Mexican Peso, Bonds Jump After Lopez Obrador's Solid Budget Release

(Bloomberg) -- Mexican bonds and the peso rallied after a budget proposal by President Andres Manuel Lopez Obrador reassured investors that his left-leaning administration would remain fiscally responsible.

Mexican Peso, Bonds Jump After Lopez Obrador's Solid Budget Release

The Mexican peso rose 0.7 percent, the second-best gain in emerging-markets behind Poland’s zloty, while yields on the 10-year U.S. dollar sovereign bond dropped by 4.2 basis points. A provision in the proposal to boost state oil company Pemex’s budget by 26 percent sent its bonds soaring, with yields on its debt maturing in 2027 plummeting 52 basis points to 6.62 percent. Stocks failed to join the rally, with the benchmark index slipping 0.8 percent.

Mexican Peso, Bonds Jump After Lopez Obrador's Solid Budget Release

Mexican assets slumped after Lopez Obrador’s decision in the wake of his landslide victory to scrap the capital city’s partially built $13 billion airport and the president stoked uncertainty by holding referendums on his own pet infrastructure projects. The Mexbol index dropped almost 17 percent this year, while the peso weakened about 7 percent this quarter alone, the worst performance among major currencies.

The budget proposes a primary surplus of 1 percent of GDP next year, eclipsing the current year’s expected 0.8 percent surplus. It incorporates spending on the new president’s key campaign promises, including social programs and infrastructure projects, while relying on consensus assumptions for economic conditions next year.

"In general, this is an austere budget," said Claudia Ceja, a strategist at BBVA in Mexico City. It relies on "assumptions that can be achieved. There are risks related to a lower oil platform and lower growth, but these are inherent risks in the budgets presented every year."

Granted, some investors may wait to see how the budget is implemented through the year. Goldman Sachs Group Inc. economist Alberto Ramos wrote in a note on Monday that the impact of a planned tax cut in northern border towns could be underestimated, and that there are non-trivial risks of a gradual erosion of the nation’s fiscal position. Lopez Obrador’s decision to

cancel a $13 billion airport in late October may prove reason enough to keep a close eye on the new president’s policy decisions.

"The budget was well received," said Jesus Lopez, a strategist at Banco Base in Monterrey. "But the market will continue reacting to other types of not-so-positive news, such as the airport project."

©2018 Bloomberg L.P.