, you are damned if you do, and damned if you don’t.
