Mexican Peso, Stocks Take Hit

Mexico’s peso closed on Wednesday at its weakest level since early 1999 and stocks hit new lows for the year on fear that the Mexican economy and markets may be hurt by fallout from U.S. accounting scandals.

The peso shed 1.2% from Tuesday to close at 10.004 per U.S. dollar, its weakest level since Feb. 10, 1999, raising chances that Mexico’s central bank would restrict liquidity in the local money market to support the currency and calm inflation fears.

Mexico’s benchmark IPC index of 36 stocks fell to a fresh low for the year, down 2.9%, or 182.63 points, to close at 6,171.63, its lowest level since mid-December. The index has lost 12.3% since the end of May and is down 3.2% since the start of the year.

Analysts said some global investors who have large stakes in Mexican securities may be tempted to sell if they need to raise cash to offset losses in other markets.

“The market has been one of the best performers, so it is one place where investors will look to raise cash,” said Thierry Wizman, Latin American strategist at brokerage Bear Stearns in New York.

Blue-chip Mexican telecommunications companies, which are favorites of foreign portfolio investors, were the top losers in Wednesday’s market rout, tracking losses in many U.S. telecom shares in the wake of news of WorldCom Inc.’s massive accounting irregularities.

Shares of wireless company America Movil tumbled nearly 10%. Phone giant Telmex, which accounts for 16% of the IPC, dropped 3.8%. Telmex’s U.S.-traded shares fell $1.72, or 5.3%, to $30.66 on the New York Stock Exchange.

Analysts said the sell-off in the Mexican telecom sector was more tied to the market’s overall reaction to the WorldCom news than to concerns that Mexican telecom companies might face debt-load problems similar to those faced by some of their U.S. or European peers.

“Mexican telecom companies are actually very under-leveraged,” said Lars Schonander, Latin American fixed-income analyst at ING Barings in New York.

Investors fear that corporate accounting irregularities in the United States and misdeeds by U.S. corporate executives could begin to threaten the U.S. economic recovery, which is also seen as negative for Mexico’s economy.

“If confidence in the United States is completely undermined and we start facing the idea of a double dip [recession] in the U.S. economy, then it is difficult to talk about a floor for the Mexican economy and market,” said Yarek Aranowicz at Credit Suisse Asset Management in New York.

Mexico sends about 85% of its exports to the United States and has seen its economy shrink by 2% in the first quarter.

In addition to Mexico’s U.S.-fueled woes, Aranowicz said Mexican assets, including stocks, bonds and the peso, could come under pressure from a worsening political and economic outlook for Brazil.

“We had this image built in the last two to three years that whatever happens in Latin America should not affect the Mexican economy and market, but problems in Brazil will impact all emerging markets, including Mexico,” he said.