Your Mexican Portfolio
By Hector Morales
October 17, 2008 San Miguel de Allende


The Mexican banking crisis of 1995 vs. the current crisis in the US

The Mexican banking crisis was widespread and brought about by external forces. It originated from a drastic foreign exchange devaluation followed by a deep recession and a steep rise in interest rates. The US banking crisis is limited to a few institutions and was self-inflicted.

It originated from overbuilding in real estate and excessive credit exposure by a few financial institutions to a deteriorating mortgage portfolio.


The Mexican government faced the crisis with several programs targeted to depositors and creditors under the practice of assuring 100% of depositors. The US government initially allowed a leading institution to fail (Lehman), affecting depositors’ confidence in the system. It has then essentially guaranteed deposits in the financial system through the support of AIG and a bailout plan proposal just passed by Congress.

The Mexican banking crisis took several years to solve. Many banks were affected and many merged or closed. The US crisis is likely to be much more contained, quicker to solve and is limited to a few institutions.

The cost of the crisis in Mexico was absorbed over a number of years, without disruptions for government finances or growth. The effect could be similar in the US, given its ability to issue debt and the size of its economy in relation to the expected cost of the crisis.

In Mexico 87% of the government cost went to cover bank losses and the balance to support debtors. In the US this is still uncertain and under discussion between the Bush administration and Congress.

Except for investors in a few banks, Mexican bank shareholders lost most, if not all, of their equity. Surviving banks ended up, with few exceptions, with new shareholders, mostly foreign. US bank shareholders in troubled institutions are likely to suffer deep reductions in value and dilution and the institutions will end up with different owners, something that is already taking place.

Surviving Mexican banks reaped the benefits of consolidation and are doing very well; however, this took several years. This is likely to be repeated in the US, with a quicker turnaround.

Héctor Morales Ortiz is the director of Actinver San Miguel de Allende, hmoraleso@actinver.com.mx , 152-4046. 

Crisis effects in Mexico
From Actinver

As of October 10, financial markets have been suffering pressure on all fronts.

Banco de México has sold US$8.9 billion in three days buying pesos, trying to stabilize the foreign exchange market. The exchange rate has been volatile, hovering between 11.98–14.08 pesos per US dollar in the last two days, closing at 13.09 pesos.

Bond rates have been pressured upward 40bp, yielding 9%, with low liquidity. Spreads have widened.

The stock market lost 30% in value in dollar terms this week, with sellers almost at any price driving down prices indiscriminately. Particularly affected were companies with short-term maturities.

Derivative transactions caused blue-chip retailer Comercial Mexicana to enter bankruptcy proceedings, spooking investors in both equities and corporate debt. Comercial announced losses close to US$1.4 billion from derivative transactions tied to the forex. Other companies also announcing significant effects from derivative trading were Alfa, Cemex, Grupo Industrial Saltillo, Posadas and Vitro, depressing their values and casting a cloud over other issuers. Not all companies reported losses on derivative transactions; Bimbo posted gains.

The government’s crisis plan announced on Wednesday, October 8, did little to calm the markets. The plan contemplates investments in infrastructure, housing and the energy sector, which should benefit building companies, but this was not reflected in their stock prices, which continued tumbling.

Hacienda Minister Agustín Carstens recommended that Banco de México lower domestic interest rates, an action likely to take place next week.

We maintain our cautious view of investing in large cap (blue chip), defensive companies with healthy balance sheets, including AMX, BIMBO, FEMSA, GCARSO, GMODELO, KIMBER, TELMEX, TELEVISA, SORIANA and WALMEX.

Is investing in pesos one of the best recent opportunities?
From Actinver



As of October 14, the Mexican peso was trading against the US dollar around $13 pesos per dollar. Just a few weeks ago, the peso was trading below $10 pesos per dollar, a depreciation of 30% in a matter of days. Unlike the crisis of 1994, the last time we had a currency devaluation, the current economic outlook for Mexico is quite different, and we believe the peso should strengthen significantly in the following months. Here are some reasons why we believe this should happen:



1. Our external debt is around $US40 billion, and our reserves in US dollars amounts to close to $US85 billion, more than double the amount of debt.



2. High oil prices and remittances from Mexican workers in the US will continue to bring a constant and high level of dollars into the country.



3. The currency exchange works as a flexible, market-floating exchange, without government controls or restrictions (as it had in the past), which makes it more transparent.



4. The interest rate differential between Mexico and the US (Federal Funds overnight rate is at 1.50%, Mexico overnight rate is at 8.25%) makes it extremely attractive for foreign investors (mainly hedge funds) to take advantage of the so-called carry trade (borrow in US dollars, invest in Mexican rates and earn the spread between the rates).



