Mexican Peso Leads Global Drop After AMLO Rejected Stimulus

(Bloomberg) -- The Mexican peso led global currency losses Wednesday after President Andres Manuel Lopez Obrador rejected calls for fiscal stimulus to offset the impact of the coronavirus pandemic.

The peso sank as much as 4% amid a global sell-off, its third decline in four days. While economists forecast the economy could contract as much as 7% this year, the president, commonly known as AMLO, says he won’t step in to aid the corporate sector. That makes him almost unique among world leaders, and hasn’t gone down well with investors.

“We definitely need a fiscal stimulus package, in addition to the urgent need for monetary easing,” said Claudia Ceja, a strategist at BBVA in Mexico City. “If there’s failure to do so, it’s difficult to see an early exit from the coming recession.”

AMLO’s reluctance to boost spending has drawn parallels with Brazil, where President Jair Bolsonaro has downplayed the pandemic and failed to lead a nationwide response, triggering a similar market reaction. Brazil’s real has slumped 21% since mid-January, the third-worst performer among 24 emerging-market peers tracked by Bloomberg.

BBVA strategists said in a note Wednesday that without a plan of action, Mexico may lose its investment grade rating in the next two to four years. Last week, S&P Global Ratings cut Mexico’s sovereign credit score to BBB, two notches above junk.

Mexico’s financial stability council also warned in a statement that elevated volatility could lead to further downgrades.

Underperforming Peers

The Mexican peso has underperformed other emerging-market currencies since mid-February, after outshining peers in the first few weeks of 2020. Yet authorities have been slow to react as the oil-price slump and the spread of the coronavirus hammer Mexican assets. The currency has lost 20% of its value in the first three months of the year, the worst quarterly performance in half a century.

In his morning press conference today though, AMLO rejected the idea of a bailout and fiscal subsidies, while reiterating that he doesn’t want to use central bank reserves. Instead, Lopez Obrador said he would focus on the needs of the poor over the needs of big Mexican businesses.

“Economic sectors, not all, would like us to apply the same recipes as before,” the president said. “Facing the crisis -- IMF credit. Facing the crisis -- ask the people to tighten their belts. Facing the crisis -- fiscal subsidies. Facing the crisis -- salvage and rescue. No longer. We have to protect the poor first.”

Not all Mexican authorities have remained on the sidelines. Banco de Mexico auctioned $5 billion in dollar credit on Wednesday, tapping a swap line with the Federal Reserve that was established on March 19 to ease the liquidity crunch. AMLO also promised to unveil more health and economic measures on Sunday, though his stance has left Mexico behind most other countries.

Around the world “announcements of large fiscal and monetary stimulus have actually stabilized some currencies and other assets,” said Brendan McKenna, a Wells Fargo strategist in New York. “AMLO has been extremely slow to respond and do what he can to protect the economy and I think it shows in how the peso is performing.”

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