Mexico’s Peso, Stocks Fall as Calderon’s Party Loses Election

Mexico’s peso and stocks fell to a two-week low after President Felipe Calderon’s party lost congressional seats in midterm elections, adding to concern the government will struggle to implement tax increases that economists say are needed to narrow a budget gap.
The peso weakened 0.1 percent to 13.24 per U.S. dollar at 5 p.m. New York time. It touched 13.3755, the weakest since June 23. Mexico’s Bolsa, the nation’s benchmark stock index, tumbled 1.3 percent to 23,742.49.
“This is not a market-friendly result,” said Jaime Ascencio, a fixed-income strategist at Actinver SA, Mexico’s biggest independent money manager, in Mexico City. “This result makes it very likely that Mexico’s credit rating will be cut.”
Calderon will need “a lot of negotiation” to pass changes to tax laws through a divided congress, Standard & Poor’s analyst Lisa Schineller said in an interview from New York. The loss by Calderon’s party raises the odds that legislation to buoy tax revenue may be “diluted” by lawmakers before being passed, said Shelly Shetty, an analyst at Fitch Ratings.
S&P cut the outlook on Mexico’s foreign debt to negative from stable in May, six months after Fitch did. S&P and Fitch both rate Mexico’s foreign debt BBB+, the third-lowest investment grade level.
Calderon’s National Action Party, or PAN, took 28 percent of the votes in the July 5 election to renew all 500 lower house seats while the opposition Institutional Revolutionary Party, or PRI, won 36.7 percent of the vote, according to 99.5 percent of all votes counted by the Federal Electoral Institute.
The PAN currently has 41 percent of lower house seats and the PRI has 21 percent in the outgoing congress.
‘Reform Momentum’
“The election result is not the one that would induce significant reform momentum in Mexico,” Shetty said in an interview from New York. “We cannot completely rule out that some sort of fiscal reform is going to be passed. But we have to see whether it’s diluted or whether it will make a dent on improving public finances.”
PRI’s victory will be “negative” for the markets because of the potential for legislative gridlock, UBS AG said.
“Congressional dynamics are set to make for the passing of a reform agenda that much harder,” analysts led by Tomas Lajous wrote in a note. “The results are negative for markets, but only marginally.”
Grupo Simec SAB, a unit of Mexico’s largest steelmaker, and Banco Compartamos SA, a Mexican bank that lends to low-income customers, led declines on the Bolsa index.
Recession
Calderon’s setback comes after the economy sank into its first recession in eight years as the slump in the U.S. curbed demand for exports and trimmed flows from remittances, foreign direct investment and tourism. Mexico’s economy will contract 5.5 percent this year, according to the government.
That contraction has swelled the budget deficit and exposed the government’s dependence on oil income. The Finance Ministry is projecting the public sector deficit may grow to 3 percent of gross domestic product this year form 2.1 percent in 2008.
The government collects 37 percent of its revenue from oil, whose production dropped 6.5 percent in May from a year earlier after falling 9.2 percent in 2008.
“Mexico has a serious fiscal challenge that the whole world is waiting to see resolved,” said Luis Garcia Pena, chief executive of Investra Consultores SA in Monterrey, Mexico, which manages $750 million in assets. Investors are “waiting for the messages from the PRI, which has re-conquered congress, to see how much attention they’ll pay to issues like fiscal reform.”
Polls before the elections predicted the loss by Calderon’s party. Mexico City-based Consulta Mitofsky forecast the PAN would get 29 percent of the vote and that the PRI would take 34 percent, according to the poll of 2,000 people conducted June 25-28 with a margin of error of 3.1 percentage points.
Further Peso Weakening
“We saw this coming,” said Antonio Magana, head of the foreign-exchange trading desk at Grupo Financiero Interacciones SA in Mexico City. That limited declines in the peso, he said.
Today’s peso drop extended a slide last week fueled by concern surging unemployment in the U.S. will delay an economic recovery. Mexico sends 80 percent of its exports to the U.S.
The peso may continue to weaken, said Win Thin, senior currency strategist at Brown Brothers Harriman & Co.
“The fundamentals and the politics are all lining up against the peso now, especially with the U.S. data being weak,” said Thin, who is based in New York.
Yields on Mexico’s 10 percent bond due December 2024 fell six basis points, or 0.06 percentage point, to 8.37 percent. The bond’s price rose 0.55 centavo to 114.02 centavos per peso, according to Banco Santander SA