BlackRock Keeping the Faith in Mexico Bond Market Despite Woes

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Mexicans gave President Enrique Pena Nieto a dominant voting bloc in congress for the second half of his term, even after corruption allegations, student kidnappings and higher taxes sapped his popularity. Bondholders from BlackRock Inc. to Prudential Financial Inc. are giving him another chance, too.

Foreign holdings of Mexico’s peso-denominated bonds are close to a 15-year high, and BlackRock fund manager Gerardo Rodriguez, a former deputy finance minister, says he’s hanging on to the country’s dollar-denominated debt. Any outperformance would mark a reversal: Since the start of Pena Nieto’s term in 2012, Mexico’s dollar bonds have risen just 1.6 percent, less than half the average emerging-market gain.

The bet is that the country’s bonds are poised for advances as Pena Nieto, 48, implements laws he pushed through during his first years in office -- including opening the state-controlled oil industry to private drillers for the first time since the 1930s. The winning bids for the first oil projects are set to be disclosed next month.

“All of these reforms are leading to future stronger potential growth,” said Pablo Cisilino, a New York-based money manager for Stone Harbor Investment Partners LP, which oversees $55 billion in emerging-market debt. “The administration has delivered on what it promised.”

‘Tremendous Opportunity’

BlackRock has touted Mexico since at least 2013, when Chief Executive Officer Laurence D. Fink called the country “a tremendous opportunity.” The New York-based firm is the biggest holder of Mexico’s benchmark peso-denominated bonds due in 2024, data compiled by Bloomberg show.

Armando Senra, BlackRock’s head for Latin America, wrote in a post last month on the World Economic Forum’s website that legal changes Pena Nieto championed “have been important to strengthen investor confidence in the country.”

So far, there’s not much to show for the faith: Mexico’s fixed-rate peso-denominated bonds have lost 6.3 percent, in dollar terms, since Pena Nieto took office Dec. 1, 2012. The peso has depreciated 16 percent in the past year. On Wednesday it gained 0.8 percent to 15.4536 per dollar as of 11:26 a.m. in New York.

“Investors have been underwhelmed relative to expectations,” Cathy Hepworth, a money manager who helps oversee $32 billion including Mexico debt at Prudential, said in an e-mail. “A silver lining is that the policy framework remains very solid and predictable.”

Congressional Control

Pena Nieto also has passed legal changes that aim to open the nation’s telecommunications industry and boost lending. In the currency market, Mexico policy makers have been offering daily dollar auctions to bolster the peso, which gained 0.8 percent to 15.4585 per dollar Wednesday as of 6:55 a.m. in New York.

Based on initial results from Sunday’s elections, Pena Nieto’s Institutional Revolutionary Party, or PRI, and the allied Green Party won between 237 and 251 seats in the 500-seat lower house. The two parties currently have 241 seats, enough to pass almost all of their legislative priorities. When combined with the New Alliance Party that has also voted with them, the bloc would have 246 to 263 votes compared with the current 251.

Pena Nieto’s approval rating dropped to 39 percent in December, the lowest for any Mexican president since the mid-1990s, according to a poll by Mexico City newspaper Reforma. His popularity declined after dozens of students were slain in a southern town by a drug cartel linked to local officials and allegations arose of cronyism involving the president, his wife and the finance minister.

All three have denied any wrongdoing.

Foreign Holdings

The Finance Ministry said in an e-mail that foreign holdings of Mexican debt have remained stable and noted that demand from global investors has increased in auctions.

“The federal government remains committed to the implementation of the structural reforms to generate productivity and economic growth,” the Finance Ministry said.

The government has said the opening of Mexico’s energy industry will help bring in $62.5 billion of private investment and add at least 1 percentage point to annual economic expansion by 2018.

This year, gross domestic product is projected to grow just 2.7 percent, based on estimates compiled by Bloomberg. When Pena Nieto took office, growth was 4 percent.

“This economic deceleration has influenced the public’s mood,” BlackRock’s Rodriguez said in a telephone interview from London. “The content and potential of the reforms are there. It’s going to depend a lot on the success in execution.”

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