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Icon Mexico rules out capital controls *EXCLUSIVE VIDEO INTERVIEW*

09/10/2010 | Sid Verma and Thierry Ogier

Mexico has ruled out imposing capital controls on foreign portfolio investment, in the wake of recent taxes imposed by emerging market nations to rein in excess flows of capital

Rodriguez: doors stay open

 
Rodriguez: doors stay open 
“We are not thinking of capital controls at the moment because we have an open and market-based economy”, Gerardo Rodriguez, head of the Mexican finance ministry’s public debt unit, told Emerging Markets.

In order to stabilize the economy, the country would rely on “fiscal and monetary measures,” he said.

Brazil this week slapped a higher levy on foreign purchases of fixed-income securities in a bid to restrain the real’s rally, triggering fears that speculative capital will flee to neighbouring economies in the region.

Agustin Carstens, the Mexican central bank governor, told Emerging Markets that capital flows in the country were driven by structural improvements in the economy.

“Mexico looks attractive to the market and capital flows keep coming as showed by the latest bond issue. The kind of capital that is coming is essentially long term, the average maturity [of Mexico’s public debt] has significantly increased.”

Mexico has front-loaded its borrowing needs this year by issuing $4.2 billion in euro and dollar debt this year, to take advantage of record low US interest rates. On Wednesday, the government sold $1 billion of 100-year bonds, the longest maturity ever issued by a Latin American government.

Royal Bank of Canada issued a report yesterday that said the Mexican debt deal heralds that a “bubble is brewing” in the global credit market.

“While not making any direct comment about the relative pricing of Mexico, we are left feeling that this sort of trade is highly reminiscent of the height of the bull market era,” said the report, entitled “I’m forever blowing bubbles”.

Rodriguez said a strong investor base, principally insurance funds and high-quality institutional accounts, drove Mexico’s historic deal this week. “They know what they are doing, though, clearly, the excess global liquidity was a contributor to the success of the deal.”

Latin American economies should consider well designed taxes to avoid the risk of excessive capital flows and financial leverage, Nicolas Eyzaguirre, the director of the fund’s Western Hemisphere department, told Emerging Markets.

Carstens said investors are positioning themselves in the equity and debt markets to gain exposure to the country’s fundamentals. And the country had beefed up its defences in the event of capital volatility thanks its strong external position.

“There is no issue with the financial system. We are well capitalized and hold a record level of reserves.” Rodriguez said. The rise in the value of the peso this year reflected the “true position of the economy as we are now growing very rapidly after the recession”.

In other comments, Rodriguez said Mexico is set to issue a 150 billion yen 10-year deal in the coming weeks thanks to backing from the Japan Bank for International Cooperation.

 

 EM VIDEO EXCLUSIVE: Mexico debt chief rules out capital controls

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