Latin Finance - September/October 2009 - 42

Mexico outlook Missed Opportunity While most believe Mexico will start to recover in 2010, a rebound is still not the most important factor for investors. Of greater concern is the possibility of a ratings downgrade. Shelly Shetty, senior director at Fitch, says fiscal reform will be key because Mexico’s eventual rebound will probably not be robust. “When the US is showing continued weakness . . . we should not be that optimistic about where Mexico’s [growth] curve might be,” she says. “Unless we see another batch of structural reforms . . . it’s still hard to see Mexico growing significantly in 2010.” She also criticizes the government’s failure to put aside more excess revenue during the boom in oil prices, saying this has limited Mexico’s ability to carry out counter-cyclical spending. Limited savings are “raising concern about the deficits and debt dynamic trajectory going forward,” adds Shetty. Mexico has boosted spending to counteract the downturn and aims to pour roughly 500 billion pesos into infrastructure this year. However, restricted credit from the private sector has postponed some projects, such as a proposed $5 billion container port in Baja California known as Punta Colonet. Economists argue the federal stimulus is too little to make much of a difference during the sharp downturn, but Messmacher defends the spending program. “The countercyclical measures have had a positive impact as we expected but the external shock has been stronger [than expected].” Fiscal Mountain With revenue flows tightening, Calderón’s administration is expected to submit a modest fiscal reform to congress in September along with a budget proposal for next year. Calderon’s business-friendly National Action Party (PAN) lost seats to the Institutional Revolutionary Party (PRI) in July’s mid-term elections and the prospects for the two blocs working together are unclear. Additionally, raising taxes is a tough sell in the midst of severe downturn. Messmacher does not divulge details of what a reform bill could look like, since negotiations with opposition lawmakers are underway. But he acknowledges that the initiative needs to be a plan “not just for next year but for the next couple of years. It needs to be convincing and put investors at ease.” Pimco’s Osses says that “both the executive power and the opposition are more fiscally responsible that what the market gives Mexico credit for.” This should “help ease market participants’ concerns on the fiscal dynamics and support a flattening of the local curve,” he adds. If negotiations fail, Messmacher says the government could limit spending and increase energy prices. The government does not need congressional approval to change prices for gasoline, electricity and other energy sources, so hikes there could help compensate for a lack of tax reform. “This wouldn’t be ideal,” Messmacher adds. “The ideal thing would obviously for different measures to be approved as part of [a reform package].” Shetty of Fitch says energy price hikes would be “a short-term measure and would highlight the gridlock in Fear of Commitment I n late July, Mexico’s Bolsa passed the 27,000 mark for the first time in over a year. Now investors must ask themselves: Does this Bolsa rebound represent a return to profits for corporate Mexico or just a temporary blip? The outlook on Mexican equities appears to be tainted by the economy’s rapid decline, coupled with a handful of companies’ problems with debt and derivatives. There is also a very high correlation between Mexico’s equity market and the US, which still looked fragile as of late July. Cemex, once a top star of emerging markets, has seen its shares rocked by volatility as profits dive and it struggles to renegotiate $15 billion in debt. Gruma, Vitro, Durango and Comercial Mexicana round out the ranks of humbled giants. At the same time, a handful have managed to remain steady or even gain some ground, including América Móvil, Wal-Mart de México, Televisa, Inbursa, Bimbo, Corporación Geo and Homex. Manuel Jiménez, an equity analyst with Ixe Banco in Mexico City, says the Bolsa may still continue climbing a little more, although he acknowledges that a more robust recovery is unlikely until things clearly turn a corner in the US. “I think the bolsa continues being a medium to long-term option due its relative risk” Jiménez says. “It will also depend on exactly how the economic side develops” He predicts a rebound may occur in a couple of quarters or within a year.” The perspective from abroad is far gloomier, however. “I think Mexico’s regarded as one of the least responsive emerging markets to the crisis, and correspondingly, is also one of the biggest sufferers because of its lockstep with the US economy,” says Christopher Ecclestone, equity strategist at Hallgarten, who notes that his firm has no Mexico holdings. He adds Mexico is “one of the last [emerging markets] that you’d want to go back into,” following the capital flight away from developing nations’ markets late last year. He says, however, that blue chips like América Móvil may see better results due to it being more geographically diversified, as Latin America’s leading mobile service provider. The company, controlled by Carlos Slim, has seen its shares rise to almost 30 pesos on July 23 after starting 2009 at under 22 pesos. Second quarter profit rose 27% to 22.5 billion pesos. Meanwhile, breadmaker Bimbo saw quarterly earnings rise 70% on US acquisitions and shares rallied to over 75 pesos on July 27, up from 60 pesos at the start of the year. Cemex, on the other hand has seen its shares bounce from a low of 6 pesos on March 9 to a high of 15 pesos on June 12, but still well below the company’s 2007 glory days, when shares traded above 40 pesos. Falling construction in main markets of Mexico, Spain and the US has hurt profits and the prospects for a recovery remain distant. -- Jonathan Roeder 42 LatinFinance September/October 2009

