Mexico Loses US$10 billion in Foreign Outflow from Debt MarketBy Cinthya Alaniz Salazar | Tue, 08/17/2021 - 10:12
Persistent high inflation, a debilitating third COVID-19 wave and an uncertain regulatory environment has diminished appetite for Mexican debt for the second consecutive year. In the first six months of 2021, the country has recorded a loss of US$10 billion in foreign capital outflow from its sovereign debt market, almost mirroring all that it had lost the entire year before.
After inflation hit 6.08 percent in April, twice the official 3 percent target from Banxico, it has not dissipated much, forcing the central bank to raise its key rate twice to 4.5 percent. This was controversial to some of Banxico’s members who viewed the inflationary pressures as temporary. However, as the pandemic drags with high infection rates, it does not seem like they were temporary after all.
Mexico has recorded over 3 million COVID-19 cases as the delta variant surges through the population, once again saturating hospitals. If Mexico fails to get this variant under control, it stands to keep the US-Mexico border closed for non-essential travel beyond the US DHS extension that was set to expire on August 21st, which will hurt border economies. Nationally the government has already indicated that the country would not cease economic activities as it ramps up its vaccination efforts.
On top of this, foreign confidence in Mexico’s investment sector has waned as the executive branch continues to scare private investors with an uncertain regulatory environment and project cancellations. This is reflected in the 14.6 percent drop in FDI from 2019 to 2020, equaling a loss of about US$5 billion. "The uncertainty that has been generated about respect for the rule of law has been a constant criticism from within the private sector," Ramse Gutierrez, Co-chief Investment Officer at asset manager firm Franklin Templeton, told Reuters.
Collectively, this has led to the US$10 billion (MX$202 billion) in capital flight from the country, making up almost all of the US$13 billion (MX$257 billion) it has lost in all of last year. July was a particularly bad month, which recorded almost US$4 billion (MX$67.5 billion) in divestments alone. Reflecting these market indicators, Mexico’s risk aversion, the yield on its 10-year benchmark, increased to 6.97 percent from 5.30 at the end of 2020.