The Bank of Mexico headquarters in Mexico City.
Mexico’s central bank (CB) unveiled around $31 billion in support for the financial system and cut borrowing costs in the country’s most decisive move yet to help the economy weather the coronavirus pandemic.
Banxico, as the Bank of Mexico is known, said it implemented the measures to “foster an orderly behaviour of financial markets, strengthen the credit channels and provide liquidity for the sound development of the financial system.”
The moves, which included cutting the bank’s benchmark interest rate by 50 basis points, were approved in a unanimous vote by the bank’s five-member governing board. The new overnight interbank interest rate stands at 6%.
Goldman Sachs economist Alberto Ramos said Banxico still has significant room to ease in coming meetings and still offer one of the highest carry trades across the emerging market landscape, as its spread versus rates in the United States remains attractive.
In a carry trade strategy, an investor borrows money in the currency of a country with low interest rates, such as the United States and some European countries, to buy bonds of a high-yield nation like Mexico.
Ramos forecast Banxico will cut the benchmark rate to 4.50% by end-2020.
Mexican President Andres Manuel Lopez Obrador is facing growing criticism for his reluctance to support businesses and jobs hurt by the coronavirus crisis with more aggressive relief measures.
Banxico said the liquidity and credit moves will support the functioning of the financial system with up to a total of 750 billion pesos ($30.8 billion). Coupled with previously announced measures, the support amounts to 3.3% of last year’s gross domestic product (GDP).
Banxico said the support would include a $250 billion peso ($10.3 billion) financing facility for commercial and development banks to boost lending to small and medium size businesses, as well as individuals.
Also, the bank said it will incorporate into its foreign exchange intervention arsenal hedge transactions settled by differences in US dollars in order to “provide orderly operating conditions in the MXN/USD exchange market, particularly during Asia and Europe trading.”
The Mexican peso is one of the most widely traded emerging market currencies and in recent weeks has depreciated sharply versus the dollar as fears over coronavirus batter investor appetite.
Finance Minister Arturo Herrera and Deputy Minister Gabriel Yorio attended the out-of-cycle Banxico meeting.
“We’re working with Banxico to permit the operation of currency hedges 24/7 and reduce the volatility of our currency,” Herrera said on Twitter.
Banxico forecast that during the first half of 2020, GDP in Latin America’s second largest economy could contract by more than 5% versus the same period in the previous year.
Mexico’s Business Coordinating Council, a private sector lobbying group, has warned that without government support the economy risks contracting 7% this year and shedding between 1 million and 1.2 million jobs. In 2019, the economy had already tipped into recession.
Ratings agency Moody’s on Friday downgraded Mexico’s credit rating due to a deteriorating economic outlook, saying the government’s responses had been “insufficient to effectively address both the country’s economic challenges and (state-oil firm) Pemex’s continued financial and operating problems.” Meanwhile, Mexican national oil company Petroleos Mexicanos joins a crowded high yield bond market as the largest fallen angel in history, just as investors have been eschewing risk and seeking stable assets to ride out the novel coronavirus pandemic.
Pemex had its wings clipped on Friday when Moody’s Investors Services followed Fitch Ratings in stripping the coveted investment-grade rating from tens of billions of dollars worth of its bonds.
The timing could not have been worse.
The proportion of high yield in the global $82.5 trillion bond market has nearly doubled since last year, to 6.7%, data from global financial industry association IIF shows, and more than $835 billion of high yield bonds have been issued in the 12 months ending March, near a record high.
These conditions exacerbate higher borrowing costs and balance sheet pressure for the world’s most indebted national oil company, investors said. Pemex last year lost $18 billion, and some fear a growing risk of default despite government backing.
Patti McConachie, a senior analyst at asset manager Columbia Threadneedle Investments, said the high-yield market will get even more cramped as global coronavirus shutdowns squeeze more companies.