ISDA Conference Center
10 East 53rd Street (at Fifth Avenue), 8th Floor
New York City
3:30 p.m. Registration
4:00 p.m. Panel Discussion
Sovereign and Corporate Perspectives on Mexico
Alberto Ramos (Goldman Sachs) - Moderator
Carlos Serrano (BBVA)
Eric Ollom (Citi)
Gerardo Rodriguez (BlackRock)
Eamon Aghdasi (GMO)
Registration fee for EMTA Members US$95 / US$695 for Non-members.
Additional Support Provided by BBVA, Citi and Goldman Sachs.
Due to space limitations, this event is not open to members of the press.
NYC Panel Speakers Debate Prospects for Mexico Under AMLO
Attendees at EMTA’s Special Seminar on Mexico: AMLO’s First 100 Days enjoyed a spirited discussion of the opportunities and challenges facing Mexico. The event was held on Monday, January 28, 2019 in New York City, with 130 market participants in attendance. MarketAxess sponsored the event, with additional support provided by BBVA, Citi and Goldman Sachs.
Moderator Alberto Ramos (Goldman Sachs) opened the session by reminding attendees that, 58 days into the AMLO’s administration, the president had inherited a “decent macro reality.” Investors, however, are concerned with policy direction under the AMLO administration, and remain fearful that the new administration could, “mess it up!” According to Ramos, AMLO has both business-friendly and ideological/dogmatic advisors, “and I’m not sure which group he is listening to.”
Carlos Serrano (BBVA Bancomer) expressed a cautiously optimistic view on Mexican economic prospects. “AMLO has populist yearnings in his micro views, but he believes in fiscal prudence, ultimately,” he stated. Serrano reasoned that the new economic team would “more or less” adhere to the budget. Furthermore, AMLO accepts the independence of the Central Bank and Serrano judged that his recent Banxico appointments, “have been good ones; I’d even argue that they are better nominees than some of the previous ones [made under the last administration].”
More serious concern over the economy was voiced by Gerardo Rodriguez (BlackRock and former Mexican Undersecretary of Finance and Public Credit). Rodriguez described Mexican economic risks as structural rather than cyclical, given the new president’s discussion of a “fourth transformation,” which has as its true aim a new Constitution, in his opinion. He warned that AMLO’s current actions should be interpreted as a “move to consolidate power and undermine institutions.” Adding a “lack of competence” in its handling of matters such as the gasoline issue to the ideological bent of the Morena constituents, “and you have a much deeper problem than a cyclical challenge,” he stressed, with “the bumpy road of the underlying deterioration of the last 58 days,” indicating what is likely to follow.
Issues with Mexico’s crown jewel, Pemex, were discussed by Eric Ollom (Citi). The main concern for investors remained whether the state oil company would retain its IG rating, and its current investor base. “Normally, an IG-rated oil and gas company should not be 4x leveraged, but investors see it as a sovereign credit,“ he opined. The market is adopting a more skeptical viewpoint, especially after a poorly-received road show in New York, and seeks assurance of official support, such as a small recapitalization, or an Eskom-style partial guarantee. Ultimately, Ollom believed the administration would reassure investors, though it could take a number of iterations if “the government does not get it right the first time.” He recommended the debt on a tactical basis, and assumed that some erratic government policies would be employed.
GMO’s Eamon Aghdasi confirmed that, as a long-term investor, he was waiting for a signal of public support. “However, it’s hard to believe that the government would not step in if needed…and we believe it is reasonable to see Pemex debt as ‘pretty close’ to sovereign debt.” Rodriguez repeated concerns over structural deterioration of Pemex, despite the possibility of an official support package. Serrano highlighted the degree of damage that a Pemex downgrade would cause to the entire Mexican financial system in arguing there was little alternative to official support. “AMLO is concerned that oil production is falling, and at some point he will realize Pemex cannot do it alone,” with the re-opening of “farm-outs” possible, he stated.
Rodriguez acknowledged that the issues of poverty and inequality in Mexico are serious concerns, but rather than being the cause, they are a symptoms of structural problems related to supply side problems: economic concentration, corruption, lack of transparency, weak rule of law, lack of contract enforceability, etc. By misdiagnosing the situation, AMLO’s government is applying the wrong medicine and thus exacerbating the problem. Serrano concurred. “There is nothing on AMLO’s agenda to improve the rule of law,” he lamented, and suggested that the failure to reduce corruption would hinder Mexican growth.
Returning to Central Bank policy, Serrano predicted inflation would fall under 4% in 2019, allowing Banxico to adopt an easing cycle by year-end. He pointed out that two Board members have characterized current policy as restrictive, and Serrano believed that the bank may have been a bit overzealous in recent hikes, although “the hike around the Mexcat decision was wise, to calm the markets.” Rodriguez largely concurred, while noting potential wage pressure on inflation.
Aghdasi made the case that there is value in Mexican rates and fx. “The current account is more than manageable. Growth is facing headwinds, but we haven’t seen the economy fall off a cliff, and it’s hard to see a scenario which leads to a massive outflow of capital,” he stated.
Ollom quickly summarized the Mexcat episode, which he saw as an indication of how AMLO will deal with foreign investors. On proposed new banking regulations, Ollom suggested the threat of changes might be enough to achieve the goal of increased lending. Serrano didn’t believe over-regulation was likely and highlighted AMLO’s quick action to spike the fee hike proposal. On lending, “demand is the issue for credit in Mexico, not the supply side, because most of the economy is informal and doesn’t seek credit,” he reasoned.
Ramos asked how local investors viewed AMLO. A nadir was reached with the unexpected Mexcat decision, in Serrano’s estimation, but recently a sense of cautious optimism seems to be emerging. In contrast, Rodriguez characterized local stakeholders as confused and fearful, and seeing a government that is “figuring things out as they go along.”
Concluding the discussion, Ramos asked whether the market would be positively surprised with Mexico by year-end. Aghdasi, Serrano and Ollom thought this was possible. Rodriguez thought there was greater likelihood of a negative surprise, “but I would not go short.” Serrano highlighted the risk of a US withdrawal from NAFTA occurring without the subsequent approval of the new treaty, because of US domestic political tensions.