By Jens Erik Gould
April 1 (Bloomberg) -- Mexican President Felipe Calderon is betting that the benefits of being able to tap as much as $40 billion from the International Monetary Fund will outweigh the stigma associated with turning to the international lender.
Calderon said yesterday that the country will activate a credit line of at least $30 billion from the IMF, after the organization said last month it would relax loan conditions for developing countries that need short-term assistance. Activating the line makes the funds available and doesn’t imply plans to draw on it immediately, a Mexican government official said.
The IMF said last month it would make loans easier to get for developing nations that have low inflation, moderate levels of foreign debt and sound public finances. The move may dispel worries that Mexico could have a balance of payments problem and concerns about a possible fiscal shortfall in 2010, said Jimena Zuniga, a Latin America economist at Barclays Capital.
“It’s more of a prize than a shame,” Zuniga said in a telephone interview from New York. “By gearing this new credit line to economies that meet certain subjective criteria, this new facility doesn’t carry the stigma that using IMF money may have had in the past.”
A 23 percent decline in the peso over the past six months reflects concern about the country’s ability to finance its current account deficit and corporate debt that comes due this year. Investors have also worried that Mexico may have a budget shortfall next year, after the expiration of contracts that guaranteed the government a minimum price for its oil this year.
Finances ‘In Order’
“We have our public finances in order and we’re able to take a line of credit of IMF in order to support the reserves of the central bank of $30, or even $40 billion, even this very same week,” Calderon, speaking in English, said yesterday at a business seminar in London.
A $50 billion IMF bailout in 1995 helped Mexico rebound from a slump that sent investor confidence into a free fall. Mexico paid off the remaining debt tied to that bailout in 2000, and also covered disbursements from a loan approved in July 1999. That loan was meant to shore up Mexico’s economy as it braced for a political transition and a wave of economic crises in Asia.
Ramon Guzman, Mexico’s representative to the IMF, declined to comment on yesterday’s announcement when contacted by Bloomberg News. Mexico’s Finance Minister Agustin Carstens is a former deputy managing director of the IMF.
“We have been in discussions with Mexico -- as well as other strong-performing countries -- regarding this issue, and very much welcome President Calderon’s positive response,” an IMF spokeswoman said in an e-mail after the announcement.
Easing Market Concerns
Mexico’s plan to activate the credit line eased market concerns that the central bank would deplete its reserves with a policy that calls for selling dollars to support the peso, said Gabriel Casillas, an economist at UBS AG in Mexico City. The IMF credit line would increase foreign reserves, unlike a $30 billion swap line offered by the U.S. Federal Reserve, he said.
“This will be positive,” said Guillermo Osses, who helps manage $40 billion of emerging-market debt at Pacific Investment Management Co. in Newport Beach, California. “Helping the economy to recover in a slowdown like the one we are experiencing now is very different from those countries that used IMF lines in the late 1990s to avoid a default.”
Still, Calderon’s announcement may hurt investor confidence in Mexico because borrowing money from the IMF has a stigma attached to it, said Marc Chandler, head of currency strategy at Brown Brothers Harriman in New York.
“Does a strong country go to the IMF to borrow money? I say no,” Chandler said in an interview. “It’s perceived to be a sign of weakness that countries go to the IMF.”
Record Lending
The IMF’s traditional loans have been in demand since the start of the financial crisis, with $55 billion to nations including Pakistan, Ukraine and Iceland. In November, the Washington-based lender had the busiest month in its 60-year history, agreeing to extend a record $41.8 billion. Those loans are typically for several years, and include scrutiny over economic and budget policies.
Ukraine’s central bank has taken control of 11 local lenders since requesting an IMF loan in October. Iceland got an IMF-led loan of $5.1 billion in November to help rebuild the crippled economy, which the international lender estimates will contract as much as 10.5 percent this year.
Mexico’s peso, stocks and bonds jumped after Calderon’s announcement. The peso rose 0.8 percent to 14.1722 per U.S. dollar at 5 p.m. New York time yesterday, extending its biggest monthly rally in 14 years. The currency climbed 7.6 percent against the U.S. dollar in March, after plunging for seven straight months as the global recession curbed demand for Mexican exports.
Revised Peso Outlook
After the announcement, Rogelio Ramirez de la O, the Mexican economist who predicted the 1994 peso devaluation, abandoned his call for further declines in the currency this year.
Ramirez said the peso may strengthen beyond 13 per dollar by year-end as the IMF credit line helps Mexico finance the current account deficit. Ramirez, the former chief economic adviser to 2006 presidential candidate Andres Manuel Lopez Obrador, said earlier this month the peso would weaken to 18.2 by yearend.
The benchmark Bolsa stock index climbed 0.5 percent to 19,626.75 yesterday, while yields on the government’s 10 percent bonds due in 2024 dropped seven basis points, or 0.07 percentage point, to 8.02 percent, according to Banco Santander SA.
“The new IMF credit lines are supposed to be for countries with very good fundamentals,” said Pedro Tuesta, an economist at 4Cast Inc. in Washington. “It’s supposed to eliminate the stigma of the IMF and that’s why the Mexican government is keen to have that as a precautionary line.”
To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net.
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