Mexico’s Interest Rates and Their Global Appeal
Despite Mexico being in a cycle of interest rate cuts, it remains the sovereign issuer with an investment-grade rating that pays the highest interest rates among its Latin American peers, according to analysts from BNP Paribas and Franklin Templeton.
The Role of Mexico’s Nominal Interest Rates
Mexico’s nominal interest rates have slightly contributed to making Mexican assets more attractive to global investors, but the weakening of the US dollar has played a more significant role, explained Luis Gonzali, Vice President of Investments at Franklin Templeton.
- Mexican currency has appreciated by 11.3% year-to-date.
- The US dollar has weakened by 10% during the same period.
“High interest rates help maintain a stable exchange rate, but the dollar’s weakness has been the primary driver of the Mexican peso’s strength,” emphasized the strategist.
Mexico’s Standing Among Latin American Peers
Pamela Díaz Loubet, Mexico Economist at BNP Paribas, noted that when comparing the yields offered by issuers with the same Latin American rating (i.e., peers in rating), Mexico stands out among those offering the highest nominal interest rates.
Based on Moody’s sovereign ratings, the countries in question are Uruguay, Paraguay, Peru, Panama, and Colombia.
- Colombia: 9.25%
- Uruguay: 9%
- Mexico: 8%
- Paraguay: 6%
- Peru: 4.50% (initiated rate-cut cycle in January 2023)
When comparing real interest rates, Mexico ranks second-highest in the region after Brazil. This indicates that Mexico maintains one of the most restrictive interest rate positions among regional economies, even though they are not peers in rating, they often compete nonetheless, Díaz Loubet pointed out.
Key Questions and Answers
- Q: How do Mexico’s interest rates impact its attractiveness to global investors?
A: Mexico’s nominal interest rates have slightly contributed to making Mexican assets more attractive. However, the weakening of the US dollar has played a more significant role in making Mexican assets appealing to global investors.
- Q: How do Mexico’s interest rates compare to its Latin American peers?
A: Among countries with the same investment-grade ratings, Mexico offers the highest nominal interest rates. When comparing real interest rates, Mexico ranks second-highest in the region after Brazil.
- Q: What factors have contributed to the Mexican peso’s strength?
A: The primary driver of the Mexican peso’s strength has been the weakening of the US dollar, complemented by Mexico’s relatively high interest rates.
