Bond Traders Drug-War Anxiety Wanes on Pena Nieto: Mexico Credit
President Enrique Pena Nieto’s bid to reform tax and energy laws is directing investors’ attention toward Mexico’s economic prospects and away from its six-year drug war.
The cost to protect $10 million of Mexican debt against losses for five years using credit-default swaps fell to 0.84 percent, or $84,000 annually, on April 11. That’s the lowest in five years and compares with a price of $490,000 on March 2, 2009, when the drug violence intensified. Mexican credit-default swaps are now 0.28 percentage point cheaper than contracts protecting debt from Brazil, Latin America’s biggest economy, as the nation’s borrowing costs fell to an all-time low.
While Mexico’s attempt to defeat its drug cartels with military force has claimed more than 60,000 lives since December 2006 and the violence has shaved an estimated 1 percentage point from economic growth each year, Pena Nieto’s push to open the state-controlled oil industry and boost tax collection are luring record foreign investment to the country’s debt securities. Standard & Poor’s said March 12 it may raise Mexico’s rating because the prospect of reforms that bolster finances and fuel growth have improved under Pena Nieto.
“The perception of Mexico has been changing significantly,” Claudio Loser, a former Western Hemisphere director at the International Monetary Fund, who is now chief executive officer of research company Centennial Group Latin America, said in an interview from Washington. “There’s a perception that there’s a better possibility of modifying things to improve the economy. Not that the situation is much more improved overall, but the perception of insecurity is not in the headlines to the extent it was two years ago.”
Pena Nieto’s press office declined to comment about the shifting views on security.
“Obviously, as you carry out a series of important reforms, this will be a positive point about information and perception,” Deputy Finance Minister Miguel Messmacher said in an April 18 interview.
Pena Nieto, who took office on Dec. 1, has said he’ll crack down on the most violent crimes and use more intelligence and less confrontation to reduce the number of murders, kidnappings and extortion. His administration also has “implemented a new communications strategy on violence and security that’s reduced the emphasis that had been given to the ‘war against crime,’” the Interior Ministry said in an Apr. 13 statement, paraphrasing a speech by Jose Carreno Carlon, an official from a government cultural agency.
Killings related to the drug war fell 14 percent in the four months since Pena Nieto took office, from the same period a year earlier, the Interior Ministry said April 10. Milenio newspaper, which tracks drug violence in a monthly study, reported a 2.5 percent drop over the same period, according to data supplied by the newspaper in an e-mail.
Communities in parts of southern Mexico have armed themselves and kidnapped law-enforcement officials, saying police can’t protect them from cartels.
Pena Nieto’s efforts to break state-owned Petroleos Mexicanos’s monopoly on the oil industry and senate passage of a bill to boost competition among telecommunications companies have prompted foreigners to boost holdings of government peso bonds to a record $91 billion, according to central bank data.
Yields on government peso debt due 2024 have tumbled 84 basis points, or 0.84 percentage points, this year to a record low 4.58 percent.
“To give people security, you need to have a stronger economy,” Alejandro Silva, who helps oversee about $800 million in emerging-market assets at Silva Capital Management, said in a telephone interview from Chicago. “He’s doing a good job of keeping the subject of the economy in the actual front page of the agenda, as opposed to focusing on the negativity of continued violence.”
Narcotics-related deaths more than doubled in 2009 as then- President Felipe Calderon’s crackdown increased competition between gangs for the best supply routes to the U.S.
In a report in December that year, the U.S. Joint Forces Command said Mexico is “under sustained assault” from drug cartels and listed the nation along with Pakistan as at risk of collapse. In 2010, the same organization, which was created to improve coordination among the military services and disbanded in August, said stability in Mexico was central to U.S. security, without repeating the failed-state warning.
Credit-default swaps on the nation’s debt surged in 2009 as deteriorating security combined with a record low peso and plunging exports to erode confidence in the country. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.
Enrique Alvarez, the head of Latin-America fixed income research, says that Mexico’s security risk hasn’t vanished and an outbreak in violence in tourist areas could still push bond yields up about 0.2 percentage point.
“You have an outright security concern,” Alvarez said in a telephone interview from New York. “This is not a trivial issue. This is a fundamental issue at hand in the overall outlook for Mexico.”
The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries rose three basis points to 174 basis points at 1:44 p.m. in Mexico City, according to JPMorgan Chase & Co. The spread hit 485 basis points in March 2009.
The peso rose 0.1 percent to 12.2641 per dollar.
Yields on interbank rate futures due in December, known as TIIE, fell 7 basis points yesterday to 4.12 percent.
The drug war in Mexico has reduced the nation’s economic growth by about 1 percentage point annually, Calderon’s administration estimated. The national statistics agency said violence including drug-related crimes slashed 0.8 percentage point from growth, according to a Dec. 17 study.
The economy expanded 3.9 percent last year, and Pena Nieto’s reforms may help boost growth as much as 1.5 percentage points, according to Nomura Holdings Inc.
“There was definitely this cautiousness about doing business in Mexico, and even traveling” a few years ago, Roberto Sanchez-Dahl, who helps manage $1.6 billion in emerging- market debt at Federated Investment Management Co., said in a telephone interview from Pittsburgh. “Mexico seems to have a much better outlook, because there’s growth and there’s dynamism on the political side.”