By THÉRÈSE MARGOLIS
It’s been the financial lifesaver that has kept the Mexican economy afloat ever since leftist firebrand Andrés Manuel López Obrador (AMLO) took office as president in December 2018.
The carry trade, a financial venture in which entrepreneurs borrow money in one country where interest rates are low to invest in second country where interest rates are high, has been touted by AMLO’s economic team as the bedrock of Mexico’s current foreign investment platform and the basis of a stable peso-dollar parity.
And there is no denying that Mexico’s high interest rates for short-term instruments have brought in massive amounts of fluid foreign revenues for the country, over $60 billion in 2019, by some estimates.
At the same time, AMLO has been able to claim bragging rights for a stable Mexican currency, dropping below the 19-peso-to-a-dollar ratio in recent weeks (a figure, which, taken by itself without considering other aspects of the economy, makes the president’s financial record seem to shine).
But while carry trade investment is a quick and easy way to bring in cash for an economy on the skids (remember, Mexico’s growth rate in 2019 was barely .1 percent and the perspectives for this year are not much better), it is not sustainable.
Basically, carry trade investments are the financial institutions equivalent of a pay-day loan.
The more they are used, the costly they get.
The Mexican Central Bank offers high interest rates to lure in financial investors.
But unlike traditional investments, which involve foreign individuals or corporations purchasing factories and other real estate that anchor them to the country, there are no tangible assets involved in carry trading other than cash itself.
That means that when an investor decides it is time to call it quits on investing in Mexico, they can simply cash in their chips (or, in the case, cetes or bonds) and move on to greener pastures.
Also, carry trade investment does not produce jobs for Mexican workers, or even the transfer of knowhow and technology, so there are no long-term benefits for the economy.
Worse yet, to keep carry trade investors interested in pumping cash into the Mexico, the government has to maintain a steady (and not always realistic) peso-dollar parity that can quickly eat away at financial reserves.
Outwardly, a strong peso may seem attractive to the average Mexican, but it can be very costly for the nation as a whole.
A cheap dollar (the flipside of a strong peso) means that foreign-made products are more affordable and Mexican-made products are less competitive in the global market.
This, in turn, leads to more imports and less exports — not the economic goal of any modern nation.
But perhaps the worst aspect of carry trade investment is that it is transient.
Carry trade investors are the financial world’s carpetbaggers, here today and gone tomorrow.
If another country offers better short-term interest rates, the carry trade investors will simply take their cash elsewhere.
AMLO may be very pleased with himself now as he boasts about how strong the peso is and how much carry trade money is flooding into the country.
But like the goose that laid the golden egg, the easy flow of carry trade cash is not eternal, and once investors begin to worry about the future stability of the peso or see a more attractive interest rate option somewhere else, they will move on, leaving Mexico with nothing but drained reserves and an insurmontable international trade deficit.