Attention Bond Buyers: BofA Says Mexico’s Economy Getting Worse

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Bond investors have been bracing for a slowdown in Mexico as oil production falters and crude prices remain low. But things may actually be even worse.

Bank of America Corp., Standard Chartered Plc and Societe Generale SA expect the government will say Thursday the economy shrank 0.1 percent over the first three months of the year, the most pessimistic projections among 17 forecasters surveyed. The median estimate is for 0.3 percent growth, which would still be the weakest since 2013.

The gloom highlights how a production slump at Petroleos Mexicanos is upending the government’s attempt to kick-start growth after it abandoned a seven-decade oil monopoly. Pemex, which accounts for a third of government tax revenue, is now in danger of seeing output sink to the lowest since records began in 1990. That has traders souring on Mexico’s local-currency debt, which slumped in the past three months even as emerging markets rallied.

“What I’m worried about is falling oil production, which has been a negative surprise all year,” Carlos Capistran, the chief Mexico economist at Bank of America, said from Mexico City. “It’s hard to know how bad it’s going to get.”

Mexico City-based Pemex, which reported a $6.5 billion loss in the first quarter, has already reported 10 straight years of falling production.

‘Very Persistent’

President Enrique Pena Nieto is seeking to reverse the decline by allowing foreign producers to drill in the country for the first time since 1938.

“The oil output decline is something that you can’t solve in the short run,” Marco Oviedo, the chief Mexico economist at Barclays Plc, said by telephone from Mexico City. “The energy reform is supposed to change this trend, but in the meantime it’s a drag that is going to be very persistent.”

Mexico’s economy expanded 2.4 percent in the first quarter from a year earlier, based on the median estimate in a Bloomberg survey. That’s well below the pace needed to achieve the government’s 2015 forecast of 3.2 percent to 4.2 percent growth.

Government Forecasts

Finance Minister Luis Videgaray has said that the government would review its forecast after the statistics institute reports first-quarter data on Thursday. The government will probably need to lower its estimate, according to Oviedo and Capistran.

Mexico’s central bank on Tuesday cut its 2015 growth forecast for the third time in the past six months. It now predicts GDP will increase as much as 3 percent this year, down from the previous forecast of as much as 3.5 percent growth.

Rate swaps show traders are all but certain the central bank will wait until at least September to raise borrowing costs. Two months ago, the swaps indicated policy makers would lift rates by June.

To Alejandro Padilla, a strategist at Grupo Financiero Banorte SAB, Mexico’s growth is likely to pick up as the year goes on, boosted by stronger demand for cars and auto parts from the U.S. That means Mexican bonds will probably outperform other emerging-market debt, he said.

Falling Bonds

Mexico’s local bonds tumbled 1.3 percent during the past three months, compared with a 0.7 percent average gain for emerging-market countries, according to data compiled by Bloomberg. The peso fell 0.9 percent in the same period. The currency strengthened 0.1 percent to 15.1675 per dollar Wednesday as of 2:05 p.m. in Mexico City.

“There’s been an overreaction and eventually investors are likely to see Mexico as a better bet than most emerging-market countries and even some developed ones,” Padilla said in a telephone interview from Mexico City.

Still, Mexico’s economy looks likely to disappoint after missing analysts’ growth estimates in eight of the past 11 quarters, said Alonso Cervera, the chief Latin America economist at Credit Suisse Group AG.

“The economy has grown less than everyone was anticipating at the start of the year,” Cervera said by telephone from Mexico City. “You need oil output to stabilize so that it stops being a drag on growth.”

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