The Mexican Government’s oil sector liberalisation programme continued with 19 deep-water blocks being successfully auctioned off in the latest January round. Shell was a prominent bidder. Pemex, Mexico’s dominant oil producer and 100% owned by the Government, was awarded 4 blocks, 2 individually. The government will receive USD535m for these blocks and Mexican officials estimate that this could bring in as much as USD93bn in investments, unquestionably a credit positive for the sovereign.
Earlier this week, José Antonio Meade resigned from his position as Mexico’s Finance Minister and announced his intention to run for the nomination as the PRI (Institutional Revolutionary Party) candidate for the 2018 Presidential Elections. The PRI party nominated candidate is due to be announced in February 2018. Interestingly, Meade is not a PRI party member but his reputation as an extremely capable candidate (having served in roles in Finance, Energy, Foreign Affairs and Development) and one who is honest and has integrity is a positive.
Pemex, Mexico’s dominant oil producer, 100% owned by the government, has been in the news of late. It recently announced its largest onshore oil discovery in the past 15 years with the Ixachi-1 well: estimates put total reserves at around 350m boe and over 1.5bn boe in place. The find is world scale and particularly attractive given its proximity to existing infrastructure allowing for a quick development schedule. This discovery builds on the momentum of some other discoveries in Mexico, albeit announced by private companies participating in the Mexican Government’s Energy Reform Programme; notably the Zama offshore oil field discovery which is estimated to have 1.4-2bn barrels of oil in place.
Brexit’s running for the most fruitless trade talks seems to have a contender in the Tratado de Libre Comercio de América del Norte - or more commonly known, to those of us not in the Spanish speaking world, as the North American Free Trade Agreement (NAFTA). The good news for Mexico (and for the US and Canada) is that at least NAFTA negotiations can be extended - as they were yesterday, to the first quarter of 2018. On news of this, the Mexican peso has rallied almost 2% from its weak point a couple of days ago.
The Mexican Energy Reform Programme has benefited from some positive news-flow in recent weeks. A discovery at the Zama offshore oil field is estimated to have 1.4-2bn barrels of oil in place. This field is owned by Talos Energy, Premier oil and Sierra Oil & Gas and was one of the blocks bought in the earlier auctions opening up the acreage to private companies, a direct result of Energy Reform that came into effect in 2014. Also Eni announced that they had upgraded their estimates for the size of their find at the Amcoa field in the Campeche Bay to 1.3bn boe in place.
Asset markets across Brazil have continued to come under pressure this week as geopolitical concerns deepen; exacerbated by the country’s bar association’s majority vote, over the weekend, in favour of President Michel Temer's impeachment. With roughly one in three cabinet members under investigation for alleged corruption, it seems the previously touted ‘EM Gem’ is set to be plagued with an uncertain outlook as the political crisis ensues, and much needed economic reform is thus put on hold.
Yesterday Oman came to the market with a multi-tranche USD5bn bond issue that was close to four times covered but with the 30 year issuing at a generous yield of 6.549%, even for a Baa1 rated credit (Moody’s), it is easy to see why investors were keen to get exposure, ourselves included. That said, we still see the greatest valuation upside in the quasi-sovereign space.
Most quasi sovereign bonds trade at wider spreads than their own governments and globally quasi sovereigns pay roughly 0.9% more than their sovereign owners. That is a lot of extra compensation for the modest additional risk.
Recent volatility across asset markets seems to have abated somewhat as befuddled markets appear to be finding their feet; although the future Trump administration policy stance still remains unknown. One thing that does appear to be ‘known’ is the future relationship between the US and Russia. After a phone call yesterday between Trump and Putin, expectations are that the two nations will look to work to normalise relationships, formalise trade agreements and work together to combat international terrorism and extremism. Our guess is that Putin will also look to Trump to ease western sanctions on Russia which are due to be reviewed in January; more recently we have heard that Italy, Hungary, Greece and Cyprus have questioned the effectiveness of the sanctions and are pushing for dilution. Although bonds within the region did sell-off post election announcement, holdings such as Russian Railways 7.487% 2031 and Gazprom 8.625% 2034 have recovered into the end of the US close and today’s trading session; up 2-3 points at time of writing. Both bonds remain attractive, yielding over 6.3%, with sufficient 2-3.5 notch protection and expected returns of 19.4% and 13.5% respectively.
Here at last, US Election Day and the most expensive campaign in history sees Hillary with a small 3.6% lead in the polls, the same margin as the Brexit polls, and we all know what happened there. Having always been taught ‘if you have nothing nice to say, say nothing at all’ we find it incredible that in a nation of over 300 million, the US has ended up with these two presidential candidates... oops nothing to say.
Where else would you wish to end the most colourful US Presidential debate in history, but the city of Las Vegas. Yesterday Trump remained his unconventional self calling Clinton a ‘nasty woman’, Clinton bit back declaring Trump ‘the most dangerous person to run for president in the history of America’; apparently quoting her nemesis Bernie Sanders. With just over 18 days left until the election, polls indicate that Clinton is winning the race although Trump is not willing to accept an election loss claiming the results could be ‘rigged’. The election’s proxy currency, the Mexican peso continued its appreciation yesterday and is now one of the strongest performing currencies so far this month having gained ~4.5% against the dollar.
In the midst of a turbulent first quarter of 2016, emerging market currencies have had their best performing month in 18 years this March. The top performers are the Russian rouble and Brazilian real, up 11.2% and 10.4% respectively versus the dollar. The Argentine and Colombian pesos, Korean won, Malaysian ringgit, Polish zloty and South African rand were amongst other currencies that appreciated between 5% and 8% this month also. This of course is a retracement following the 50% rise in oil, back to end 2015 prices, and a more dovish tone from the US Fed. But should Brazil really be the one of the leading performers on the back of all these developments? Are markets assuming these factors have considerably more impact than the escalating internal strife? Of course Brazil stands to benefit from these latest developments and a settling of exaggerated Fed rate rise expectations. But the country is still in the middle of a major political upset at a time when it really needs to be addressing public spending and economic reform in the face of stagnating growth.