Trader worries about Mexican debt rise

Staff Writer
Columbus CEO

(c) 2014, Bloomberg News.

MEXICO CITY — Traders are no longer giving Mexico the benefit of the doubt when it comes to the nation's creditworthiness.

The cost to protect the nation's debt against non-payment for five years using credit-default swaps rose 0.19 percentage point in July, the first increase in six months, as economic growth fell short of forecasts and the central bank warned the expansion will probably remain sluggish. The jump, which reflects heightened concern over the nation's credit quality, was the biggest among four countries that share Mexico's BBB+ rating from Standard & Poor's, including Peru and Kazakhstan.

While the price of the contracts fell to a six-year low in June on speculation President Enrique Pena Nieto's sweeping changes to energy laws will lead to faster growth in coming years, traders are now demanding more default protection as Latin America's second-biggest economy struggles to gain momentum.

"The recovery has taken place at a much more sluggish pace than everybody had imagined," Alberto Ramos, the chief Latin America economist at Goldman Sachs, said by telephone from New York. "We thought we would be flying at 25,000 feet. There's a certain sense of disappointment that things are moving very slowly."

The economy expanded 1.4 percent in May from a year earlier, according to a report from the national statistics institute on July 24, less than the 2 percent median forecast in a Bloomberg survey. A day later, central bank minutes showed that most policymakers expect growth to remain below potential through 2015.

Agustin Carstens, Mexico's central bank governor, said on June 19 that the bank may need to reduce its growth expectations again after cutting its 2014 forecast to as little as 2.3 percent. Its previous estimate was for 3 percent to 4 percent growth.

After the economy expanded 1.1 percent last year in the weakest growth since contracting in 2009, it will grow 2.7 percent, based on the median estimate in a Bloomberg survey.

"The recovery is not as strong as we expected," Alexis Milo, the chief economist at Deutsche Bank, said by telephone from Mexico City. "I expect a sound recovery, but the consensus growth rate implies an acceleration rate that isn't realistic anymore. What I don't expect is for the economy to have a brusque shift into a higher growth rate."

Milo lowered his growth forecast to 2.3 percent from 2.6 percent in June.

Alejandro Padilla, a strategist at Grupo Financiero Banorte, said the increase in Mexico's bond risk has more to do with a rising aversion to emerging-market assets because of the crises in Israel and Ukraine than sluggish growth in the Latin America nation. Congressional passage of rules for implementing last year's changes to the country's oil laws, which will probably take place before September, will help boost investor confidence in Mexico, he said.

"Although we've had low growth to start the year, we expect an important rebound in the second half," he said by telephone from Mexico City. "Mexico is still being seen favorably in the eyes of investors."

The cost of protecting Mexico's government debt with default swaps fell to as low as 0.64 percentage point, or 64 basis points, on June 18 before rising to 0.86 percentage point Thursday, according to CMA Ltd.

A basis point equals $1,000 annually on a contract protecting $10 million of debt, or about $86,000 to secure that amount of Mexico's government debt.

Policymakers have chopped rates 1.5 percentage points since March of last year to a record low 3 percent to revive an economy that expanded less than analysts' projections in seven of the past eight quarters.

"We see a slowly materializing recovery," Goldman Sachs's Ramos said. "We haven't yet seen a significant acceleration."

_ With assistance from Rita Nazareth in New York.