Bloomberg News

Pimco Leads Bullish Investors Backing Pena Nieto: Mexico Credit

November 30, 2012

When Enrique Pena Nieto becomes Mexico’s president tomorrow, he will be taking control of a country with more support from foreign investors than at any time in a decade.

Led by Bill Gross’s Pacific Investment Management Co., international investors now own 53 percent of Mexico’s $144 billion fixed-rate peso bond market, the highest proportion since February 2000. Record overseas buying propelled returns on peso debt to 19.6 percent in dollars this year, or eight times the advance in local-currency Brazilian bonds, pushing Mexico’s borrowing costs to an all-time low in July.

The 46-year-old Pena Nieto, who inherits a $1.2 trillion economy that grew faster than Brazil last year for the first time since 2006, has pledged to open the state-controlled energy industry to more private investment and bolster tax revenue. In the past decade, Mexico has almost doubled auto exports, tamed double-digit inflation and lifted about a fifth of its population into the middle class. Nomura Holdings Inc. says yields will fall to a record next year as Pena Nieto bolsters growth in Latin America’s second-largest economy.

Foreign investors “continue to like Mexico because they believe there’s a deeper story in terms of growth with Pena Nieto on the back of these reforms,” Benito Berber, a Latin America strategist at Nomura, said in a telephone interview from New York. Mexico’s economic outlook is “very appealing” for global bondholders, he said.

Yields Tumble

Yields on Mexican peso debt due in 2024 have fallen 236 basis points, or 2.36 percentage point, in the six years since outgoing President Felipe Calderon took office, to 5.53 percent. The yield, which touched a record low 5.10 percent on July 20, will fall to near 5 percent next year as Pena Nieto gets lawmakers, including those in his Institutional Revolutionary Party, known as the PRI, to back the reform proposals, according to Berber.

To push his policy agenda, Pena Nieto plans to name today Luis Videgaray, an economist trained at the Massachusetts Institute of Technology, as the nation’s finance minister and former trade negotiator Ildefonso Guajardo as economy minister, two people familiar with the announcement said. Videgaray, 44, headed Pena Nieto’s transition team and served as his finance chief when he was governor of Mexico state from 2005 to 2011, winning an upgrade in the region’s debt to investment grade.

Economy Performance

The economy will grow 3.8 percent this year, compared with 1.5 percent for Brazil, 2.2 percent for the U.S. and a 0.5 percent contraction in the euro area, according to the median forecast of analysts surveyed by Bloomberg. Mexico’s growth comes in spite of a drug war that has cost more than 57,000 lives since Calderon sent the army to take on the cartels six years ago. The violence shaves 1 percentage point off annual gross domestic product, according to government estimates.

Mexico’s stock market has surged under Calderon, with the IPC Index (MEXBOL) recovering from a two-year low reached in October 2008 as the economy shrank at the start of the worst slowdown in a decade. The measure has more than doubled since then and climbed to a record last month.

The nation’s access to cheap energy, low wages and proximity to U.S. consumers are sparking a manufacturing boom that has lured investment from Ford Motor Co. to Bombardier Inc. (BBD/B) and is on pace to boost exports to a record this year.

Car Boom

Over the past two years, automakers have said they plan to pour an additional $7.8 billion into plants in Mexico, according to Sean McAlinden, a labor economist with the Center for Automotive Research in Ann Arbor, Michigan. Nissan Motor Co. is spending $2 billion to build its third plant in Mexico, while Honda Motor Co. is investing $800 million in its first large Mexican assembly plant. Mazda Motor Corp. is building a $500 million factory. Dearborn, Michigan-based Ford said in March it was planning $1.3 billion in plant upgrades in Mexico.

Volkswagen AG’s Audi unit is building the nation’s first luxury-car factory.

“All of the conditions to grow with more vigor are there,” Agustin Coppel, the billionaire chairman of Coppel SA, a countrywide network of 1,000 stores where low-income shoppers buy goods such as smartphones and Lacoste perfumes on credit, said in a Nov. 12 interview in Queretaro. “There’s potential, and I hope that energy reform comes quickly so it can be a lever for productivity and growth in the country.”

Private Investment

Pena Nieto has said he favors allowing more private investment in the nation’s energy sector and accelerating Mexico’s development of shale gas reserves and deep-water oil deposits as state-owned Petroleos Mexicanos seeks to reverse seven years of declining crude production. Depending on their scope, his plans may require changes to at least one article of the constitution drawn up in 1938 when the government of PRI President Lazaro Cardenas seized oil fields and assets belonging to British and U.S. companies.

