Mexico’s recent attempts to boost its economy might not have been well received, but the latest assessment on the reliability of markets has given the Latin American country the green light. Mexico’s risk premium is at a steady 196 basis points, according to the JP Morgan EMBI index, said analysts from Bank of America Merrill Lynch, Barclays and LatMark Asset Management. Mexico's rating is the lowest in Latin America, compared to 250 basis points for Brazil and 1,091 basis points for Argentina, and even compares favorably to other emerging markets, such as Ukraine (802) and Indonesia (370).
“Investors see Mexico's good economic fundamentals. If we compare it to different emerging countries and we contrast their deficits and short-term debt, Mexico is in very good shape,” said Carlos Capistrán, an analyst with Bank of America.
Mexico’s deficit is currently 1.8 percent of GDP, half that of Brazil. And according to Capistrán, Mexico has enough foreign-exchange reserves to cover its short-term foreign debt more than seven times over.
Capistrán also mentioned the recent energy reform proposal as another key factor shoring up investor confidence. Despite the controversy surrounding the proposal of President Enrique Peña Nieto, which would include opening state-owned Petróleos Mexicanos (Pemex) to private companies, foreign investors see this move as a step forward in making Mexico’s market competitive.
Moreover, Capistrán pointed out that if the reform ends up not happening, it could cause significant capital outflow, which could depreciate the peso from the current exchange rate of 13.6 for $1 up to 14.5.
Continue Reading Below
The analyst's opinion is echoed by the governor of the state of Colima, Mario Anguiano Moreno. The politician told Mexican newspaper El Universal that if the reform is not approved, the Mexican economy is in “serious risk of stagnation.”
“If the reform is not approved, we would stay as we are, with the same problems we have already. The modernization of the economy is necessary,” he added.