Foreign capital returned to Mexico last year, bucking earlier outflows

© Reuters. FILE PHOTO: A ticker displays stock exchange data outside Mexico's stock exchange building, in Mexico City, Mexico June 1, 2021. REUTERS/Toya Sardo Jordan

By Noe Torres

MEXICO CITY (Reuters) - After two years of record outflows of foreign capital, Mexico's economy bounced back in 2022 in large part due to attractive yields compared to other destinations, though some analysts doubt last year's performance will set a new trend.

A major factor will be Mexican borrowing costs, as the central bank is expected to end a bullish cycle of rate hikes.

Mexico's government debt market attracted 73.5 billion pesos ($3.9 billion) last year in foreign capital, following a drop of 515 billion pesos in 2020 and 2021, according to official data released on Tuesday.

Last year, the amount of government debt in foreign hands increased nearly 5% to reach 1.71 trillion pesos - the largest percentage increase since 2014.

International demand grew after the central bank, known as Banxico, sped up interest rate hikes in a bid to tackle inflation. Mexico's early tightening of monetary policy outpaced other nations and boosted the peso. The currency was up 5% in 2022 versus the U.S. dollar.

Banxico has increased its benchmark rate by 650 basis points since June 2021, raising it to a record 10.5% - well above yields for U.S. government debt of between 4.25% and 4.50%.

"For this year, we believe that differential will hold, although not necessarily through the whole year," said Juan Rich, analyst with brokerage Ve por Mas.

Banxico will likely decouple its rate policy from the U.S. Federal Reserve in coming months, Rich added.

Some analysts argue the pace of capital flows into Mexico this year will probably depend on investor appetite for riskier assets even despite a narrower rate differential with the Fed.

But even as Latin America's second-biggest economy is seen benefiting from less restrictive monetary policy this year, stubborn inflation combined with meager growth could tame expectations.

"I don't see a lot of additional money coming in," said CI Banco analyst Jorge Gordillo.

($1 = 19.0601 Mexican pesos)