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Peso free fall shows oil isn't Mexico's only problem

- An oil price slide and virus fears have hammered the peso
- Investors have refocused on key weaknesses in Mexico

By Aline Oyamada and Justin Villamil/Bloomberg

MEXICO CITY
Petroleumworld 03 20 2020

The Mexican peso is in free fall as an oil price drop turned investor attention to the nation's deeper issues.

The currency fell 2% to a record 24.2 per dollar on Thursday, extending its year-to-date decline to 22%, the third worst in the world -- only better than the oil-exposed Russian ruble and Norwegian krone. Since Feb. 17, the peso has posted just three days of gains.

It wasn't always this way. Last year, the peso was the third-best performer in the world and widely expected to continue gaining on a strong carry trade. Now, as oil sinks and the coronavirus spreads, Mexico's high rates can no longer paper over the cracks.

The peso's worst start of any year since 1995 underscores investor concern about the impact of lower oil prices on the nation's revenues. Mexico relies on Petroleos Mexicanos -- the state oil company -- for almost a fifth of revenue. Meantime, the viral outbreak has put the spotlight on the economy's lackluster growth. Before virus fears took hold, most analysts expected a gross domestic product rebound this year. Now, the consensus is for a contraction.

Danny Fang, a New York-based strategist at BBVA, says the virus adds to existing concerns about Mexico's growth and credit strength.

President Andres Manuel Lopez Obrador‘s response to the coronavirus outbreak isn't helping. While other countries in Latin America declared national emergencies, closed the borders and imposed curfews, Mexico hasn't yet taken severe control measures. In turn, Lopez Obrador gathered to celebrate the nationalization of Mexico's petroleum reserves and kissed and shook hands on stage on Wednesday.

Renewed pressure on the economy and on oil revenue has sparked worry that the strong fiscal position Lopez Obrador has defended through his term will be gradually eroded, and that the government will have to spend to kick start the economy or spend to rescue the national oil company. Pemex is already struggling under more than $100 billion in debt and has shown few signs of turning around more than a decade of production declines.

At the same time, market concern about the policies of Lopez Obrador himself, who campaigned as a left-leaning populist, have led to a drought in investment.

While such worries had faded for much of 2019, investors are less willing to forgive Mexico as global markets melt down. According to Fang, with investors seeking cash at all costs, nations in Mexico's precarious position don't look attractive anymore.


Story by Aline Oyamada and Justin Villamil from Bloomberg

bloomberg.com
03 19 2020

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