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Media 042213 FNS-peso-debt

Monday, April 22, 2013

Mexican Peso Strengthens as Foreigners increase Debt Buying

Frontera NorteSur

Regular visitors to Mexico might have noticed that their dollars buy less this year than in the preceding few years. On top of price increases for food and transportation, the dollar-peso rate of exchange is much more favorable for the latter, with purchasers of the Mexican currency even finding that April's rates have dipped below 12 pesos for each dollar. Analysts say a brisk round of foreign buying of Mexican government debt in the form of bonds and treasury certificates has greatly pumped up the peso.

The reason for the injection of foreign debt investment? Mexican treasury certificates yield 3.81 percent in interest on an annualized basis, compared with U.S. T-bills that only net 0.06 percent interest on a monthly basis. In other words, investors in Mexico can earn 63.5 times the amount of money they make in the U.S. in an entire year's period.

Perhaps not surprisingly, the amount of internal Mexican government debt held by foreigners has increased 23 percent to a whopping 1.687 billion pesos. From last December 31 to March 25, the amount of foreign-held securities grew by nearly $10 billion. In the one-year period from February 2012 to February 2013, foreigners invested in government bonds at a rate eight times faster than did Mexican nationals.

Overall, foreigners now own between 37.3 and 37.8 percent of Mexican internal government debt. Japanese capital ranks high among the money gushing into the Mexican bond market. According to Bank of America Merrill Lynch, Japanese investors could increase their portfolio of Mexican bonds from a current holding of $2.7 billion to $8 billion by 2014.

2013 isn't the first time a bubble of foreign investment built up in Mexican government securities. From the end of 1991 to the spring of 1993, Wall Street firms tripled their holdings of Mexican Treasury securities to the tune of $9 billion. The investment spike coincided with the negotiation of the North American Free Trade Agreement and the push of Mexican President Carlos Salinas de Gortari to make Mexico a First World nation.

"There is no other country in the world where I can buy government securities that yield so much and are safe," quipped Robert Beckwitt, mutual fund manager, in April 1993.

Within the next two years, Mexico was successively unhinged by the slaying of Cardinal Posadas, the Zapatista revolt, the assassination of presidential candidate Luis Donaldo Colosio, the murder of Institutional Revolutionary Party Secretary Jose Francisco Ruiz Massieu, the peso crash, and the economic implosion of 1994-95 -- the worst crisis since the Great Depression.

Two decades later, the official talk is once again promoting Mexico's looming entry into the global club of powerhouse economies. Assuming office at a moment when Mexico is viewed as a sure-bet in world financial circles, the new administration of President Enrique Peña Nieto is unveiling ambitious plans to exploit energy resources, develop new infrastructure, and curb hunger.

How contradictory economic forces play out this year will be crucial for the short and medium-term fortunes of the Mexican economy.

Although the dollar experienced a slight rebound in relation to the peso in recent days, the prevailing tendency in exchange rates could bring the value of the US currency down to 11 pesos per dollar this year, said Alfredo Coutino, Latin American economic analyst for Moody's Economy. On the other hand, Miguel Calderon Ramirez, vice-president of the Chihuahua Economists Association, said he expects the dollar to begin rising again soon but not to exceed 13 pesos in value.

Based on Mexico's current position in the world capitalist economy, a strong peso delivers both positive and negative impacts, depending on the economic sector as well as the circumstances of individuals.

Analysts predict cheaper imports but less revenue from oil, migrant remittances and tourism -- three key pillars of the Mexican economy.

Manuel Guzman, economist for Ve por Mas Bank, contended that migrants are delaying the sending of remittances until a better exchange rate emerges. Other analysts blame the slide in remittances on a still-weak U.S. economy in which migrant employment in construction and other vulnerable industries has been adversely affected.

In January and February, migrant remittances in Mexico tumbled 7.1 percent, from about $3.3 billion to just slightly over $3 billion, in comparison with last year's figure for the same months. The most recent decrease continued an eight month slide.

Low-income households headed by women in migrant-sending states like Guerrero and Michoacan are especially sensitive to reduced remittance flows.

In U.S.-Mexican twin cities such as El Paso-Ciudad Juarez, merchants on the U.S. side should benefit from a strengthened peso -- if Mexican shoppers are willing to tolerate the often time-consuming border crossings -- while businesses on the Mexican side stand to lose customers to the competition across the border.

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Sources: La Jornada, April 15, 2013. Article by Juan Antonio Zuñiga. Nortedigital.com.mx/El Universal, April 15 and 16, 2013. Lapolaka.com, April 15, 2013. El Diario de Juarez/El Financiero/Reforma, April 12 and 15, 2013. Proceso/Apro, April 1, 2013.Article by Juan Carlos Cruz Vargas.

Reprinted with authorization from Frontera NorteSur, a free, on-line, U.S.-Mexico border news source; translation FNS.

Frontera NorteSur (FNS)
Center for Latin American and Border Studies
New Mexico State University
Las Cruces, New Mexico

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