AMLO’s Austerity Pitch Fizzles With Investors as Bonds Lag Peers
(Bloomberg) -- Mexican bonds are underperforming peers as an austerity drive by left-wing President Andres Manuel Lopez Obrador threatens to deepen the economic damage from the coronavirus pandemic.
AMLO, as the president is known, has steadfastly resisted calls for major fiscal stimulus or to bail out the country’s flailing businesses, even as Latin American peers pump billions of dollars into their economies.
It’s a strategy that has kept a lid on the budget deficit, while helping push the economy towards its steepest recession in a century. As concern mounts in the rest of the region over uncontrolled fiscal expenditure, in Mexico a growing chorus of investors and analysts say the spending restraints threaten to cripple companies, destroy investment and undermine long-term growth.
The policy “risks creating a bigger hit to potential output in Mexico than other Latin American countries,” said Jens Nystedt, a senior portfolio manager at Emso Asset Management in New York who reduced his exposure to both dollar and peso-denominated sovereign debt in Mexico last month. “Some fiscal loosening to buttress short-term growth would have been a better policy prescription.”
Mexican bonds have gained almost 20% from their March lows, less than their peers in Peru, Chile and even Brazil, where concern is mounting over the widening deficit.
Now AMLO is promising to even cut some government spending, reducing wages for government employees by as much as 25%.
Gross domestic product slumped 19% in the second quarter from the year earlier, compared with 7.3% in Colombia, 14.1% in Chile and 9.5% in the U.S. The International Monetary Fund expects the economy to contract 10.5% this year, more than its main peers in Latin America.
“Mexico’s fiscal prudence will do more harm than good,” said Alejo Czerwonko, an analyst at UBS in New York who said he is “cautious” on Mexican debt. “Extraordinary circumstances call for extraordinary measures.”
Mexico’s budget deficit doubled to $12.7 billion in the first half of the year from the same period in 2019. Brazil’s leaped 10-fold to $75.6 billion over the same period.
For some, that relatively stable deficit is a reason to stay in Mexico.
“We favor fiscal prudence over growth,” said Shamaila Khan, director of EM debt at AllianceBernstein in New York. “What is more important is that measures are taken to revive local confidence.”
But for many other investors, Mexico’s strong budget balance will probably be little consolation as the rest of the region returns to growth later this year or next.
“You could see a very prolonged period of low growth in Mexico as opposed to other Latam countries that are bouncing back much faster from the crisis,” said Erick Martinez, a strategist at Barclays in New York.
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