Ricardo Pascoe Pierce
Funds invested in Mexico flowed out of the country in the amount of $7 billion over the past month. Financial analysts say this was due to the Bank of Mexico’s decision to lower interest rates at a time when inflation is rising, driven by the war in Iran. The impact of that war is being felt directly by the Mexican economy.
Banxico decided to lower the interest rate by 25 basis points, from 7% to 6.75%, despite a spike in inflation in Mexico. This decision helps the government’s finances by reducing the cost of financing its debt in pesos and dollars. It allows the government to save money at a time when it is under extreme fiscal pressure. It lacks the means to cover its inherited and acquired fiscal commitments.
Banxico’s decision comes at a time when Mexico’s headline inflation reached 4.59% on an annualized basis, its highest level in 16 months. Obviously, this jump in inflation is reflected in the cost of gasoline—both premium and regular—but mainly in diesel. The rise in inflation is largely, though not solely, a consequence of the war in Iran. As the conflict continues, inflationary pressures will grow, driven by rising fertilizer and other input costs in production chains and by higher transportation costs.
Funds fled Mexico following Banxico’s message. It stated that its primary role was not to control inflation, but to assist the federal government with its liquidity crisis. Investors were alarmed to learn of the federal government’s precarious situation and that Banxico would do whatever it took to safeguard public finances, even if it harmed their investments in Mexico. They viewed this as an ominous message.
What are the ominous messages? First, the message from Banxico is that, with its interest rate decision, it has abandoned its independence of judgment and operation, becoming an operator at the whim of the Ministry of Finance and Public Credit. In other words, it lost its autonomy in decision-making. A central bank without autonomy is not trustworthy.
Second, the Supreme Court of Justice of the Nation (SCJN) ‘s decision to authorize the Financial Intelligence Unit (UIF) to freeze accounts without a court order is cause for concern. It is clear to everyone that there is no precise list of reasons to justify the measure when the authority takes it. Therefore, it is at the authority’s discretion. The observation is that the SCJN operates as the justifying and legalizing arm of the Executive Branch’s intentions, whether or not they are constitutional. This ruling also helps explain the capital flight we are witnessing.
A third message is that the reported outflow of foreign investment in the energy sector is largely explained by mistrust of the constitutional reforms, especially the changes to the Judiciary’s functioning. There is a conviction among foreign investors that there is no longer an independent Judiciary from which one can expect objective treatment in accordance with the law, because it is subordinate to the National Palace.
A fourth message, of a more political nature but reflecting the Mexican government’s mindset, was the furious rejection of the UN Committee on Enforced Disappearances’ report. If they are unable to empathize with an issue like the disappeared, they will be even less likely to do so with investors who complain about the unfavorable and discriminatory treatment their ventures receive under national laws. They detect that the underlying rejection of an international body reflects a more generalized attitude toward anything that comes from abroad. They perceive an exacerbated nationalism, tinged with an authoritarian stench.
These four messages, recently issued by the country’s highest authorities, generate a mood among investors that can be summed up in a single word: uncertainty.
Just as the “fly-by-night capital” did, other investors will not wait to see how the relationship with the Mexican government evolves. They will make their decisions.
@rpascoep
Further Reading: