Goldman Sachs GDP Cut Spurs Rate-Bet Delays: Mexico Credit

Governor of Mexico's central bank Agustin Carstens
Governor of Mexico's central bank Agustin Carstens. Photographer: Nelson Ching/Bloomberg

Mexican traders are postponing bets for interest-rate increases to August after Goldman Sachs Group Inc. and Bank of America Corp. lowered the country’s growth forecast amid concern the U.S. may relapse into recession.

Yields on futures for the 28-day interbank due in August, known as TIIE, sank 15 basis points in the past week to a record low 5.02 percent. The contracts indicate traders expect Banco de Mexico to leave its key rate unchanged at 4.5 percent until that month. They have delayed their estimates for a rate boost 14 times this year. In Brazil, traders are pricing in the possibility the central bank may lower borrowing costs by December after betting on an increase three weeks ago.

Mexico’s growth prospects are dimming after the economy in the U.S., the Latin American country’s biggest trade partner, grew less than forecast in the second quarter. Mexico is more likely to cut interest rates than raise them next year, Goldman Sachs economist Alberto Ramos wrote in a research note. Mexico is the only major Latin American country to keep its key rate unchanged in the past year as inflation holds near a five-year low.

“With the data where they are and inflation so benign, some are betting there could be an even longer pause,” Gabriel Casillas, chief Mexico economist at JPMorgan Chase & Co. in Mexico City, said in a telephone interview. “We expected a long pause.”

The yield on Mexico’s benchmark peso bonds due in 2024 fell 56 basis points, or 0.56 percentage point, in the past month to 6.5 percent, according to data compiled by Bloomberg. In Brazil, yields on similar-maturity government debt fell 13 basis points, or 0.13 percentage point, in the past five sessions while those on Colombian debt fell eight basis points.

‘Highly Dependent’

Goldman Sachs on Aug. 5 reduced its Mexican growth forecast for this year to 4.1 percent from 4.4 percent and its estimate for 2012 to 3.9 percent from 4.5 percent, citing weakening demand from the U.S. A day earlier, Bank of America cut its 2012 growth projection to 4 percent from 4.5 percent, while leaving its forecast for this year at 4 percent.

“Given the logistical proximity to the U.S., Mexico will always be an economy that is highly dependent on the U.S.,” Goldman Sachs’s Ramos said in a telephone interview. “There is not much they can do. When the U.S. is doing well, they benefit handsomely. When the U.S. is not doing so well, they are more exposed than other economies.”

‘Remain Cautious’

The U.S. economy, the destination for 80 percent of Mexican exports, grew at a less-than-forecast 1.3 percent pace in the second quarter following revised growth of 0.4 percent in the first three months of the year that was less than previously estimated, the Commerce Department said July 29. U.S. consumer spending grew 0.1 percent, the smallest gain since the second quarter of 2009, the final months of the recession.

Press officials at Mexico’s central bank didn’t return telephone calls seeking comment.

The Finance Ministry maintained its forecast of 4.3 percent growth this year and 4.2 percent in 2012, Miguel Messmacher, chief economist, said in an Aug. 5 phone interview.

“The different indicators of economic activity aren’t for the moment sounding any alarms, even though we have to remain cautious,” Messmacher said from Mexico City.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries rose 19 basis points to 160 at 6:01 p.m. New York time, according to JPMorgan Chase & Co.

The peso weakened 2.7 percent to 12.3253 per U.S. dollar. It’s up 0.1 percent this year.

Default Swaps

The cost to protect Mexican debt against non-payment for five years rose 24 basis points to 152, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Mexico’s economy will weather the slump in the U.S. and grow 4.8 percent this year, said Sergio Luna, head of economic research at Citigroup Inc. in Mexico City. Central bank Governor Agustin Carstens will raise the benchmark rate from 4.5 percent in January, Luna said.

“The market reaction has been disproportionate to the data in the U.S.,” Luna said in a telephone interview. “We don’t see a deterioration in the data that indicates any more difficulty for the U.S. markets. The data in Mexico has also been much better than that in the U.S.”

Rate Outlook

Economists expect Banxico, as Mexico’s central bank is known, to stay on hold until May, according to the median forecast of 21 economists in a survey distributed Aug. 4 by Citigroup Inc.’s Banamex unit.

Inflation slowed in Mexico to 3.28 percent in June from 3.69 percent a year earlier. It touched a five-year low of 3.04 percent in March.

The Mexican economy is still struggling to rebound from its 2009 recession, Goldman Sachs’s Ramos said. Mexico’s economy shrank 6.1 percent that year, the worst since 1995.

“The recovery from the brutal 2009 recession has been very moderate,” Ramos said. “Things never accelerated to gain a lot of momentum.”

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