Dollar-Denominated Corporate Debt Time Bomb Set to Blow
- Dollar-Denominated Corporate Debt Time Bomb Set to Blow
by Don Quijones, Spain & Mexico, editor at WOLF STREET
Hot Money Flees Mexico.
Emerging economies around the world are already feeling the first pangs of withdrawal as fast yield-chasing investors send their funds back to the U.S. in anticipation of higher Treasury yields and a further appreciating dollar.
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In Mexico, the central bank has just published its balance of payments data for the third quarter, 2015. The results do not make for pretty reading.
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Early Signs of a Stampede
Net portfolio investment – the total amount of foreign money spent on Mexican financial assets – clocked in at a paltry $933 million, down from $4.47 billion during the same quarter last year. That’s a 79% drop. It was also Mexico’s fifth successive quarterly decline and the lowest level recorded since 2002. Although the rout was across the board, it was particularly pronounced in the private sector which suffered a $241 million net outflow of funds.
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Interestingly, while portfolio investment stagnated, foreign direct investment (FDI) flourished, growing by 57.6% in the first nine months of 2015. In other words, those who are investing for the long haul continue plowing funds into Mexico. Which is wonderful news — in the long term! The problem is that investors who are after the quickest of monetary fixes are frantically moving their money out. And that is bad news in the short term! Crises are made of this phenomenon.
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And right now, with monetary pressures building around the globe, it’s the short term that counts.
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Since the U.S. Federal Reserve alighted on its madcap scheme to flood the global economy with dirt cheap, easy-come-easy-go dollars, high-yield seeking “investments” have poured into emerging markets. Much of the money ended up in Mexico, one of comparatively few Latin American economies to have completely liberalized its financial sector.
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If the Fed were to begin raising interest rates again, which it keeps threatening it might eventually do, it would significantly tamp down on investor appetite for risky, high-yield emerging market assets. The merest prospect of a quarter-point raise is enough to send junkie-like convulsions through the investment community. As the IMF warned in its Article IV consultation with Mexican authorities, “a surge in financial market volatility, triggered for example by a disorderly normalization of U.S. monetary policy, could lead to a reversal of capital flows and an increase in risk premia.”
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If that were to happen, the consequences could be dire, not only for Mexico but for the broader Latin American economy.
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