Mexico's record capital outflows tipped to reverse in 2021
By Abraham Gonzalez
MEXICO CITY, Jan 13 (Reuters) - Mexico's capital outflows hit record levels during the coronavirus pandemic in 2020, but a turnaround could be in store this year due to diminishing risk perception, attractive returns and relatively high interest rates, market analysts say.
Mexico last year recorded total flight of some 251 billion pesos ($12.58 billion) from the government bond market, amid a wave of global risk aversion during the COVID-19 scourge, official data showed on Wednesday.
The outflow was the highest that Mexico, Latin America's second-biggest economy, has registered since current records began in 1999. Still, it has started to reverse.
Most emerging markets suffered substantial capital flight. But Mexico could be well positioned to stage a comeback thanks to its higher interest rates, analysts said.
"Mexico is still considered one of the principal attractive countries to invest in," said Lucia Cardenas, director of economic studies at bank Citibanamex. "As risk aversion in the world decreases and greater progress is made on vaccines, we will see a greater inflow of capital into our country."
At 4.25%, Mexico currently has the third-highest central bank benchmark interest rate among the Group of 20 nations.
Mexico's benchmark 10-year bond is trading at 5.40%, above the debt of countries with a similar or lower credit rating, such as Colombia and Uruguay.
Capital flows into Mexico began to recover after the U.S. presidential election, with 145.2 billion pesos ($7.28 billion) entering the sovereign bond market in November and December, data from the Bank of Mexico showed.
Gabriel Lozano, JPMorgan's chief economist for Mexico, said last year's outflows were worrying given that the country had a relatively low fiscal deficit of about 3% of GDP in 2020 and a debt-to-GDP ratio of less than 55%, nearly half that of Brazil.
"Bond holdings in the hands of foreigners should be much larger," he said.
If inflows recover, the peso should hover close to current levels of about 20 per dollar during 2021, analysts say.
Local risk factors could still curb inflows, including a contentious bill currently being overhauled in Congress which could force the central bank to buy up dollars that banks cannot repatriate, plus the outcome of legislative elections in June.
Additionally, Mexico's economy was going backwards even before the pandemic, and tame inflation may encourage the central bank to lower interest rates in the coming weeks.
But emerging markets have in general benefited from rising investor optimism, with the iShares JPMorgan EM Bond ETF fund now close to its highest level since March.
"The exodus of capital from emerging markets is now firmly in the rearview mirror and robust inflows look set to continue," said Jonathan Fortun, an economist at the Washington-based Institute of International Finance. (1 dollar = 19.9500 Mexican pesos at the end of 2020) (Reporting by Abraham Gonzalez; Writing by Daina Beth Solomon; Editing by Jonathan Oatis)