Latin Finance - September/October 2009

Table of Contents for the Digital Edition of Latin Finance - September/October 2009

Latin Finance - September/October 2009
Contents
Investment Banking Survey
Who Said That?
OTPP Investment Strategy
Central Bank Scorecards
Brazil Liability Management
Real Estate Equity Resurrected
Structured Finance Forecasts
Grim Outlook. Reform Required
Banorte Seeks to Grow
Peru Spending Hits a Block
BCP Sees Better Days
Caribbean Investment Report
Sustainable Banking
Legal Services Survey
Parting Shot
Latin Finance - September/October 2009 - Latin Finance - September/October 2009
Latin Finance - September/October 2009 - Cover2
Latin Finance - September/October 2009 - Contents
Latin Finance - September/October 2009 - 2
Latin Finance - September/October 2009 - 3
Latin Finance - September/October 2009 - 4
Latin Finance - September/October 2009 - 5
Latin Finance - September/October 2009 - 6
Latin Finance - September/October 2009 - 7
Latin Finance - September/October 2009 - 8
Latin Finance - September/October 2009 - 9
Latin Finance - September/October 2009 - 10
Latin Finance - September/October 2009 - 11
Latin Finance - September/October 2009 - 12
Latin Finance - September/October 2009 - 13
Latin Finance - September/October 2009 - Investment Banking Survey
Latin Finance - September/October 2009 - Who Said That?
Latin Finance - September/October 2009 - 16
Latin Finance - September/October 2009 - 17
Latin Finance - September/October 2009 - 18
Latin Finance - September/October 2009 - 19
Latin Finance - September/October 2009 - 20
Latin Finance - September/October 2009 - 21
Latin Finance - September/October 2009 - 22
Latin Finance - September/October 2009 - OTPP Investment Strategy
Latin Finance - September/October 2009 - 24
Latin Finance - September/October 2009 - 25
Latin Finance - September/October 2009 - Central Bank Scorecards
Latin Finance - September/October 2009 - 27
Latin Finance - September/October 2009 - 28
Latin Finance - September/October 2009 - Brazil Liability Management
Latin Finance - September/October 2009 - Real Estate Equity Resurrected
Latin Finance - September/October 2009 - 31
Latin Finance - September/October 2009 - 32
Latin Finance - September/October 2009 - 33
Latin Finance - September/October 2009 - 34
Latin Finance - September/October 2009 - 35
Latin Finance - September/October 2009 - 36
Latin Finance - September/October 2009 - Structured Finance Forecasts
Latin Finance - September/October 2009 - 38
Latin Finance - September/October 2009 - Grim Outlook. Reform Required
Latin Finance - September/October 2009 - 40
Latin Finance - September/October 2009 - 41
Latin Finance - September/October 2009 - 42
Latin Finance - September/October 2009 - 43
Latin Finance - September/October 2009 - 44
Latin Finance - September/October 2009 - Banorte Seeks to Grow
Latin Finance - September/October 2009 - Peru Spending Hits a Block
Latin Finance - September/October 2009 - 47
Latin Finance - September/October 2009 - 48
Latin Finance - September/October 2009 - 49
Latin Finance - September/October 2009 - BCP Sees Better Days
Latin Finance - September/October 2009 - 51
Latin Finance - September/October 2009 - 52
Latin Finance - September/October 2009 - 53
Latin Finance - September/October 2009 - 54
Latin Finance - September/October 2009 - Caribbean Investment Report
Latin Finance - September/October 2009 - 56
Latin Finance - September/October 2009 - 57
Latin Finance - September/October 2009 - 58
Latin Finance - September/October 2009 - 59
Latin Finance - September/October 2009 - 60
Latin Finance - September/October 2009 - 61
Latin Finance - September/October 2009 - 62
Latin Finance - September/October 2009 - 63
Latin Finance - September/October 2009 - 64
Latin Finance - September/October 2009 - 65
Latin Finance - September/October 2009 - 66
Latin Finance - September/October 2009 - Sustainable Banking
Latin Finance - September/October 2009 - 68
Latin Finance - September/October 2009 - Legal Services Survey
Latin Finance - September/October 2009 - 70
Latin Finance - September/October 2009 - 71
Latin Finance - September/October 2009 - 72
Latin Finance - September/October 2009 - 73
Latin Finance - September/October 2009 - 74
Latin Finance - September/October 2009 - 75
Latin Finance - September/October 2009 - 76
Latin Finance - September/October 2009 - 77
Latin Finance - September/October 2009 - 78
Latin Finance - September/October 2009 - Parting Shot
Latin Finance - September/October 2009 - 80
Latin Finance - September/October 2009 - Cover3
Latin Finance - September/October 2009 - Cover4
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