Analysis: History may repeat itself for Mexico, Peru as Fed eyes exit
MEXICO CITY |
(Reuters) - "Mexico and Peru's popularity among foreign investors means they are among the emerging market economies most exposed to losses when the United States finally moves to take its foot off the monetary accelerator".
"History shows that when U.S. interest rates jump - widely anticipated when the Federal Reserve begins reducing its $85 billion a month bond purchases - new foreign investment in Peruvian and Mexican financial assets drops by almost two-thirds.
In what many see as a dress rehearsal, worries that the Fed might slow buying later this year pushed Mexican 10-year yields up almost 100 basis points in May. The rise was twice the jump in U.S. Treasuries".
"Bonds in Brazil, Colombia and Peru also sold off and major Latin Americancurrencies fell on average 5.5 percent on the mere hint of a limit to the cheap cash that has pushed many emerging markets to record highs.
Latin America has outperformed other emerging markets in attracting foreign investment over the last two years and economists say countries with the highest inflows may see the strongest outflows when the wind turns.
Mexico, with its close ties to the United States, has been the biggest magnet for Latin American portfolio flows since 2009, with foreign ownership of local bonds close to 40 percent. Peru and Chile lead taking all foreign flows into account".
Reuters' analysis of data shows that "a one percentage point rise in U.S. 10-year yields since 1995 is typically followed by a 63 percent drop in net, non-foreign direct investment inflows to Mexico. Taking inflows over the last 12 months, that would be equivalent to a $50 billion fall".
"In Peru, where foreigners own a whopping 57 percent of local currency debt, a comparable rise precedes a 61 percent drop in inflows, while a 40-48 percent fall could be expected in Chile, Colombia and Brazil, which has just dropped a tax on foreign investment in domestic bonds to attract more capital'
Peruvian Finance Minister Luis Castilla downplayed risks to his country from a Fed exit and welcomed the sol's easing from 16-year highs.
"We're a country that has been running fiscal surpluses," he told Reuters. "We are not a country that will need to be tapping markets such as other countries in the region. That gives us some comfort."
"But Peru is also pressured by slower growth in China, undercutting the high commodity prices that have buoyed its economy. The minerals exporter has just posted its first quarterly trade deficit in more than four years and economists are trimming growth forecasts.
To some investors, the sell-off in May was a wake-up call to those who had preached that emerging markets were the new global safe haven amid ongoing weakness in developed economies".
