Emerging Markets to Rebound: All in Mexico Will Prosper (CDMX)

The Global Economy is expected to grow 5.5%

It will affect emerging markets and you living in Mexico

Money...Money...Money

Photo by Blogging Guide on Unsplash

Are emerging markets really set to rebound? I cannot say with certainty that they are, but I also cannot say that they are not. Although emerging economies have a higher growth potential than developed economies, they are volatile and depend on too many external conditions.

We heard constantly in 2020 that countries needed to keep spending on the Covid-19 crisis. If not, the premature withdrawal of fiscal support would lead to widespread bankruptcies and higher unemployment.

The IMF singled out and called on Mexico to spend more to speed up weak recovery. Of course, Mexico was not about to provide rescue packages for big business by going into more debt.

And now, expats and all citizens are primed to prosper from the Coronavirus (Covid-19) recovery because Mexico chose a great time to reject the rigged finance game.

Mexico avoided the stimulus trap

Anybody who writes about how citizens of Mexico are suffering because of a lack of government stimulus, clearly has never lived here. Individuals in Mexico do not depend on formal employment or the government to survive.

However, big business does. Without bailout money, companies were restrained from rewarding themselves and unleashing more chaos by fueling market rallies with buybacks. Companies should shy away from these type of tactics because they undermine the economy and should instead focus on increasing capital investments and hiring.

Anyways, why would anyone go into debt to rescue companies that have record cash on hand and access to cheap money? It made no sense to President Andres Manuel Lopez Obrador and he instead announced a program that would grant 1,000,000 loans.

500,000 loans would go to the formal economy and another 500,000 for the informal economy. Each loan would be for a onetime whopping payout of $25,000 pesos, about $1,200 dollars, and include restrictions to avoid laying off employees.

Also, instead of printing money, tax relief is an effective tool available that can help a lagging economy. Recently, Mexico lowered Pemex's tax burden to pay down debt and make it more productive.

It was also used during the swine flu pandemic to help boost the economy, but now many see Mexico as a stand alone in its tax relief response to Covid-19. It works more like an extension to file and pay taxes, as well as providing waivers on certain state taxes.

A made up problem arises: Inflation

Companies in Mexico may have been subdued because of a lack of bailout money, but that does not mean they are done trying to instill their will on consumers. It starts off slowly, with price fluctuations and eventually takes form with a permanent increase in prices.

They call it inflation, driven by too much money flowing in the economy; but I see it as a fancy word for "more profit" based on greed. Consumers are the ones most affected. Our purchasing power is eroded as disposable income decreases and our cost of living in Mexico increases.

First, the Covid-19 pandemic destabilized the world's economies and individuals began to struggle as they lost their jobs. Consumer spending fell and what followed next was textbook. As stated earlier, the consensus was to pump more money into the economies.

The case was made that developing economies, like Mexico, could borrow cheaply because interest rates were at a record low. As Mexico became more reluctant to borrow, the IMF could not grasp why they refused to borrow since debt was low compared to GDP.

Fast forward to early 2021 and everyone is sounding the alarm on inflation. Prices are going up. First, they said an increase in the money supply caused demand-pull inflation, where demand overwhelms production and prices rise.

But as individuals chose saving over spending, inflation became a cost-push effect. This has more to do with speculation than a rise in production costs.

Wages have not gone up and transportation cost have increased because of congestion in ports around the world. This is something temporary and should already be accounted for.

What was expected? Factories are back on-line and everyone is trying to get their products to consumers as quickly as possible.

You know what comes next...

Because people are rushing to buy basic living essentials, like toiler paper, before they run out there must be an increase in the velocity of money. No other reason other than people having too much money and "splurging" on toilet paper. Really?

Or how about the argument that economies are now about to grow at a faster rate than previously expected. Evil! There will be too much money in the near future and individuals will "binge" on basics.

Speculation at its best and just like that, higher interest rates to the rescue. Shouldn't companies be concentrating on raising output before raising prices?

Debt-ridden emerging economies will be the most affected

The output gap, which is the difference between what is being produced by the economy and what could be produced, is a good measure of how much the economy can grow without triggering inflation.

Instead they are looking at households buying essentials as prove that consumers have too much money to spend. It looks as if their master plan is beginning to unfold.

