The SVB crisis and the risks to the Q4 narrative

From the lessons learned by the Mexican authorities as a consequence of the crisis triggered in our country in December 1994 with that famous “December Error”, there is no doubt that Mexican banking is subject to stricter regulation than banking from other countries, including the United States. For this reason, there is no logical reason for banks operating in Mexico to be nervous about the outlook, except for those of a psychological nature, which in situations such as those experienced since Friday in international markets due to the intervention of the authorities financial institutions of the United States on the banks Silicon Valley Bank and Signature Bank, usually occur and cause contagion effects in the stock markets.

However, inherent to human nature, nervousness always appears, and for this reason, it goes without saying that yesterday’s Monday drop of around 5% in the value of banks listed on the Mexican stock market is precisely explained. because of the nervousness of investors.

However, what was observed yesterday was not only the pressure on the value of the shares of the banks listed on the stock market in Mexico. Financial nervousness has also spread since Friday to the currency markets, and the value of the Mexican peso has not been the exception. For example, according to the information published by the Bank of Mexico, between the opening value of last Wednesday, March 8, and the closing value of yesterday, Monday, March 13, the Mexican peso lost 5.4% of its value.

I bring this up because, in recent months, we have observed how the price of the peso against the dollar had been recovering much of the ground lost as a result of the overreaction to which the price of our currency was exposed as a result of the triumph of Donald Trump for the presidency of the United States in 2016, at which time a period of relative greater uncertainty for the Mexican economy began due to the outbursts of that right-wing populist president.

After Trump’s departure from the US presidency, and calming the waves that had caused his repeated hitting on the trade association between Mexico and that country via NAFTA, which we know had to be renegotiated, the Mexican peso entered a period of stability, which became a mirage for the administration of President López Obrador, who was seduced by the improvement that has been systematically reported in the value of the Mexican peso in recent weeks, to the extent that it became the maximum -and practically unique- indicator of the supposed good progress of the Mexican economy, and this, in turn, of the supposed prosperity that the Fourth Transformation is generating for Mexicans.

The relatively rapid deterioration in the value of our currency, which I have no doubt will not continue for a long time, shows us that the factors that explain its behavior, although they are related to what is happening in Mexico, are also strongly explained by what is happening out of Mexico.

What we saw these days was simply a wake-up call from the markets for the government of President López Obrador to show it the risks of betting the narrative of the success of its economic policies on a single variable such as the exchange rate, a narrative that has recently It went up to a large number of spokespersons, be it state secretaries, governors or legislators, who without further reflection boasted the performance of the exchange rate.

Two days of nervousness can throw overboard months of narratives detached from reality, especially when the economy remains stuck in its anemic state.

@GerardoFloresR