Grupo México-Citibanamex case sends peso shockwaves, but monetary policy holds more sway

The Mexican peso lost ground against the US dollar earlier this week after the government seized control of Grupo México's Ferrosur rail concession in the Tehuantepec isthmus region.

After the decree was issued ordering the navy to take over the railroad and Ferrosur's facilities last Friday, the Mexican currency and the local stock market experienced one of their worst days so far this year in Monday trading and various financial analysts pointed to the move as the source of the drops.

The government's decision even ended up halting 16 months of negotiations over the sale of Citibanamex, one of the largest financial institutions in the country, to Grupo México.

Despite the waves generated by the controversy, the monetary policies of Mexico's central bank (Banxico) and the US Federal Reserve will continue to have a greater influence on the behavior of the peso, which had been on the rise for months until this week, according to Raymundo Tenorio, emeritus professor at university Tecnológico de Monterrey (TEC), and James Salazar, deputy director of economic analysis at CI Banco.

The local currency regained some of the value lost on Wednesday, when Citigroup said it would launch an initial public offering for its consumer banking, small business and middle market operations in Mexico, with a view to completing the spin-off in 2024 or 2025.

“The peso is the second most appreciated currency today. That appreciation is related to positive data on inflation in Mexico and the news that Citi is withdrawing from the sale of Banamex," Gabriela Siller, director of economic analysis at Grupo Financiero BASE, posted on Twitter when the announcement was made.

"This depreciation [of the peso] in the last six days has been due to this phenomenon of lack of confidence, risk, loss of prestige of the rule of law in Mexico," Tenorio told BNamericas, referring to the uncertainty caused by the decree published by the government to assume the Ferrosur concession.

"With Citi's announcement, Grupo México is no longer obliged to present guarantees to obtain credit and buy Banamex ... The exchange rate is stabilizing, the price of Grupo México [shares] is returning to positive territory, but Mexico's bad prestige continues to predominate regarding the respect for the rule of law," added the TEC analyst.

The role of the Fed

Salazar, from CI Banco, said in a separate interview with BNamericas that "the external issue will continue to be the most important thing in the exchange rate: the Federal Reserve and the monetary policy decisions."

The financial analyst recalled that the reason for the general appreciation of the peso since last year is the interest rate differential between Mexico and the US, which has led the peso to rally nearly 10% against the dollar since the start of the year.

“The restrictive monetary policy that Banxico and the Federal Reserve have been implementing caused the differential to widen even in real terms, not just nominal ones, and that makes investments in pesos more attractive. That's why this appreciation has occurred and we've seen [the exchange rate] fall below 18 pesos per dollar,” said Salazar.

Tenorio pointed out that "as long as the interest rate in Mexico is real, that is, that the market rate of returns on savings is 500-600 basis points higher than inflation, Banxico has no problem keeping it fixed," as the board of the central bank stated in its most recent policy decision.

“The real yield that is being paid in pesos is already double the Fed rate. The real [Fed] rate is 300 basis points, not the nominal one. In Mexico, paying a real rate of 500 to 600 basis points is attractive enough to retain demand for money,” said Tenorio.

Meanwhile, the issue influencing the behavior of the peso most is the debate on the debt ceiling in the US, Salazar suggested.

“This is what has caused the exchange rate to come close to 18 pesos per dollar in the last six or seven days. This uncertainty due to the possibility that the US could fall into default, because the deadline is next week and no agreement has been reached, has caused or pressured the exchange rate to rise and the peso to depreciate" due to the uncertainty, he said.

The financial analyst believes that the domestic issue of Grupo México's Ferrosur concession would only have affected the Mexican peso marginally. "Of the 40-cent depreciation, maybe 5 or 10 cents were related to that issue, but the reality is that what matters most is the external issue," he added.

Several mining companies focused on Mexico reported that the strength of the peso against the dollar was one of the main factors that negatively impacted their financial results in the first quarter, along with inflation, and that situation has been seen in other sectors too.

Salazar said that in the medium term and for the rest of this year, CI Banco anticipates that the peso could depreciate against the dollar. 

“We estimate that [the peso] will end the year at 18.60 or 18.70 pesos per dollar, one peso higher, because this interest rate differential, which is what has caused such a sharp drop, is going to start shrinking."