Inflation ‘Under Control’ as Commodities Retreat: Mexico Credit
May 11, 2011, 5:46 PM EDTBy Jose Enrique Arrioja and Andres R. Martinez
May 11 (Bloomberg) -- Mexican President Felipe Calderon said the two-year rally in commodities prices is probably over, helping curb inflation even as the economy grows faster than the government forecast.
“I think we have under control that variable,” Calderon said yesterday in an interview at Bloomberg’s headquarters in New York. “You can combine economic growth and low inflation and you are under the best scenario.”
Mexican peso bonds are rallying the most in seven months and the peso is leading gains in Latin American currencies this year as the economy expands at the fastest pace in a decade while inflation holds near a five-year low. The central bank has kept its benchmark rate at a record low 4.5 percent since July 2009, in contrast to emerging economies such as Brazil, India and China that are raising borrowing costs to subdue inflation.
“I’d like to see lower interest rates in Mexico, but I think it’s not easy to see that, in particular because of the price of commodities right now,” he said. “I cannot see higher prices in terms of commodities. My perception is that very soon we are going to see some kind of peak on that.”
Commodities slid the most since 2008 last week and have declined 8.1 percent in the past month, paring the advance in the past two years to 46 percent, according to the UBS Bloomberg CMCI index. Calderon said Mexico closely monitors the price of corn, which has declined 13 percent in the past month on the Chicago Board of Trade, because it’s a staple food used to make tortillas.
Bond Yields
The yield on Mexico’s benchmark 10 percent bond due in 2024 fell 25 basis points, or 0.25 percentage point, in the past month, the most in a 30-day period since October, to 7.41 percent, according to data compiled by Bloomberg.
The yield gap between fixed-rate debt due in 2014 and similar-maturity inflation-linked bonds, a gauge of investor expectations of annual price increases in the next three years, shrank to 3.75 percent from 4.65 percent on March 7, according to data compiled by Bloomberg.
The 5.9 percent rally in the currency this year is a “natural phenomenon” as near-zero interest rates in the U.S. drive investors into countries with higher rates, Calderon said. The peso dropped 0.9 percent to 11.6479 per U.S. dollar at 5 p.m. New York time.
“If you analyze the beginning of the crisis until now Mexico’s peso is probably the currency that has appreciated the least,” Calderon said. “I feel very comfortable.”
Jim Craige, who helps manage about $20 billion at Stone Harbor Partners in New York, said the peso is set to rally for the next 12 to 18 months because it hasn’t yet reached the level it was at before the global financial crisis began in 2008. The currency rose to 9.85 pesos per U.S. dollar on Aug. 4, 2008.
‘Playing Catch Up’
“They suffered more than the rest and they are very closely linked to the U.S. in terms of growth,” he said. “Mexico right now is playing catch up.”
Craige is overweight on Mexico’s dollar and peso bonds.
The cost to protect Mexican debt against non-payment for five years was little changed at 98 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.
Yields on futures contracts for the 28-day interbank rate due in October fell one basis point to 5.03 percent.
Even as growth in Latin America’s second-biggest economy accelerates, annual inflation in April was 3.36 percent, about half the 6.51 percent rate in Brazil and near the central bank’s 3 percent target.
Economic Growth
Calderon said that Mexican economic growth quickened to more than 5 percent in the first quarter from 4.6 percent in the fourth. The country benefits from growth in the U.S., which buys 80 percent of Mexican goods sent abroad, he said.
“The demand in the United States looks to me like it’s starting to recover -- not enough, and my perception is that the American economy will suffer,” said Calderon. “However, even with a very small growth in the demand sector, it will be very positive for us.”
Mexico’s economy will grow 4.3 percent this year, more than a previous government estimate of 3.9 percent, Calderon said. The International Monetary Fund and private economists expect gross domestic product to expand by as much as 5 percent in 2011, he said. Mexico’s GDP grew 5.5 percent in 2010, the most in 10 years.
“I would like to see even better growth, but it’s not bad,” Calderon said. “Under the circumstances it’s a very good performance.”
Inflation Target
Central bank minutes showed Governor Agustin Carstens is confident that price increases will stay within the target range of 2 percent to 4 percent, giving him room to leave borrowing costs unchanged. Brazil raised borrowing costs 125 basis points this year to 12 percent to cool growth that has driven inflation beyond the upper end of its 6.5 percent target.
India raised its benchmark repurchase rate 100 basis points this year to 7.25 percent. China increased its benchmark lending rate 50 basis points to 6.31 percent.
Commodities prices are volatile and could contribute further to inflation if consumer-goods companies pass on higher costs, said Jaime Valdivia, who helps manage about $1.4 billion of emerging market assets at Bluecrest Capital Management in New York. Faster-than-forecast growth could also spur demand and lead to higher prices, he said.
‘Volatile’ Market
“Inflation can always give us a lot of surprises, especially when we are talking about a market that is as volatile and difficult as commodities,” Valdivia said. “You can’t lower your guard.”
Calderon said he’s fighting monopolies and seeking to open the oil industry to more private investment to improve competitiveness. Antitrust legislation he signed May 9 aims to end “monopolistic behavior” by big companies including ones in the telecommunications industry owned by billionaire Carlos Slim, the Mexican president said.
U.S. growth “will not be enough to translate to a significant uptick in inflation in Mexico,” said Stone Harbor Partners’ Craige. “We don’t think they are overheating at all.”
--With assistance from Julianna Goldman, Joshua Goodman and Karen Toulon in New York, Jonathan J. Levin, Jonathan Roeder, Adriana Lopez Caraveo, Carlos Manuel Rodriguez and Crayton Harrison in Mexico City and Thomas Black in Monterrey. Editors: Brendan Walsh, David Papadopoulos
To contact the reporters on this story: Jose Enrique Arrioja in New York at jarrioja@bloomberg.net; Andres R. Martinez in Mexico City at amartinez28@bloomberg.net
To contact the editors responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net
