July 13, 2024

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Currency Crash Scars Make Mexico Peso Slump a Risk for AMLO

(Bloomberg) — The crash in the Mexican peso this month risks dragging the government’s popularity down with it, in a nation with painful memories of currency crises in its recent history.

President Andres Manuel Lopez Obrador held onto his strong approval ratings during his first year in office, even as the economy soured. As energy and construction investments were shelved and growth slowed to zero, he would often point to the strong peso as a sign that things were well.

The coronavirus pandemic and last week’s global oil price rout look set to change that, sending the peso tumbling to a record low.

“For Mexicans, the peso exchange rate equals the success of the government,” said Barclays economist Marco Oviedo. “If the peso is devalued, the president devalues.”

Lopez Obrador took office in December 2018, and over the next year the peso rallied 4.3%, the most among major emerging markets after the Thai baht. That strength was largely fueled by investors taking advantage of Mexico’s relatively high bond yields, but that didn’t stop Lopez Obrador from taking the credit for it. Before his daily press briefings he would ask his aides how the peso was doing.

Over the last month, that was all wiped out as the peso lost 18% of its value, making it the worst performer of more than 130 currencies tracked by Bloomberg. Despite his dislike of a weak currency, Lopez Obrador said Thursday he didn’t think the central bank should burn reserves trying to halt the sell-off.

“From our perspective, we shouldn’t intervene to artificially strengthen our currency,” he said. “We have healthy public finances, and we won’t spend our reserves.

The peso weakened 4% on Monday to a record of 22.9 per dollar. It reached a fresh low during Tuesday morning trading before paring its losses.

Mexican Peso Falls to Record as Trump Comments Drive Sell-Off

The nation’s currency trauma dates back to repeated devaluations in the 1980s and 1990s. In 1994, political turmoil in Mexico and U.S. interest-rate increases helped spark a peso devaluation that fueled capital flight in what became known as the “Tequila Crisis”. The economy contracted 6.3% the following year, strengthening the association in the public mind between a falling peso and job losses and bankruptcies.

Lifted by his anti-corruption discourse and folksy manner, Lopez Obrador won in a landslide in 2018 and rode through his first year in office with record-high popularity ratings. A Reforma poll this month showed his approval rating slipped from 68% to 59% as murders rose to a fresh record high in 2019, sowing doubts about his security strategy.

Crude Slump

Oil prices have fallen by more than 40% over the last month, and if they remain around their current levels of about $30 per barrel, the government will face an even worse growth outlook as well as a hole in its finances. Lopez Obrador’s focus on reviving state owned oil company Petroleos Mexicanos staunched a decades long decline in production, which has leveled out around 1.7 million barrels per day.

Crashing Latin American Currencies Curb Space for Rate Cuts

Foreigners’ appetite for Mexican bonds, which had underpinned the peso’s strength, is unlikely to revive for the time being, as investors remain focused on moving to safer assets, amid the global sell-off, said New York-based Rabobank strategist Christian Lawrence.

The peso may see even steeper losses if the oil price slump leads credit ratings agencies to cut Mexico’s oil company Pemex to junk.

“If your average person sees the peso is getting weaker, in their head they think something is wrong in the economy and the government is to blame,” Oviedo said.

(Updates with peso move in eighth paragraph.)

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