Despite uncertainty following presidential runner-up Andres Manuel Lopez Obrador’s challenge to the election result, Mexico’s debt markets will remain stable presenting buy opportunities in TIIE and Bono bonds, say analysts.
“Our base case is that the result will hold... and this could strengthen further Mexico’s institutional framework,” said Alonso Cervera, Mexico economist at Credit Suisse. “The world would recognise that Mexico was able to carry out a very tight election in a peaceful and orderly way.”
Populist Lopez Obrador, the Mayor of Mexico City, lost out to the market-friendly Felipe Calderon by 0.58%, or 244,000 votes, in the country’s second fully free general election on July 2. Calderon’s PRI (Institutional Revolutionary Party) ruled Mexico for 71years until finally losing power in 2000. Lopez Obrador’s PRD (Democratic Revolutionary Party) has claimed that the process of adding up the votes was suspect and is demanding a full re-count.
“It’s unlikely that the challenge is going to be successful in overturning the election result, so the question is whether demonstrations by supporters of Lopez Obrador turn violent. He has every incentive to keep everything peaceful otherwise he will pay a political price,” said Fernando Losada, senior Latin America economist at ABN AMRO. According to Losada, Lopez Obrador, 52, is “relatively young and still has another chance to run for president.”
The federal electoral tribunal has until August 31 to analyse the challenges to the electoral process, and until September 6 to make a final ruling. The president will take power on December 6.
While markets rallied on news of Calderon’s victory earlier this week, several senior hedge fund managers told emerging markets they had hoped that Lopez Obrador would win because of his superior team of advisers, ability to forger coalitions and emphasis on redistributing wealth and expanding education, which would “take Mexico onto higher growth rates.”
“Those are valid points but from a market perspective... the Calderon government gives you less worries about fiscal indiscipline or co-operation with the central bank,” said Cervera.
Given that the PRI/Green Party coalition, Alliance for Mexico, won 28.2% and 27.4% of seats in the congress and senate respectively, “Constitutional reforms will not be easy to approve”.
Credit Suisse expects the electoral tribunal to ratify Calderon’s victory, reducing the likelihood that the central bank of Mexico will need to hike rates to counter a loosening of fiscal policy by Lopez Obrador’s government, or a major sell-off of the peso.
This creates a buy opportunity in funds linked to the benchmark TIIE 28-day (Tasa de Interes Interbancario de Equilibrio) and Bono bonds. According to Cervera: “The short end of the TIIE curve is still pricing in substantial rate increases by the central bank... In our forecast, the rates will remain unchanged in the foreseeable future... Investors who subscribe to our constructive view [should] extend duration on the TIIE curve.”