July 1, 2020 / 4:31 PM / a month ago

Latam FX to stay vulnerable, amid worsening fiscal and virus fears

BUENOS AIRES (Reuters) - Latin American currencies are heading into the second half of the year vulnerable to further depreciation amid a worsening fiscal picture and fears over the relentless spread of the coronavirus, a Reuters poll showed.

The Mexican peso MXN= and the Brazilian real BRBY recouped some losses in May after plunging to record lows with the virus outbreak, but a brief upswing fizzled out last month and more selling is likely ahead.

The steep cost of the crisis, combined with a collapse in revenues caused by a historic downturn, have punctured the budgets of Mexico and Brazil, pressuring authorities already under fire for their handling of the health emergency.

The peso is seen logging a modest gain of just over 3% by the close of 2020 to 22.20 per U.S. dollar from its value on Wednesday and staying close to that level for at least a year, according to the median view of 25 analysts polled June 26-30.

“We expect the peso to continue (to be) highly volatile in the second half of the year, resulting from changing global financial conditions,” said Mario Correa, chief economist at Scotiabank Mexico.

"Besides, there are worries about the possibility of new sovereign debt downgrades for Mexico in relation to an expected fall in tax receipts and operational problems at (state oil producer) Pemex". (Graphic: Reuters Poll - USD/MXN outlook, here)

The country is facing its deepest recession in decades and investors believe it could soon follow the fate of the national oil giant in seeing its credit rating relegated to “junk” territory as the COVID-19 pandemic rages on.

In Brazil, the national debt and public-sector deficit surged to record highs in May, reflecting the squeeze on finances from a second full month of social isolation and quarantine to curb the pandemic.

“Brazil may experience renewed outflows if the current mix of elevated debt ratios, rate cuts and high credit risks drags on,” said Alex Agostini, chief economist at Austin Rating, adding he still expected a return to fiscal restraint soon.

The real is forecast to end the year up 7.0% from this week’s value at 5.10 per dollar and then carry on basically unchanged until mid-2021. Still, economists remained pessimistic about prospects for the currency.

Out of 14 respondents to a separate question in the survey, seven said risks for the real were tilted to the downside, while five saw a stronger trend for the currency and two answered “neutral.”

So far in 2020 the peso has shed nearly 18% of its value, despite having recovered just over 10% from a lifetime low in March. The real is down by a little over a quarter in the year after rising nearly 8% since it hit a record low in May.

(For other stories from the July Reuters foreign exchange poll:)

Reporting and polling by Gabriel Burin in Buenos Aires; Additional polling by Hari Kishan and Sumanto Modal in Bangalore; Editing by Ross Finley and Steve Orlofsky

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