Mexico and Brazil with the highest yields in Latin America but must compensate for risks

With the restrictive policy, Mexico’s real rate has become one of the two most attractive among Latin American emerging markets, which has partially offset the accumulated outflow of capital flows, warned economists from Banco de México.

According to them, the current ex-ante real rate offered by Mexico is 3.62%, which is the difference between the monetary policy rate (8.50%) and the 12-month inflation expectation (4.89%).

It is the highest real rate Mexico has offered since 2008, when they started using the rate as a target.

This positive yield is only surpassed in the region by Brazil with a rate of 8.16%, also discounting 12-month inflation expectations.

Despite this higher yield, the director for Latin America at Moody’s Analytics, Alfredo Coutiño, pointed out that Mexico has to offer a higher yield given the increase in country risk.

That is, it cannot be assumed that investors will accept this premium permanently when vulnerabilities to strengthen investor attractiveness continue to widen.

Mexico’s risk premium is trading at 783 points, up 52 points in the last 12 months, although it has moderated by 10 points since the first business day of January.

The markets have so far been complacent with Mexico, the expert said.

But this does not mean they will continue to overlook vulnerabilities such as its low growth capacity, growing budgetary pressures to use resources for social programs and subsidies, fiscal risks, and trade imbalances, among others, he pointed out.

CAPITAL OUTFLOWS MODERATE

In an analysis of Banxico’s Quarterly Report, they evidenced that “the positive contribution of this internal monetary factor has been increasing” and has helped to partially offset the accumulated outflow of capital flows.

The governor of Banco de México, Victoria Rodríguez Ceja, recently explained that this year has seen a moderation in the pace of capital outflows of Mexican assets compared to the speed at which they were liquidated in 2021 and 2022.

“Capital outflows have been much lower than in previous years, and a small reversal was observed in August.”

Banxico confirms that in the first 24 days of August, foreign investors took Mexican debt assets for MXN 8.2 billion (US$407 million). If the positive flow continues in the last week of August, it will be the first month in a semester with capital inflows to the market.

With information from El Economista

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