Mexico reached the month of October as the emerging market that registered the highest liquidation of debt bonds by foreigners, reveal preliminary figures obtained by the Institute of International Finance (IIF, for its acronym in English).
With preliminary information from the IIF on the behavior of portfolio investment towards emerging markets, it can be observed that foreigners unwound positions in Mexican debt bonds for 13.868 million dollars between January and October.
This settlement has been maintained for eight of the 10 months of the year and has not been able to recover even in the last four months, when the rate differential began to widen, given the rise made by Banco de México to its target rate. Only in October foreigners got rid of 2,252 million dollars, highlights the information of the Institute.
According to the “Capital Flows Tracker of the IIF”, which is the monthly report of the largest association of global financial institutions, “the increase in the performance of emerging markets, as a consequence of the change in the position of central banks to face inflation , has awakened a certain attraction for investors ”. Clearly, this has not been the case in Mexico.
By broadening the observation on the portfolios of 34 other emerging markets, it is exposed that only a third of them have registered debt securities liquidations.
According to the IIF, close to the divestment that Mexico has experienced is the 13.544 million dollars that foreigners have released in government bonds from the Czech Republic.
The other eight emerging markets that registered divestments are: Poland, South Africa, the Philippines, Lithuania, Slovenia, Indonesia, India and Mongolia.
Political aversion
The director for Latin America at Moody’s Analytics, Alfredo Coutiño explained that “the harassment of the federal government over private initiative” has been the origin of this aversion to risk that has guided capital outflows.
“Since the cancellation of the Texcoco Airport; the changes and revisions of contracts that resulted from the energy reform in the previous administration; the labor reform; the outsourcing law and the initiative to change the electricity sector have undermined the credibility of government policies for investors, who have come out to protect themselves, ”the specialist explained.
China receiver
In the IIF analysis, led by senior economist Jonathan Fortun, they explain that, in contrast, the emerging economy that has managed to attract the capital that left the emerging countries has been China.
Despite the aversion that the deterioration of the financial situation of the mortgage giant Evergrande did generate, during September and October, the Chinese market captured 81.393 million dollars in the same 10 months.
“Beginning of tapering will lead to capital outflows and will put pressure on the exchange rate”
The beginning of tapering will cause an adjustment in Latin American exchange rates due to the capital outflow that will occur when liquidity returns to its place of origin, warned the director for Latin America of Moody’s Analytics, Alfredo Coutiño.
By reducing liquidity, “the ant capital outflow that has been maintained in Mexico, whose origin is in internal factors, will worsen,” he stated.
It refers to the settlement of Mexican debt securities, which according to figures from the Bank of Mexico, has reached 268,000 million pesos between January 4 and October 21. In 2020 it was 257,238 million pesos.
Interviewed by El Economista, he explained that to help this return of capital be orderly, Banco de México can accelerate the rise in interest rates to leave it, at least, at 5.5% at the end of this year and thus widen the rate differential .
He commented that while the Federal Reserve kept “pumping” additional liquidity into the market, from March 2020 until last month, by buying US government assets and mortgage-backed securities, it facilitated the arrival of that same liquidity to emerging markets, where one of the biggest beneficiaries was Mexico.
“Those who had excess liquidity, were able to meet their financial commitments and looked for attractive markets to invest in, which were mostly emerging markets that offered the highest yields on government bonds. And Mexico was one of those who benefited from the attractiveness generated by a nominal rate of 4 percent ”.
This excess liquidity allowed the exchange rate to drop from 24 pesos, which reached 20 pesos in April last year, where it has fluctuated since then. And this same pumping caused Banco de México to lower the rate to 4%, which was the minimum it still reached in February of this year.
Order return
The reduction of purchases of bonds by the Fed will motivate an increase in the interest rates of the United States government bonds.
This will encourage the return of capital from Mexico and other emerging countries and will motivate a revaluation of the dollar by attracting more investment. The capital outflow will depreciate the Mexican peso and other emerging currencies.
Reference-www.eleconomista.com.mx