Remember, the only way out was to take advantage of low interest rates and borrow. Also, some emerging countries were convinced to take on more debt and buy vaccines through the COVAX program.

Now...surprise, surprise. The U.S. Federal Reserve's change to tightening monetary policy could spur an increase in interest rates. Big U.S. banks have even gone as far as cutting loans to a record low as deposits jump.

It comes down to the banks trying to get your money that they lent you back at a higher interest rate. More profit for them. That's all.

However, higher interest rates will force emerging economies to allocate more resources for paying off debt and will also trigger outflows from emerging markets.

Mexico looks really good about now

I have been reading about Mexico's demise since Andres Manuel Lopez Obrador was elected president. But I only see change and innovation for the better of Mexico and it is paying off.

According to the Secretaria de Economia, Mexico will see a capital inflow of $26.2 billion dollars in 2021. With a pandemic going on throughout 2020, Mexico registered $39.22 billion dollars in capital inflow and $10.14 billion dollars in capital outflow. This gave Mexico a net capital inflow of $29.08 billion dollars for 2020.

Also, Mexico has a debt to GDP ratio of 54.1% compared to a 106.70% ratio of the United States. Wow! That is a big difference. Both countries are expected to grow about the same in 2021, with the US growing at 6.4% and Mexico growing at 5.3%.

Another interesting fact is that Mexico did take advantage of the low interest rates by refinancing $10 billion dollars in external debt and $408 billion pesos in internal debt. Even with higher interest rates, Mexico looks better positioned than the United States financially.

Because of these actions Mexico will have more capital available to invest domestically. However, higher interest rates could make the United States more attractive than Mexico for investors, resulting in a stronger dollar.

Why is the dollar so strong

Currencies go up when they are in high demand. And so, the external debt of Mexico increased due to a stronger dollar and not because they borrowed more during 2020.

Yet, the U.S. dollar share of global FX reserves fell to the lowest in 25 years. Now tell me who exactly is buying up these dollars in high demand.

Maybe the Federal Reserve should stop strengthening big business through the stock market. It's not something new for the Fed to participate in this type of market manipulation, but it has never been done to this scale.

It feels like the Fed is addicted to propping up the markets, even without a need. Why not sell the bonds that have been bought? It will generate a pretty profit, but it will also trigger a sharp sell-off.

We need to realize that at some point shares will have to trade on basics, which will not be at current levels. As an expat or citizen living in Mexico, we can get ahead of whatever uncertainty is to come.

Outsmart a strong dollar

You can choose to short the market, buy low and sell at a higher price quickly. This video does a good job about explaining the situation markets are facing today and what actions you can take. I personally do not recommend trying to outsmart the market and propose the following.

We have no idea when the market will correct itself, but we know that when it does, the dollar will suffer. To protect your interests, I suggest you diversify in the areas you will most be affected in.

Ask yourself how the dollar's standing affects you as an expat living in Mexico. You most likely have an account in dollars that is used for the majority of your transactions. So you buy more when the dollar goes up, but buy less when it goes down.

Why not open an account in pesos and use it to make all your purchases in Mexico. Exchange dollars when it is high by transferring dollars into your account in pesos. This is a simple process that can be performed from your account in dollars.

The amount of dollars will be reflected in your peso account at the current exchange rate, thus guaranteeing you take advantage of the higher exchange rate. Once it goes down, you can transfer pesos into your dollar account at a lower exchange rate. You win in both scenarios.

We also know that the dollar and certain metals move inversely to each other, meaning one goes down when the other goes up. Choose a precious metal to invest in. The best option I see out there is gold.

Buy centenarios and hold them. You will be able to sell them in the future and receive both dollars or pesos. I would sell them when the dollar is going down so you get more pesos and buy cheap dollars.

A lot more going on in Mexico

We can still get ahead even as others are trying their hardest to make it more difficult on us. If they are using prices as a weapon, we can always flex our consumer purchasing power by choosing substitutes or choosing not to buy certain products.

The best defense is to be prepared. Avoid surprises about living in Mexico and look into my blog. You will thank me later.

Oh, and by the way, I am linking to an article on what you should know about emerging markets if you are interested in the subject.