5. The current depreciation of the peso is explained by two factors: the so-called flight to quality of global investors and stop losses of both foreign investors and Mexican companies that were “long” or heavily invested in pesos during the last weeks. This steep depreciation should be corrected in the very short term. 



Based on the factors mentioned above, we at Actinver strongly believe that this is a unique opportunity to benefit from the very volatile environment by investing in a very conservative strategy: you can buy one of our Fixed Income Funds such as Actimed or Lloydmax and hold those funds for a few months. You would get the double benefit of an expected appreciation of the peso while earning an interest of your money in pesos.

We expect the peso should go back to at least $11 pesos per dollar in the next months, which represents an 18% appreciation potential just by holding pesos against the US dollar.

Our funds have been behaving very well despite the recent turmoil. We don’t hold any positions in US banks or any other instrument that is at risk of defaulting. More than 50% of our funds are invested in Mexican government securities, with low durations and short-term horizons. 



Financial notes

The following notes on the impact of the financial crisis on the Mexican economy were compiled from articles posted on the fastest growing financial information network in the world, Bloomberg.com. 

Oct 8, Mexican Peso Falls to a Record on Outlook for Economy, Rates
By Michael Moore

Mexico's peso fell to a record low on speculation the global credit crisis will stall domestic growth, forcing the central bank to cut borrowing costs. 

The global credit crisis has already reduced some expectations for growth in Mexico, curbing demand for pesos.

The finance ministry will revise its forecasts for economic growth, inflation and the assumed export price for oil in its 2009 budget proposal before Oct. 20.

http://www.bloomberg.com/apps/news?<
pid=20601083&sid=a6G8eqIiLzUw  

Oct. 9, Comercial Mexicana Suspended From Mexico Trading After Decline
By William Freebairn

“Controladora Comercial Mexicana SAB, the owner of supermarkets and Costco stores in Mexico, was suspended from trading by the Mexican stock exchange following a 45 percent decline yesterday. 

The exchange said the company was suspended from trading while it responds to a request for information. Comercial Mexicana said yesterday it is in talks with creditors after the cost of its foreign-currency debt rose as the peso dropped this week.”

Oct. 10, Mexico Sells Record $6.4 Billion in Bid to Stem Peso's Rout
By Michael J. Moore and Jens Erik Gould

“Mexico's central bank sold a record $6.4 billion in the currency market today, stepping up its bid to quell a rout in the peso that threatens to bankrupt companies and ignite inflation in Latin America's second-biggest economy. 

Banco de Mexico has now sold $8.9 billion in three days, tapping into a near-record $84 billion of foreign reserves, after the peso plummeted to a record low. The peso gained as much as 4.7 percent after today's intervention, reversing an earlier tumble of as much as 6.1 percent. It has plunged 16.5 percent this month as investors sought the safety of U.S. dollars amid the worst financial crisis since the Great Depression.”

Oct. 14 Mexico's Peso Falls Amid Concern US Bank Plan to Take Time
By Michael J. Moore

“Mexico's central bank sold $8.9 billion of foreign reserves last week, including $6.4 billion on Oct. 10 alone, to stem the peso's rout. The sales pushed down the country's foreign reserves to $75 billion, the lowest in a year, the central bank said today. 

“The peso has also plunged as oil, Mexico's biggest export, tumbled. Crude oil dropped 0.4 percent today to $81.33 a barrel in New York Mercantile Exchange trading, leaving it down 45 percent from a record high of $147.27 reached on July 11. Oil accounts for 40 percent of the Mexican government's revenue.”

www.bloomberg.com/apps/news?pid=
20601086&sid=awtV8e4b8k_4&refer=latin_america 



Oct. 14 Mexico Budget Bill Proposes Largest Deficit Since ‘90 (Update2)
By Adriana Lopez Caraveo & Jens Erik Gould

Mexican lawmakers drafted a bill for part of the 2009 budget that proposes the first fiscal deficit in four years and the largest shortfall since 1990. 

President Felipe Calderon's government aims to boost public spending next year in order to create jobs and spur growth, buffering the economy against the global slowdown sparked by the collapse of credit markets. The higher spending comes even as the price of oil, which accounts for more than one third of federal revenue, falls from records reached earlier this year. 

The bill approved today by the finance committee assumes the price of oil exports will average $70 a barrel in 2009, $5 lower than the price proposed by the government. It also changes the forecast for the exchange rate to 11.7 pesos per dollar from the 11.2 pesos per dollar proposed by Calderon last week.

http://www.bloomberg.com/apps/news?pid
=20601086&sid=aa2N1iUk42I0&refer=latin_america