Citigroup Embraces Enrique Pena Nieto Zero-deficit Budget

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MEXICO CITY — President Enrique Pena Nieto‘s bid to balance Mexico’s budget for the first time since 2009 is prompting Citigroup and Bank of Nova Scotia to recommend the nation’s bonds.

Yields on Mexican peso bills due in 2024 may fall 20 basis points, or 0.2 percentage point, and approach an all-time low 5.1 percent, according to Accival, Citigroup‘s local brokerage. Borrowing costs have tumbled a record 1.2 percentage points this year to 5.48 percent, helping to hand investors a 23 percent return in dollars. That’s double the average gain for emerging- market debt, according to Bank of America.

Pena Nieto’s proposal on Dec. 7 to erase Mexico’s deficit is bolstering a rally that began last week, when he brokered an accord with the country’s largest parties to spur growth in Latin America’s second-biggest economy. The plan is adding to speculation that Pena Nieto, who took office Dec. 1, will keep promises to boost private investment in the state-controlled energy industry and increase tax revenue, which according to Scotiabank Mexico will cause yields to fall to record lows.

The budget is “a very strong sign to the markets,” Arnulfo Rodriguez, Accival’s deputy director of research, said in a telephone interview from Mexico City. “He’s showing a clear commitment to prudent management of public finances.”

Pena Nieto’s finance minister, Luis Videgaray, proposed a zero-deficit budget next year by raising revenue to offset a 2.3 percent boost in spending. Congress has a Dec. 31 deadline to decide on the 3.58 trillion peso ($281 billion) budget.

A balanced budget, excluding spending on Petroleos Mexicanos, would be the country’s first in four years, Miguel Messmacher, one of Videgaray’s deputies, said in a Dec. 7 interview. When investment in the state-owned oil monopoly is taken into account, the 2013 budget shortfall would equal 2 percent of gross domestic product, from 2.4 percent this year, Messmacher said. He didn’t respond to telephone and e-mail messages seeking further comment.
Zero-deficit budget a big step for Mexico

For Mexico, having a zero-deficit budget would be “a big step” because it’s “pretty rare” elsewhere in Latin America, according to Bret Rosen, a Latin America strategist at Standard Chartered Bank.

Colombia’s consolidated budget deficit was 2.2 percent in 2011 and is expected to be less than 1 percent of gross domestic product this year.

The U.S. budget deficit equaled 6.9 percent of the economy in the fiscal year ended in September, while the European Commission forecasts that Spain’s will be 8 percent this year.

Mexico’s lower house approved the revenue portion of the 2013 budget yesterday and sent the proposal to the Senate. The chamber voted to increase the nation’s 2013 revenue forecast by lifting the price estimate for oil exports and boosting income expected from taxes.

Lawmakers have approved deficits over the past three years, overriding a law requiring balanced budgets, as the nation sought to recover from a 2009 recession and the global financial crisis. Standard & Poor’s and Fitch Ratings cut Mexico’s rating one level to BBB in 2009 as the economy contracted 6.2 percent and crude output from Pemex declined.

“Anything that is implying that you’re going to have a tight fiscal stance is going to be bullish for” Mexican fixed- rate bonds, Rosen said by telephone from New York.
The zero-defecit budget will not leave any wiggle room if something goes wrong

Enrique Alvarez, the head of Ideaglobal’s Latin America fixed-income research, said a balanced budget may hinder Mexico’s ability to spend more to buffer the nation from any economic weakness in the U.S., the destination for 80 percent of Mexican exports.

“It leaves you with this trap door if something goes wrong,” Alvarez said in a telephone interview from New York. A zero-deficit budget “leaves you no flexibility if you have another round of external risk that is heavy and overflows onto the Mexican economy.”

Foreign investors stand to benefit from Pena Nieto’s “prudent” policies because they will help boost the peso and dollar-based returns, according to Rodriguez, who also helps oversee recommendations on Mexican financial markets at Accival, which is part of Citigroup’s Banamex unit.

One-month historical volatility, a measure of swings in the peso during that span, fell to a 19-month low today. Fewer fluctuations reduce the risk of losses for investors seeking dollar-based returns on local-currency securities.

“The general favorable momentum that you’re seeing in Mexican rates seems to have to do with the expectations that next year there will be some of the reforms.” Alejandro Martinez, a fixed-income strategist at HSBC Holdings Plc who recommends buying bonds maturing in 2022, said in a telephone interview from Mexico City.

Enrique Pena Nieto brokered a deal with leaders of the nation’s major political parties to back legislation planned for the first half of 2013 to boost competition at Pemex and to support a bill in the second half of next year to enhance tax collection.

In announcing Pena Nieto’s budget plan, Videgaray said “fiscal responsibility” is necessary for job creation and growth in Mexico. Latin America’s second-biggest economy will grow 3.8 percent this year, twice as fast as Brazil, according to the median forecast of economists surveyed by Bloomberg.

Araceli Espinosa, a fixed-income strategist at Scotiabank Mexico, said approval of Pena Nieto’s budget proposal will prompt foreign investors to bolster their holdings, pushing down yields to 5 percent or lower by mid-2013.

“Psychologically, seeing zero will capture the attention of international investors,” she said.

— With assistance from Ian Katz in Washington, Matthew Bristow in Bogota and Eric Martin in Mexico City.

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