IFR held its Mexico Capital Markets Roundtable on November 28, 2016, just weeks after Donald Trump defied expectations by winning the US presidential election on November 8.
Trump’s upset win sent Mexico’s markets into a tailspin. The country had borne the brunt of his negative rhetoric on the campaign trail, where he threatened to dismantle the North American Free Trade Agreement and build a wall along the US/Mexico border.
It was amid concerns of how a Trump presidency might impact economic growth in Mexico and limit access to hard-currency funding that IFR gathered some of the country’s leading bankers, CFOs and analysts to discuss the year ahead.
Few in the market had expected Trump to win the race to the White House, and this was reflected in the trading levels of the peso, a major barometer for political risk emanating from the US.
In the days leading up to the election, the peso strengthened to Ps18.29 against the US dollar from Ps19.36 as markets priced in a likely win for the Democratic candidate Hillary Clinton, only to fall back to Ps20.71 amid a knee-jerk reaction to the results.
This marked some of the steepest drops in the country’s currency since the ‘tequila crisis’ of the mid-1990s. Such volatility caused trepidation among market participants worried about the fallout for corporate Mexico and the country’s credit standing.
S&P, which revised the outlook on the country’s BBB+ rating to negative in August, will start assessing the sovereign’s ratings in the first half of 2017, as the true scope of Trump’s policies begins to take shape.
In late November, the consensus was that investors had thrown in the towel for 2016, closing the doors to any potential borrowers wishing to tap the market before year-end.
State-owned oil company Pemex upended the conventional wisdom on December 6, issuing a US$5.5bn three-part bond that drew over US$30bn in demand.
But corporate Mexico is still likely to face a tough year ahead, with borrowing costs on the rise. That is bad news for issuers wishing to pre-finance ahead of 2018, when Mexico faces its own potential electoral upheaval in the form of leftist candidate Andres Manuel Lopez Obrador, who has taken an increasingly strong position in the presidential polls.
In the US, meanwhile, the Federal Reserve looks set to continue its monetary tightening into 2017 after hiking rates in December. Yields on the 10-year Treasury jumped from 1.86% on the day of the election to as high as 2.59% last year.
For its part, Mexico’s central bank raised rates five times in 2016 to 5.75% as it sought to contain the inflationary effects caused by the weaker currency.
Indeed, the peso was at the front and center of discussions during this year’s roundtable. Yet unease about currency instability goes far beyond the volatility caused by Trump’s electoral victory.
The Mexican peso is now one of the most freely tradable currencies in the region. And while that has provided confidence to foreign investors who have piled into Mbonos, or local Treasuries, it has also allowed the currency to become a major hedging instrument for accounts taking bets far beyond Mexico’s shores.
As a result, the peso has suffered dramatic swings that don’t necessarily reflect the market’s views on the country’s underlying fundamentals.
The question is whether the costs of a free float outweigh the benefits (or vice versa). While roundtable participants had varying views on this point, most agreed that this was a policy issue of the upmost importance.
It also has consequences for the development of a peso-denominated debt market for corporates, which has largely been held captive by a handful of pension funds. Bankers have tested a variety of structures designed to entice foreign investors into this market, but to little avail.
Few international accounts have the time or the appetite to take on the currency and the credits risks involved. With the peso becoming more volatile in recent months, demand could wane further. An index tracking the sector could be the answer.
These themes and more were on the minds of some of the leading figures in Mexico’s capital markets, who sat down with IFR’s Paul Kilby in November to talk about the future of financing in the country. We hope you will find the discussion enlightening and informative.
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