Mexico risk to Pacific Alliance’s IG club status

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Three-quarters of fund managers that responded to a recent Bank of America Merrill Lynch survey think that Mexico is going to lose its investment grade status.

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This prediction is echoed by the bank’s Mexico economist, Carlos Capistran, who thinks that the government is overestimating revenues and economic growth.

Should Mexico lose its investment grade (IG) rating it would be another hit to the region’s faltering economic reputation. Brazil is still a long way from reclaiming its IG status and the other big news story in Latin America – Argentina – is hardly an example of a strong or improving credit environment.

It would also be a worrying sign that the malaise that has hit the southern cone can affect the Pacific Alliance – that group of countries whose economic and financial management orthodoxy was supposed to ensure that membership of this club remained exclusive to those with strong and stable credit ratings.

Sharp

Sadly, it seems that the fund managers’ prediction could be correct. For only the second time since the Mexican peso was floated, the Mexican current account turned into surplus in the second quarter of 2019. 

And the swing was sharp – from a deficit of 1.3% in the first quarter to a 1.0% surplus. The drivers were sharp contractions in imports for consumption (the country is in a technical recession) and capital goods (which signals lower future growth).

And Mexicans are moving capital offshore at a rate that suggests they also worry that the cyclical downturn could turn into something more structural, with a decline in the investment climate pushing the economy into stagflation.

The responses to the Bank of America Merrill Lynch survey seem to prove that it is politics causing economic problems, rather than the other way around. Investors reported that “government decisions” are the biggest tail risk to Mexico – cited by 60% of all respondents.

It would be a good thing for the Pacific Alliance specifically, and Latin America more generally, if policymakers in Chile, Colombia and Peru could counsel the Mexicans back into orthodoxy.