Mexico Growth Beats Brazil Slowdown as Yield Gap Keeps Widening

  • Mexico risk perception relative to Brazil at lowest since 2004
  • BBVA, Lumen Advisors predict Mexico will retain advantage

Mexico’s widening advantage over Brazil in the overseas bond market, already the biggest in a decade, shows no signs of abating in 2016.

The extra yield investors demand to hold Brazil’s dollar-denominated debt due in 10 years instead of Mexico’s swelled to 3.4 percentage points last month after Fitch Ratings handed Brazil its second junk grade. The gap, still near its widest since 2004, shows a reversal from as recently as 2013, when the South American country was viewed as safer.

Mexico is luring investors with steady growth driven by surging demand in the U.S. for the consumer goods turned out in its industrial heartland, while Brazil’s dependence on commodity exports to China saps growth in Latin America’s largest economy. With Brazil’s fiscal accounts deteriorating amid a sweeping corruption scandal enveloping its government and some of its biggest businesses, Mexico is looking like the much better bet this year, according to the local unit of Banco Bilbao Vizcaya Argentaria SA.

“The environment favors the Mexican government debt against that of Brazil both in terms of credit risk and for economic factors,” said Ociel Hernandez, a strategist with the BBVA unit known as Bancomer, which recommends buying the Mexican dollar bonds. “Mexico is growing very slowly, but in the end its growth is very connected with the U.S.”

Brazil is forecast to post its longest recession since at least 1901, with projections calling for the economy to contract 2.95 percent this year after shrinking 3.71 percent in 2015. Inflation topped 10 percent last year and the real posted the biggest losses among major currencies, while the government struggled to pass measures aimed at pulling the country out of its slump amid efforts to impeach President Dilma Rousseff.

The peso declined 0.5 percent Monday to 17.3512 per dollar at 1:23 p.m. in Mexico City.

While Mexico’s economic growth has disappointed analysts expecting an investment-fueled boom after the country moved to open up its energy industry to foreigners, analysts see the expansion accelerating for four consecutive years through 2017. Inflation is at the lowest in almost 50 years, and local borrowing costs are one-quarter those in Brazil. The economy, Latin America’s second-largest, grew 2.5 percent last year, forecasts show.

Mexico’s fiscal situation is poised to improve as the government moves to expand tax collection, according Simon Nocera, chief investment officer at Lumen Advisors LLC. Finance Minister Luis Videgaray said in November that a the smaller Mexican deficit laid out in the government’s budget for 2016 will help shore up the economy. The nation’s 10-year dollar debt now yields 3.26 percent less than Brazilian bonds.

That gap is “definitely going to expand,” Nocera, a former economist at the International Monetary Fund, said from Brasilia. “You’re going to see a widening of the spread for two reasons: Brazil will get worse and Mexico will get better.”

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