UPDATE 2-Investors boost direct investment in Mexico, cut stocks

Fri May 24, 2013 6:44pm EDT

MEXICO CITY May 24 (Reuters) - A healthy boost in foreign direct investment in the first quarter underscored confidence in Latin America's No. 2 economy even as investment flows into the country's stocks and bonds moderated, central bank data showed on Friday.

Foreign direct investment reached $4.99 billion in the first quarter after touching negative territory in the fourth quarter of 2012, the first time since the data collection began in 1995.

The lionshare of the direct investment went into the manufacturing sector and came from the United States, which receives about 80 percent of Mexican exports.

"There is a huge surplus in the financial account, which is savings from abroad coming into the Mexican economy," said Rafael Camarena, an economist at Santander in Mexico City.

But foreign inflows into other Mexican assets fell to $13.9 billion in the first quarter, down from $24.65 billion in the fourth quarter, with flows into Mexican stocks and corporate debt dipping to $749 million from $5.61 billion reported at the end of 2012.

Flows into peso-denominated bonds also declined, easing to $9.34 billion from the $14.19 billion originally reported in the fourth quarter.

Optimism about a raft of economic reforms promised by President Enrique Pena Nieto helped boost the local peso in recent months, though the currency has since fallen back on slower growth and on Friday hit its lowest level since mid-March.

Mexico's annual economic growth slumped in early 2013 to its weakest in three years, prompting the government to cut growth estimates and backing expectations of another interest rate cut.

DEFICIT NARROWS

Friday's data showed Mexico's current account deficit narrowed to $5.53 billion in the first quarter, the equivalent of 1.8 percent of gross domestic product, from a revised record high of $7.023 billion deficit in the fourth quarter of 2012.

The quarterly balance of payments data, which provides a snapshot of Mexico's dealings with the outside world, showed that imports during the quarter again outweighed exports.

Gross reserves rose by $4.2 billion to a high of $171.3 billion, at the end of the first quarter and analysts said the increase in the central bank's war chest from around $90 billion in 2009 would help weather any global financial turmoil.

"The external accounts are at this juncture resilient enough to deal with potentially large negative external shocks," Goldman Sachs economist Alberto Ramos said in a client note.

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