Mexico plans to buy more U.S. dollars and end credit lines with the International Monetary Fund and U.S. Federal Reserve in a sign of confidence in the country’s recovery from the financial crisis.
Mexican Central Bank chief Agustin Carstens said on Wednesday his country should increase international reserves and gradually extricate itself from a $47 billion line of credit with the IMF.
Separately, the bank said Mexico would not renew a $30 billion swap line with the Fed that expires on Feb. 1.
Carstens said the Mexican economy was recovering from a deep recession better than he had expected and that it was a good time for the bank to buy dollars. The peso currency MXN= weakened 0.8 percent to 12.97 per dollar following his comments.
The plan shows that the central bank thinks Mexico’s currency does not need help at the moment, although Carstens said he was concerned the peso could take a hit when the United States eventually starts raising interest rates.
Higher reserves would allow Mexico to cushion any shocks to the peso by selling dollars into the market, as it has been doing since the financial crisis flared in October 2008.
Mexico’s economy has recovered in recent months from the fall in U.S. demand for Mexican exports like cars and refrigerators, although Carstens noted that the turnaround is not strong enough to affect inflation, so interest rates do not need to move “at the moment.”
The U.S. Federal Reserve in October 2008 offered Mexico and more than a dozen other countries swap lines to give them access to dollars to counter turmoil in financial markets. Mexico tapped the line for about $3 billion in April of 2009, the same month it asked the IMF for access to a line of credit.
Mexico, however, will try to boost reserves instead of putting limits on foreign investment in financial markets, Carstens said.
“We don’t want to put limits on capital inflows,” he noted.
Since October 2008, Mexico’s central bank has sold nearly $32 billion in dollars to foreign exchange markets.
Accumulating more international reserves would be “a gradual process,” Carstens said, adding that the plan would have to be approved by the Finance Ministry, which also has a say in foreign exchange policy. Mexico currently holds $91.2 billion in reserves, near a record high.
Carstens said Mexico’s economy will grow between 3.2 percent and 4.2 percent in 2010, above the bank’s previous forecast for growth between 2.5 percent and 3.5 percent.
- Mexico will use a “rules-based mechanism,” probably based on currency options, to increase its foreign exchange reserves, Banco de Mexico Governor Agustin Carstens said Friday.
Carstens said “the bank’s primary objective will be to be predictable and transparent, “so that whenever we buy international reserves, it can’t be considered by the markets as an attempt by the Mexican authorities to defend a particular exchange rate.”
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Carstens acknowledged that the assets that are to be bought–likely to be overwhelmingly low-yielding U.S. dollar assets–will result in a higher overall “cost of carry” for the bank in its reserve management. However, he said this effect should be outweighed by a lower country risk profile, as international ratings agencies attach more value to actual reserves than to contingent ones such as the IMF line.
“We were penalized by the ratings agencies because we didn’t hold as many reserves as peer group countries–that’s why we decided to spend this money, even if it means a higher carry cost,” Carstens said.
The perception of country risk in any case has appeared to recede as the economies of Mexico and North America overall return to real growth. The bank earlier this week upgraded its forecast for gross domestic product growth this year to between 3.2%-4.2%, from a prior forecast of 2.5%-3.5%.
Carstens also said that the economy may actually have shrunk by less than feared in 2009, thanks to a sudden upturn in activity at the end of the year.
The contraction “may be less than 7%, because the latest data we have for exports, retail sales and the November monthly GDP figure were all higher than expected,” he noted.
“Also, the U.S. economy grew faster,” he added.
There was more good news for Mexico’s economy Friday when preliminary U.S. data for fourth-quarter GDP showed an annualized growth rate of 5.7%, well above consensus.
Carstens also said that the economy may actually have shrunk by less than feared in 2009, thanks to a sudden upturn in activity at the end of the year.
The contraction “may be less than 7%, because the latest data we have for exports, retail sales and the November monthly GDP figure were all higher than expected,” he noted.
“Also, the U.S. economy grew faster,” he added.
There was more good news for Mexico’s economy Friday when preliminary U.S. data for fourth-quarter GDP showed an annualized growth rate of 5.7%, well above consensus.
The U.S. has for decades been a major buyer of Mexican oil, although the relative importance of those exports has declined as the country has diversified its economy.
Many of Mexico’s largest fields are mature or in decline, but Carstens said he saw no long-term threat to the current account balance as a result of this trend. For one thing, he noted that oil is now less than 15% of total exports; secondly, he said heavy investment in the sector is helping to stabilize production.
“And, we still have an important level of reserves,” he said.