Investors in Mexican bonds are taking a cautious breath of relief after nearly three years of being at the mercy of the often capricious policies of President Andrés Manuel López Obrador.
Mexican peso-denominated bonds rose this week after support for the ruling coalition fell in the midterm elections, and benchmark 10-year bonds rose 0.2 cents to more than 108 cents, trading near the highest level. from April 15. The debt of Braskem Idesa, a petrochemical company that has been the target of López Obrador’s initiatives, also extended recent gains, while sovereign dollar bonds reached their strongest level since February.
In the elections, López Obrador’s ruling coalition lost its supermajority in the Lower House, clipping the president’s wings for the second half of his term. On Monday, the peso was the world’s best-performing currency and has since risen to a six-month high, while the Mexican Stock Exchange’s stock index was among the best-performing in the world when votes were counted. Everything indicates that the worst fears of the operators about the current Administration remained in the past.
“AMLO is weakened, which reduces his ability to make constitutional changes, but at the same time he is not dejected, which means he is not a dangerous wounded animal,” said Edwin Gutierrez, portfolio manager at Aberdeen in London. “It was the best result we could have hoped for.”
Gutierrez said he would maintain his long-term position in the nation’s sovereign bonds, but he is not increasing it. Now that the elections are over, he said, operators will turn their attention to external factors, including the fate of a US infrastructure plan that can help Mexico’s economic recovery.
State enterprises
The election results are expected to control the more leftist tendencies of the López Obrador Administration, including its campaign to benefit state companies such as Petróleos Mexicanos and the Federal Electricity Commission, at the expense of private industry. CFE bonds stalled on Monday after a nine-day rally.
The initiative to benefit Pemex and CFE is currently suspended by the courts and the loss of the supermajority means that constitutional changes to reverse those court decisions are probably out of the question. Any amendment to the Magna Carta requires a two-thirds majority in both the Lower House and the Senate, something that López Obrador, known as AMLO, no longer has.
That’s good news for companies like Électricité de France and Italy’s Enel, which have questioned renewable energy projects in Mexico because of measures to protect state-owned companies from competition.
“The results allow governance to continue and, on the other hand, should limit some of the more controversial policies,” said Shamaila Khan, director of emerging markets debt at AllianceBernstein in New York.
unexpected turn
However, the risk presented by López Obrador is far from disappearing.
With coalition partners, AMLO’s Morena party still retains a majority in both houses of Congress and secured 11 of the 15 governor seats that were chosen in the elections, indicating that the president’s dominance in Mexico’s political landscape is far from over.
In addition, there is the unexpected turn of the elections. AMLO’s weakened congressional support may prove detrimental to long-term bonds.
The president has insisted on fiscal austerity in the face of the COVID-19 pandemic, more than any other country in Latin America, underpinning Mexico’s strong financial position and supporting bonds.
But after Sunday’s vote, AMLO needs the support of the Green Party and the Labor Party to obtain a simple majority in the Lower House, hampering attempts to pass any tax reform measures, said Luis Gonzali, portfolio manager of Franklin Templeton. Over time, these measures may be necessary to convince credit rating companies of the nation’s creditworthiness.
“Although it is not yet clear which factor will weigh the most, for now there is a lot of optimism in the fixed income market,” Gonzali said. “That optimism is likely to continue for a few more weeks.”
This week has been positive for the Mexican markets, and the peso has been among the best performing currencies in the last five days. On Wednesday, López Obrador announced that Treasury Secretary Arturo Herrera will be nominated to head the central bank and that Rogelio Ramírez de la O, his longtime economic adviser, will take his place. The peso briefly weakened after the news before pulling back.
Little data will be released in Mexico next week. The nation will report international reserves, which are down this year, and aggregate supply and demand figures for the first quarter. All eyes will also be on the Federal Reserve’s rate decision on Wednesday.
WHAT TO OBSERVE:
-June 15: International reserves
-June 18: Aggregate supply and demand
-Cemex proposes to sell hybrid bonds
-Mexico plans another sustainable bond sale this year
-Betterware requests a debt quota of 10,000 million pesos
-Consorcio ARA will sell 1,500 million pesos in local bonds in June
-Volkswagen Leasing de México will sell bonds for 2,000 million pesos on June 23
-Grupo Axo will hold calls with investors for bond in dollars
