Debt will be the undoing of the global economy, but one never knows what straw will break the camel’s back. Mexico may be a candidate. The strong dollar is certainly not helping. From Don Quijones at wolfstreet.com:
Fearing “a large-scale crisis” in foreign currency debt.
Since central banks embarked on their madcap ZIRP and QE during the Financial Crisis, emerging-market companies have not been able to resist the fatal allure of cheap dollar debt. As the good times rolled, the risks were ignored.
In relative terms, dollar-denominated debt recently reached a record 17% of global GDP excluding the US, a ratio that has doubled over the past 20 years. Some countries are more exposed than others. In its latest report on Mexico, the IMF pointed out that almost a quarter of all of the corporate debt in circulation in the country is denominated in dollars. That’s roughly the equivalent of 25% of Mexico’s GDP ($1.1 trillion in 2015).
Foreign denominated liabilities jumped 83% over the past four years to 1.7 trillion pesos ($82 billion). During the same period, Mexico’s non-petroleum exports increased by just 10%, meaning that the ability of private companies to generate the dollars needed to continue meeting their burgeoning dollar-denominated debt obligations has weakened significantly.
To make matter worse, the Mexican peso can’t stop losing value, in particular against the U.S. dollar. The Bank of Mexico has already raised the country’s benchmark rate twice since February, from 2.3% to 2.8%, but to little avail: the peso has still fallen nearly 20% against the dollar so far this year.
Hence the debt problem. According to the IMF, Mexico’s corporate debt binge is no biggie. Having dollar-denominated corporate debt worth 25% of GDP is apparently “relatively low” by today’s standards, it says. What’s more, some of the exposure is hedged.
To continue reading: Things Are Getting Serious in Mexico’s Corporate Debt Crisis
