Investor exodus: Mexico could see more outflow of foreign debt capital this year

A historic rout of sovereign debt flows from Mexico, which has marked two consecutive years of record figures, could be extended in the coming months by the hand of an expected increase in interest rates in U.S, which would also keep the domestic currency under pressure.

Last year, the nation saw 257.601 million pesos ($12.63 billion) out of its debt securities, amid greater risk aversion and the persistent advance of the pandemic, above the 2020 record of 257.239 million pesos. pesos, according to data from the central bank.

“It is very likely that this bleeding will continue in 2022,” predicted James Salazar, deputy director of analysis at the firm CI Banco, anticipating effects due to a tightening of the monetary policy of the Federal Reserve (Fed) from the United States.

In the first week of the year, the local government debt saw another 8,944 million pesos (US$ 439 million) flee, and that rate is expected to continue as long as the tail of the pandemic persists, although the president Andres Manuel Lopez Obrador has ruled out effects on the economy despite the increase in infections.

Local debt, which since the years following the 2008 crisis has benefited from an expansionary monetary policy in its northern neighbor that pushed rates to historically low levels, is now suffering from the prospect that the US central bank will begin to upload them from March.

The market anticipates at least three increases in the rate in the United States during 2022, from its current level of between 0% and 0.25%, which would go against emerging assets, such as Mexico’s debt, which, although they offer better returns are viewed as higher risk.

Analysts expect Banco de México to respond by raising its own to above 6.5% at the end of the year from the current 5.5%, according to a Citibanamex survey, at a time when inflation is at its highest levels since 2001.

Remittances and tourism

In the midst of the gale, the Mexican peso has also suffered from concerns about the rate differential and analysts believe that it could continue to suffer pressure. According to the Citibanamex survey, it would close 2022 at 21.60 per dollar, with a depreciation of 5.9% compared to its current level of 20,396 units.

Even so, last year the currency depreciated just 3.1%, much less than the rest of its peers in the region, encouraged by the reactivation of economic activity in the United States, Mexico’s main business partner, which helped mitigate the effect of capital outflows.

Local exports, one of the country’s main sources of foreign currency, recovered almost 20% between January and November 2021 compared to the 10% slump throughout the previous year, when lockdowns to deal with the pandemic hit the economy. global, according to official data.

In addition, remittances, mainly from the United States and which López Obrador sees as a blessing, go straight to scoring a historic year in 2021 after adding a record US $ 46,834 million between January and November.

Another element that has played in favor of the peso has been the continuous arrival of foreign tourists to the country, since the expenditure of international visitors totaled US$ 17,263 million in the first 11 months of last year, 78% more than in the same period of last year. 2020.

But at the domestic level, concerns also persist about a possible downgrade of the sovereign note and that controversial projects advance in Congress, such as a reform of the electricity industry that could inhibit investments in the sector.

“These are local factors that don’t help much and that contribute to us seeing these capital outflows,” said Alejandro Saldaña, an analyst at financial group Ve Por Más. “These months may still be difficult.”

But not all flows left the country. The stock market gained more than 20% in 2021, its best performance in 12 years, and the position of foreign investors in the stock market rose almost 13% to US$157,692 million compared to a drop of 6.3% in 2020. Analysts and operators said that there have been rearrangements in the portfolios in favor of the Mexican market.