Photographer: Jam Media/LatinContent/Getty Images

Mexico Set to Be Big Winner From Brazil's Second Junk Downgrade

  • Investors may sell Brazil assets after losing investment grade
  • Many investors require two investment grade ratings to buy

Brazil’s misfortunes may just be Mexico’s blessing.

On Wednesday, Fitch Ratings handed Brazil its second junk rating, which could force institutional investors whose bylaws prevent them from holding such securities to dump them. The decision sent the Brazilian real tumbling the most in emerging markets and spurred a selloff in its overseas debt.

As investors adjust portfolios, the country seen as best-positioned to benefit is Brazil’s rival, Mexico. The second-largest economy in Latin America is less dependent on commodities than most in the region and has the closest ties to the U.S.

“Everyone gets the benefit, but more so the higher-quality credits,” Gerardo Rodriguez, a money manager at BlackRock Inc. and a former deputy finance minister for Mexico, said in an e-mail. “Mexico is a solid macro story” and is likely to be one of the chief beneficiaries, he said.

Chile, Philippines and Malaysia may also see inflows tied to the downgrade, he said. Brazil’s junk status may spur investors to sell $1.6 billion of the nation’s bonds, Barclays Plc economist Bruno Rovai said in an e-mailed note Wednesday.

Fitch’s move comes three months after Standard & Poor’s cut the country to the equivalent level. Mexico’s dollar-denominated bonds are rated BBB+ by both Fitch and S&P, three levels above Brazil’s new rating of BB+. Since the S&P announcement Sept. 9, Brazil’s currency has weakened 2.8 percent, twice as much as the peso’s decline.

Brazil is facing the longest recession since the 1930s, with inflation more than double the central bank’s target. Worse, the country’s politicians are locked in a political stalemate as lawmakers debate whether to impeach President Dilma Rousseff and a corruption scandal pulls in senators and lawmakers as well as prominent executives and bankers.

Mexico, on the other hand, is the only country in Latin America with below target inflation. Growth, while modest, is set to accelerate next year to 2.8 percent from 2.5 percent in 2015. President Enrique Pena Nieto’s initiatives to foment competition and to open up the country’s oil industry seem to be working, with consumer prices rising at the slowest pace in decades and a 100 percent take-up in the latest auction of oil rights.

Investors have favored Mexico this year. While Brazil’s real has plummeted 32 percent this year, the second-most among 31 major currencies tracked by Bloomberg, the peso has fared relatively better, slipping 13 percent. The Mexican currency rose 0.2 percent to 17.0124 per dollar as of 10:31 a.m. in New York.

It now costs 3 percentage points more to insure Brazil’s bonds against a default for five years in the swaps market. That’s about five times the average premium for the past five years and a reversal from as recently as 2011, when it was cheaper to insure Brazil’s notes.

“It’s the natural destiny for flows forced to leave Brazil," said Rafael Elias, the head of emerging-market strategy at Cantor Fitzgerald. “Mexico is the sovereign credit that looks strongest now out of Latin America."

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