Background on Banco de México and its Reserves
Banco de México, the central bank of Mexico, reported a new record high for its international reserves in the week of May 19-23, 2023. The reserves now stand at $239,885 million, surpassing the previous record set on May 16 at $238,923 million.
Consistent Growth Throughout the Year
In 19 out of the 21 weeks this year, Banco de México’s assets have shown increases, accumulating a total rise of $10,895 million.
Experts’ Perspectives on Mexico’s Investment Grade
Alejandro Saldaña, Chief Economist at Bx+, highlights the importance of international reserves as an anchor for Mexico’s investment grade. He points out several solid fundamentals that support the country amidst uncertainty:
- Committed Hacienda Secretariat: A dedicated and recommitted effort to reduce fiscal deficit.
- Autonomous and Credible Banco de México: A central bank with autonomy and credibility.
- Strengthened External Position: A lower current account deficit as a proportion of GDP and foreign reserves covering nearly four months of imports.
Gabriela Soni, UBS’s Director of Investment Strategy, agrees that Mexico’s international reserves form part of the country’s “support network” to reduce exposure to capital outflow episodes that have historically led to balance of payments crises.
Drivers Behind Reserve Growth
According to Banco de México’s statistics, 26% of the reserve increase over these past 21 weeks is due to valuation changes in assets. In 17 of those weeks, the reserves grew by $6,691 million from the appreciation of their investments.
Officials from the international financial system explain that if a portion of reserves is held in gold, for example, the asset balance reflects the strengthening of gold’s price. Specifically:
- Pemex Dollar Sales: 26.6% of the reserve increase in the first five months of 2023 is attributed to Pemex’s direct sales of dollars to Banco de México, totaling $2,900 million over six weeks.
- Fondo Mexicano del Petróleo’s Dollar Sales: An administrative decision led to the sale of part of Fondo Mexicano del Petróleo’s dollars to Banco de México, accounting for 5.8% of the $10,895 million reserve increase since January.
Key Questions and Answers
- What are international reserves? International reserves are the dollar-denominated assets held by a central bank, such as Banco de México, to ensure stability and provide confidence for the sovereign and other issuers.
- Why are international reserves important for Mexico’s investment grade? International reserves serve as an anchor for Mexico’s investment grade by demonstrating the country’s capacity to manage external risks and maintain financial stability.
- What factors contributed to the recent growth in Mexico’s international reserves? The growth can be attributed to valuation changes in assets, Pemex’s direct dollar sales to Banco de México, and Fondo Mexicano del Petróleo’s decision to sell part of its dollar holdings to the central bank.
