Greece Crisis Impacts Mexico Expats

Greece Crisis Impacts Mexico Expats

Written July 10, 2015

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Greece Crisis and Effect on Mexico

Many Expats living in Mexico have financial concerns they may not even realize exist. The recent market turmoil may precipitate a Peso Crisis and that can have mixed blessings. Read On.

Greece and Its Problems

The Greek Economic Crisis is a complicated issue, but let's try to summarize the situation in just a few lines.

  • Greece is deep in debt and owes $billions to other European countries. They want to get a bail out from those countries.
  • The lenders want Greece to introduce austerity measures as a condition to extending their loans to Greece.
  • Greek voters, in a referendum on July 5, 2015, overwhelmingly rejected the creditors' demands for more austerity by Greece (higher taxes etc.), which the creditors demanded as a precondition for those rescue loans.
  • If there is no rescue, Greece will default on its debt and likely precipitate a domino effect across the Eurozone. The full impact is complicated and nothing is known for sure in terms of global impact.
  • Negotiations continue at the time of this writing. (July 13th - A tentative rescue deal was reached but has yet to be finalized.)

Last week began with a huge drop in oil prices following the “no” vote in Greece. The drop was further compounded by significant weakness in the Chinese Stock market. As the bearish fundamentals line up for the oil markets, it is natural for investors to be wondering, what’s next?

Oil Prices and Impact

Going into 2015, the over-supply of oil was rapidly filling storage tanks to capacity and the fear was that the over-supply will lead to another oil price decline. Low oil prices are good for consumers, but are a mixed blessing. A lower price at the pumps means more dollars for consumers, but low oil prices also negatively impact oil producing countries such as Canada, Mexico, Brazil, and Russia, for example. Low oil prices lowers revenue for those countries and results in increased risk of economic and currency declines which are already clearly evident for the Mexican Peso, Canadian Loonie and the Euro.

Lower oil prices help consumers but hurt oil-producing countries (Mexico) which are heavily dependent on oil revenues to support their economies.

The big news from the U.S. this month was that the rig count actually increased after 29 consecutive weeks of rig count declines. Baker Hughes reported that an additional 12 oil rigs came into service for the week ending on July 2, although natural gas rigs declined by 9, for a net gain of 3 rigs. This means more production to offset other declines and that can further weaken oil prices. Just to sum up why this is such bearish news: production has not substantially declined in the U.S., the world is still awash in oil, and shale companies just added more rigs back to the field. That is not a formula for market equilibrium. 

In fact, despite oil prices being 40% lower than they were a year ago, companies are still drilling. After trading a few dollars above and below $60 per barrel for WTI (West Texas Intermediate) and a few dollars more for Brent, oil broke below that trading range for the first time in two months. 

  • Oil prices fell 7 percent on July 7th in the worst single-day decline in three months after Greece’s “NO” to its bailout referendum. Meanwhile, fears of oversupply have taken hold as Iran and world powers approach a nuclear deal.
  • The US benchmark oil price kept going down for the third session in a row on the New York Mercantile Exchange, losing 7.7 percent to close at $52.53 per barrel.
  • Brent crude, the global benchmark for oil prices, fell more than 5 percent on the London ICE Futures Exchange to close at $56.93.
  • Capital Economics lowered its year-end price forecast by more than 8 percent, which puts US oil at $50 a barrel and Brent – at $55.

Read More on Risk to Mexico because of Falling Oil Prices

Currency Issues – The Peso

The big news today for many investors is the strong US dollar and its prospects for continued strength against other currencies. Again, no one has a crystal ball onto what the future holds, but the general consensus is that the U.S. dollar will continue to strengthen in 2015 against other currencies. The Mexican Peso lost over 13% in 2014 with accelerating declines so far this year in 2015.

A year ago the Mexican Peso stood at 12.94 to the US dollar; six months ago, 14.75; one month ago, 15.49; and on June 30th 15.73. On July 1, 2015, analysts at Societe Generale forecasted that the peso can go lower and have revised their target to 17 pesos to the dollar.

For expats living in Mexico, that news also is a mixed blessing. Your US and Canadian dollars will go a lot farther today than they did a year ago. However, if you hold a lot of money in the Mexican Peso (or are invested in the Bolsa), there may be more bad news (lost value) ahead.

The Bolsa

On January 1, 2014, the Bolsa stood at 40,879. On January 1, 2015, it stood at 40,950...which appears to be a break even. BUT, the Peso lost over 13% against the USD in 2014.

By June 1, 2015, the Bolsa had moved up to 45,053 which is a 10% improvement in 6 months...BUT, the Peso has lost over 20% of its value since January 2014.  Even a 10% gain in the Bolsa leaves investors 10% behind.

For Expats in Mexico, a move into U.S. Investment Funds may be a wise move. Others, may wish to hedge and take a more balanced approach by holding a diversified portfolio. This is an individual investor’s choice to make. For Canadian Expats particularly, increased exposure to the U.S. is justified considering the continued the strengthening of the U.S. market and its currency. The question is… How much exposure?

What Should You Do?

What should you do? As always in the investment world, the answer is “It depends”. However to help you through the process of considering options, I have put together several portfolio scenarios. They are not intended to time the market. There are many more options, and we would work together to identify your best option before anything is done.

Defensive Options

The risks are fairly obvious... a declining peso, continued Equity Fund Out-Flow, and increased downward pressure on the Mexican economy. For foreigners who can move cash out of Mexico and invest it into other currencies, this may be the warning shot telling you to give that idea some serious thought.

As mentioned in the beginning of this article, the impact of Oil Prices on the Mexican Economy is complex. This overview should not be relied upon for decision making purposes. Readers are advised to seek professional advice prior to making financial decisions based upon its content.

For Canadians with non-resident status, it may prove difficult to move capital back into their home country. Most financial institutions in Canada will not open new accounts for non-residents although a skilled financial advisor may be able to offer some options. One such option for Canadians may be moving your money back to Canada and purchasing a Guaranteed Income Pension with your savings.

This article has been compiled by a Certified Financial Planner (CFP) who assists Canadians design portfolios for their life abroad. His extensive experience has helped 100's of Canadians move to Mexico since 1999. If you need advice or have questions, please contact our office for a no-cost consultation.

For Canadians who wish a no-cost consultation.  Please have a Canadian Financial Advisor contact me.

More information about non-residency rules for Canadians.

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