Mexico may tap IMF credit line

Mexico is more likely to draw on a US$47 billion credit line from the International Monetary Fund after the deadly swine flu outbreak sparked the peso's biggest tumble in six months, according to Barclays Capital.

The spreading disease "raises the odds of tapping the facility", Eduardo Levy-Yeyati, head of emerging-market strategy at Barclays in New York and a former economist at the IMF, said in an interview. "The flu increases growth risks and currency pressures."

The peso sank 5.1 per cent to 14.0505 per US dollar yesterday, the biggest decline among all currencies tracked by Bloomberg, as the number of deaths suspected to be caused by swine flu rose in Mexico.

The benchmark stock index lost 3.3 per cent and bonds dropped.

The sell-off began just as investor confidence in Mexico was starting to recover because of the IMF's April 17 decision to extend the country a credit line.

The currency, which had plunged 32 per cent in the six months through March 9 as Latin America's second-largest economy slipped into a recession and drug violence increased, surged 12 per cent in the six weeks before the Government first reported the swine flu cases on April 23.

President Felipe Calderon requested the IMF credit line to shore up the country's foreign reserves amid a slump in tourism, migrant remittances and exports to the US. Central bank Governor Guillermo Ortiz said on April 1 that the IMF line was a "preventive" loan facility that the Government hadn't planned on drawing down.

Win Thin, a senior currency strategist at Brown Brothers Harriman & Co in New York, said Mexico shouldn't hesitate to tap the line "if they feel they need it".

"It's there to be used," Thin said. "This is something they couldn't really control, so I don't think the markets would take it too badly."

The peso's drop extended its decline to 6.2 per cent in the past two trading days. The central bank bought US$400 million worth of pesos to stem the currency's slide. It has spent US$23.1 billion of its foreign reserves since October, pushing them down 7.4 per cent, to defend the peso.

The Bolsa stock index led declines in Latin America as Mexico City estimated the outbreak was costing companies in the capital at least US$85 million a day in lost revenue, deepening a recession.

The extra yield investors demand to own Mexican bonds instead of Treasuries rose 20 basis points to 3.4 percentage points, the widest since April 1, according to JPMorgan Chase. A basis point equals 0.01 percentage point.

Mexico's government may hold off from tapping the IMF's credit line and instead spend international reserves, said Gabriel Casillas, chief economist for Mexico and Chile at UBS AG.

The bonds the central bank sells to adjust money supply yield more than the return obtained from investing reserves in assets such as US Treasuries, he said. Reserves totalled $77.9 billion as of April 17, the latest central bank data available.

"The level of reserves is pretty large," said Casillas in an interview from Mexico City.

Barclays predicts the peso will rebound to 13.2 per dollar by year-end. Jimena Zuniga, an economist at Barclays in New York, said the bank "will see what health organisations say about the likely evolution of the situation before" considering changing that forecast.

The flu outbreak will cut dollar inflows from tourists and curb consumer spending as more people stay at home, said Sergio Luna, head of economic research at Citigroup's Banamex unit in Mexico City.

"The economic impact will depend on how long this situation lasts," said Luna, who is keeping his forecasts for the peso at 13.5 by year-end and for the economy to shrink 3.5 per cent this year.

"If this lasts a few weeks, it will have a more notable impact on aggregate demand," he said.

- BLOOMBERG