Prepare for “years” of volatility ahead – Ortiz

Prepare for “years” of volatility ahead – Ortiz

Mexico Economy & Policy Corporate & Sovereign Strategy

Latin financial markets must dig in for “several years” of volatility as an inevitable adjustment towards higher developed world interest rates is certain to prove disruptive for emerging markets, Guillermo Ortiz, chairman of Mexico’s Grupo Financiero Banorte, has warned in an interview with LatinFinance.

Although emerging regions including Latin America are “very well prepared” to face tighter liquidity conditions as the global monetary policy cycle normalizes, economies and companies that require external financing are now “more vulnerable” to a reversal in capital flows, Ortiz said.

Markets in recent weeks have stabilized following a sharp sell-off in emerging market assets in May and June on fears of an earlier-than-expected end to the US Federal Reserve’s bond buying program.

But Ortiz, who as finance minister in 1995 helped coordinate the response to Mexico’s peso crisis, warned that the recent market respite could prove short-lived.

“The markets are calmer today but the trigger can come at any point,” he said. “Emerging markets and Latin American countries will be well advised to prepare themselves for a difficult period in the next years.”

He added: “What we face now is an episode of a normalization of interest rates that will last for sure for several years. The process of adjustment is never smooth, it’s always disruptive. One has to be prepared for that.”

His comments came in the wake of Banorte’s MXP31.98bn ($2.55bn) follow-on equity sale on July 16. The deal was Mexico’s largest equity sale since Santander Mexico’s  $4.1bn IPO last September and the largest all-primary follow-on in the country’s history.

Ortiz said that while market conditions for the sale “were not ideal” he was “pleased” with the outcome of the deal, which was 3.5 times oversubscribed.

“We had headwinds of course: we have problems with homebuilders and the Mexican economy has also slowed down considerably in the first part of this year. But yet I think Banorte’s story is pretty compelling,” he said.

Mexico’s homebuilders are facing a liquidity crunch following a shift in government policy and are seeking to restructure their debts. Mexico’s stock exchange on Friday suspended trading in Urbi, a troubled homebuilder that had postponed its quarterly trading report a day earlier.

Ortiz said that Mexico’s economic prospects were nevertheless “quite good” relative to other emerging markets. “Mexico’s economy is in a very strong competitive position and that is being reflected in large flows of both domestic and foreign investment” – a fact he said was helped by the government’s ambitious economic reform agenda. LF

The full interview with Banorte chairman Guillermo Ortiz will be published next month in LatinFinance’s landmark 25 Year edition.