A fiscal overhaul would help boost tax revenue that equaled 19 percent of gross domestic product in 2010, the lowest among 34 nations in the Organization for Economic Cooperation and Development.

Calderon’s National Action Party, known as the PAN, has pushed for similar changes during his six-year term, only to be blocked by the PRI. Gustavo Madero, the PAN’s president, reiterated on Nov. 24 that his party will work with the PRI to pass the overhauls that it proposed under Calderon.

Pena Nieto may face resistance to his energy reform agenda from the oil workers’ union, said James R. Jones, a former U.S. congressman and ambassador to Mexico under President Bill Clinton.

Antitrust Agenda

Pena Nieto has said he also wants to spur more business competition and to give antitrust regulators more power. Billionaire Carlos Slim, the world’s richest person, controls 80 percent of Mexico’s landlines and 70 percent of its mobile-phone lines through America Movil SAB. (AMXL) Grupo Bimbo SAB controls the majority of the packaged bread industry, while Grupo Televisa SAB and TV Azteca SAB represent a broadcast television duopoly.

Central bank governor Agustin Carstens said last month that the lack of competition pushes up prices for goods bought by Mexican consumers. The social benefits from breaking the monopolies could help lower inflation and benefit the nation as much as the North American Free Trade Agreement that was implemented in 1994, he said.

Nafta helped spur a sixfold increase in Mexican exports to the U.S., and the economy has almost tripled since it took effect.

“The welfare gains in terms of applying stronger laws in that respect would be very useful,” Carstens said at an event in Minneapolis on Oct. 26.

Pimco View

Pimco, the biggest holder of Mexican fixed-rate debt due in 2024, said that the Latin American country’s debt was one of its favorites on Oct. 3, three months after Gross, the firm’s co- chief investment officer, said he preferred them over German bunds. Similar maturity securities from the European country yield 1.48 percent.

Mexico’s lower debt levels and higher yields made investing in the nation’s debt instead of German notes a decision so obvious to Gross that he ended his June comments on the Pimco Twitter account with the word “duh.”

Pimco spokesman Mark Porterfield said that the firm’s officials weren’t available to comment further.

The International Monetary Fund in April projected Mexico’s government debt will equal 43 percent of gross domestic product next year, versus 110 percent for the U.S., 77 percent in Germany, 91 percent for the euro area and 77 percent overall for the Group of 20 nations.

Mutual funds, pensions and hedge funds outside Mexico tracked by EPFR Global have poured a record $7.94 billion into the nation’s debt securities this year through Nov. 21, according to the Cambridge, Massachusetts-based research firm.

‘Consensus Trade’

Mexico “is probably the biggest consensus trade in the investment community,” Alejandro Silva, who helps oversee about $800 million of emerging-market assets at Silva Capital Management in Chicago, said in an e-mailed response to questions. “The ability with which you can get in and out of the market, the size, the laissez-faire approach to capital markets just make it the best place in Latin America to invest.”

Mexico’s 4.5 percent interest rate compares with near-zero benchmarks in the U.S., Europe and Japan.

Alejandro Diaz de Leon, Mexico’s head of public credit, said in telephone interview from Mexico City on Nov. 22 that a lack of barriers for foreigners entering the fixed-income market has helped the country obtain lower funding costs and deepen its local market.

Default Swaps

The cost to protect Mexican debt against non-payment for five years was little changed at 100 basis points at 1:42 p.m. in Mexico City, data compiled by Bloomberg show. The 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. The price was 47 basis points before Calderon took office Dec. 1, 2006.

The peso was little changed at 12.9410 per dollar. It has fallen 15 percent during Calderon’s term.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries was unchanged at 167 basis points, according to JPMorgan Chase & Co.’s EMBI Global Index.

Pablo Cisilino, who helps oversee about $50 billion of emerging-market debt, including Mexican assets, at Stone Harbor Investment Partners, says that while investors expect Pena Nieto to push through legislative changes, there’s a risk that the new administration will fail to achieve the reforms.

‘See an Impact’

“If he doesn’t come through and he doesn’t deliver, you’ll start to see an impact at some point” on the bond market, he said in a telephone interview from New York.

Responsible economic management has been a hallmark of the Calderon administration, said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington.

“If Pena Nieto can continue to follow those conservative approaches, he’ll have a huge benefit over the next six years,” Wood said in a telephone interview. “Mexico has every possibility of really booming as an economy.”

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Ben Bain in Mexico City at bbain2@bloomberg.net

To contact the editors responsible for this story: Michael Tsang at mtsang1@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net


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