Is AMLO’s spending plan spooking traders?

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Mexican dollar bonds led losses in emerging markets after President Andres Manuel Lopez Obrador stepped up spending plans to fund a splurge in the last year of his administration.

The Lopez Obrador administration presented a draft 2024 budget late on Friday, September 8th, that boosts support for state oil giant Petroleos Mexicanos and social programs to consolidate Lopez Obrador’s legacy before the presidential election next June. Officials also proposed an $18 billion dollar-debt ceiling in the 2024 budget, triple the $5.5 billion set for this year.

The increased spending will result in a fiscal deficit equivalent to 4.9% of gross domestic product — the largest since 1988. It’s a reversal of the president’s penny-pinching ways, which had won him favor with investors in past years as other countries boosted spending to cope with the fallout from the coronavirus pandemic.

Bonds fell across the curve on Monday, September 11th, with notes due in 2053 down 1.1 cents to 96.52 cents on the dollar, according to indicative pricing collected by Bloomberg. Losses were contained to debt markets, with both stocks and the currency advancing amid broad gains in developing-nation assets on China optimism.

While concern about more sovereign issuance should subside as the increased figure proposed by the government “does not necessarily mean” Mexico will sell that amount, “considering more issuance in 2024 and taking into account that an election year is coming, we could expect an increase in the risk premium in 2024,” said BBVA Mexico SA analyst Miguel Iturribarria.

Pemex Transfer

The government plans to transfer 145 billion pesos (US$8.3 billion) to Pemex and reduce its tax burden further to help with its heavy debt payments, according to the draft budget. Pemex, the world’s most indebted oil major, has around US$11 billion in payments due next year.

The company’s bonds were mixed on Monday as traders have grown to see shows of support from AMLO, as the president is known, as temporary fixes.

“The legacy of the current administration regarding public finance will be moderate debt, modestly higher tax revenues than before AMLO, but with increasing spending pressures and a higher deficit,” Citigroup analysts led by Dirk Willer and Ernesto Revilla wrote in a note to clients. “All these topics should be addressed early by the next administration.”

Source: El Financiero

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