Itaú BBA - Oil increases duration-risk in Mexico and Colombia

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Oil increases duration-risk in Mexico and Colombia

July 7, 2017

We see limited room for further compressing of Mexican yields, given the fiscal impact of the oil rout.

For the full report, see enclosed file

Highligths

  • Soft inflation and stable growth in DM still favor LatAm assets, but oil poses risks for Mexico and Colombia.
  • The long end of the Mexican curve compressed strongly after Banxico’s signaled the end to the tightening cycle.
  • However, we see limited room for further narrowing, as the Mexican government will have less leeway to mitigate the fiscal impact of the oil rout.
  • We now expect wider nominal fiscal deficits in Mexico for 2017 (-2.2% of GDP, 2.1% previously) and 2018 (-2.4% of GDP, -2.1% previously).
  • The deterioration in Colombia’s fundamentals will put pressure on credit spreads and long yields ahead. The oil decline compounds the lack of a significant fiscal consolidation, still-high external gap and poor growth.
  • The premium at the back end of Brazilian nominal curve seems consistent with the historical average, if one postulates the steady-state inflation is at the 4.00% CPI target set for 2020.

 



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