Optimism Boosts Mexico Index to Record High

Mexico’s approval of an austere federal budget bolstered hopes that the nation will break its habitual six-year cycle of economic booms and debacles and fueled Mexico’s leading stock market index to its third straight record high Wednesday.

Analysts also cited Mexico’s strengthening economy and political stability for the recent market run-up, including Wednesday’s 1.6% gain in the IPC index to 7,121.79. Led by telecommunications players such as Telmex and Grupo Televisa, the IPC index has gained 80% this year.

Shrugging off suggestions that the peso is overvalued by as much as 20%, economic pundits see mostly good things ahead for Mexico in 2000, despite it being a presidential election year--an event that in the past has ushered in economic chaos. So far, the presidential primary elections have been peaceful, pointing to an orderly general election in July.

The assassination in April 1994 of leading presidential candidate Luis Donaldo Colosio was a destabilizing factor that contributed to the 1994 peso devaluation and ensuing recession. Mexican stocks fell 40% in 1994, and Latin American stocks as a whole lost 11%.

Mexico isn’t the only Latin American country on a roll: Brazil’s Bovespa index rose for the ninth straight session as that country’s economic recovery gained credibility. The Bovespa, which climbed 2.4% to close at 16,772, has jumped 147% this year. The Brazilian real, which closed at 1.81 to the dollar Wednesday, has gained 10% in value since October.

Another sign of increased investor confidence in Latin America is that investors are receiving a much smaller interest rate premium for investing in long-term bonds, compared with rates available on U.S. bonds with similar maturities, said Siobhan Manning, a PaineWebber Latin debt expert in New York.

But Mexico’s importance as a U.S. neighbor and No. 2 trading partner after Canada makes its economic health a more critical issue than that of any other Latin nation.

The new Mexican federal budget approved Tuesday lowers Mexico’s fiscal 2000 spending deficit to 1% from 1.25% this year and keeps the bailout of troubled banks on track. These are signs that the government is avoiding election-year temptations to spend its way into voters’ hearts, said Geoffrey Dennis of Salomon Smith Barney in New York.

Meanwhile, the Mexican economy should grow at 4.5% or better in 2000, amid relatively low inflation of under 11%, down from 18.6% in 1998, Merrill Lynch equity strategist Eduardo Cabrera said. Other favorable signs are the lowest unemployment in more than a decade and booming exports.

Consumers are finally participating in Mexico’s recovery, largely because wage growth is exceeding inflation for the first time since the devaluation, Cabrera said.

“Consumers paid for the peso devaluation,” Cabrera said, adding that consumption in many categories, including automobile sales, is still below that of pre-devaluation 1994. Despite the huge 1999 gains, Mexico’s stocks are still 23% below their February 1994 high in dollar terms, while Brazilian stocks lag the July 1997 high by 35%.

Among other reasons to be hopeful that Mexico will avoid an election year collapse, Dennis said, is that the country’s trade deficit next year will be 4% of economic output, down from 7% in 1994. Maturing foreign debt in 2000 will total less than $2 billion, compared with a lopsided $33 billion in 1994, when dollar-denominated debt helped sink the economy.

The government has $30 billion in foreign reserves with which to defend its currency, compared with only $6 billion when the run on the peso began in 1994. Moreover, Mexico allows its peso to float freely on the global exchange, unlike in 1994 when it was pegged to an exchange rate defended by the central bank.

The only cloud on the horizon--in addition to it being an election year--is that Mexico’s peso is commonly thought to be overvalued by 15% to 20%. “It’s on the high side,” said Brian Gendreau, a Latin American equity strategist also with Salomon Smith Barney. “But it’s not enough to keep us from liking this market,” he added.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Bulls on the Bolsa

Mexico’s stock market has rocketed this year and closed Wednesday at a record high. The 80% year-to-date gain in the main IPC index far exceeds the 19% rise in the U.S. Standard & Poor’s 500 index. Quarterly closes and latest for the IPC

*

Source: Bloomberg News