Mexico’s peso tumbled the most in six months and stocks and bonds dropped as an outbreak of the deadly swine flu threatened to curb tourism and consumer spending, deepening the country’s recession.
The peso sank 5.1 percent to 14.0505 per dollar at 5 p.m. in New York, the biggest decline among all currencies tracked by Bloomberg. The benchmark Bolsa index dropped 3.3 percent, the most among Latin American stock markets.
The swine flu “has an immediate economic impact,” said Gerardo Margolis, a vice president for emerging markets at TD Securities Inc. in Toronto. “Investors will be cautious.”
The flu outbreak may scuttle a rebound in investor confidence in Mexico that was fueled by the government’s decision to seek a $47 billion credit line from the International Monetary Fund and tap a $30 billion swap line with the Federal Reserve. The peso has gained 10.8 percent after dropping to a record low of 15.5892 per dollar on March 9.
The currency had plunged 32 percent in the previous six months, the worst performer among the 16 most-traded currencies against the dollar, as the global recession eroded demand for the country’s exports and slowed migrant remittances from Mexicans working abroad.
“They’ve been doing all the right things,” said Cathy Elmore, who manages $450 million in emerging-market assets at Blackfriars Asset Management in London. “The swine flu is really bad luck. There has been a knee-jerk reaction to sell Mexico.”
Schools, Bars Closed
The flu outbreak, which has claimed more than 100 lives in Mexico and spread to countries including the U.S., Spain and Canada, prompted authorities across the Latin American nation to order mandatory closures of public places, including schools and bars. The spread of the disease will reduce dollar inflows from tourists and curb consumer spending at restaurants, theaters and other venues where crowds gather, Margolis said.
“There will be a drop in consumption and tourism and that affects the currency,” Margolis said.
Tourism attracted $13.3 billion into the economy last year, making it Mexico’s third-largest source of foreign currency behind oil exports and remittances from Mexicans living abroad. Private consumption accounts for about 50 percent of total demand for goods and services in Latin America’s second-biggest economy.
Retailers, Airport Operators
The Bolsa fell the most in almost a month, led by declines in retailers and airport operators.
Grupo Aeroportuario del Pacifico SAB, the country’s largest private sector airport operator, plunged 14 percent, while Wal- Mart de Mexico SAB, Latin America’s largest retailer, slid the most since November. The yield on the government’s benchmark peso-denominated bonds due in 2024 rose 18 basis points, or 0.18 percentage point, to a one-month high of 8.16 percent.
The peso earlier weakened to as much as 14.0610, the lowest since April 1. It depreciated 1.6 percent last week after the government first disclosed deaths tied to the virus and as faster inflation fueled speculation the central bank will slow the pace of interest-rate cuts.
The central bank bought $400 million worth of pesos at three separate auctions today to stem the currency’s slide. It has spent $23.1 billion from its foreign reserves since October.
“It’s a very significant risk factor,” said Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York. “If the outbreak spreads and causes damage to the economy, then that could do damage to financial assets.”
Spain, Canada, New Zealand
Spain reported its first case today, while six people in Canada contracted the virus and more cases are likely, government officials said. New Zealand said as many as 13 students who recently visited Mexico may have swine flu.
The extra yield investors demand to own Mexican bonds instead of U.S. Treasuries widened 20 basis points to 3.39 percentage points today, according to JPMorgan Chase & Co.’s EMBI+ Index.
Mexico’s Finance Minister Agustin Carstens said “there’s no doubt” the outbreak will reduce economic output and that the virus has a “high potential for disruption.” The government doesn’t yet know the extent of the impact, he said at the IMF’s spring meetings in Washington.
The government earlier this month forecast the economy will shrink 2.8 percent this year, the first contraction since 2001, as the U.S. recession curbs demand for Mexican exports and slows dollar flows from remittances, foreign direct investment and tourism.
‘Very Bad Time’
The outbreak “comes at a very bad time,” said Benito Berber, an economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. He predicted the peso will drop to 14 per dollar over the next two weeks.
UBS AG downgraded Mexican stocks to “underweight” from “top pick” on concern the country’s economic outlook may worsen because of the swine flu.
Sony Corp., Samsung Electronics Co. and Nokia Oyj are among companies that have told workers not to travel to Mexico, officials at the companies said. Japan, Malaysia, Australia, South Korea and Singapore are screening passengers at checkpoints for fever. The European Union advised travelers to avoid going to Mexico.
Mexico’s President Felipe Calderon declared a swine-flu emergency on April 25, giving him powers to order quarantines and suspend public events in the nation, where more than 1,600 patients have been hospitalized with flu-like symptoms.
‘Lot of Jitters’
The number of deaths from Mexico’s flu outbreak has risen to 149, Health Minister Cordova said. Not all deaths have been confirmed to be caused by swine flu, he said.
In the U.S., 40 people have confirmed cases of swine flu linked to the Mexican virus, the World Health Organization said today. It has called the outbreak a “public health emergency of international concern.”
“We don’t know what the magnitude of the flu outbreak will be,” said Mario Copca, a currency strategist at Metanalisis SA in Mexico City. “This is going to fuel a lot of jitters.”
Russia suspended imports of all meat from Mexico, the Philippines ordered a ban on imports of pork and hogs from the Latin American country, South Korea is boosting quarantines on pig and pork imported from Mexico and China has banned some imports of pork.
“We may start seeing an impact on exports,” said Margolis at TD Securities. “That could also hurt the currency.”
To contact the reporter on this story: Valerie Rota in Mexico City atvrota1@bloomberg.net.
By Valerie Rota
http://www.bloomberg.com/apps/news?pid=20601086&sid=aEQyIL11CsrI&refer=latin_america
