STARTLING TRANSFORMATION OF MEXICO´S FINANCES / THE FINANCIAL TIMES ( RECOMMENDED READING )

Startling transformation of Mexico’s finances

By Adam Thomson in Mexico City

Published: October 14 2010 13:31

When it comes to emerging markets these days, it is not often that Mexico outshines Brazil. But this month, Latin America’s second-largest economy did just that as it issued the region’s first century bond as well as the largest amount placed with a 100-year maturity: $1bn.


There is little doubt that the milestone – achieved at a modest yield of 6.1 per cent – could not have happened were it not for record-low interest rates in industrialised countries and investors’ voracious search for higher yields.


As Gerardo Rodríguez, who heads the public-debt division at the country’s finance ministry, told the Financial Times after the placement: “There is an unusual demand for countries like us at the moment, and at long maturities and historically low rates.”


But neither would it have happened had it not been for a startling transformation of Mexico’s debt management over the last 15 years or so that has led many analysts to conclude that the country has become one of the leaders in the area among emerging markets.


“Mexico’s liability management has been strong for many years,” says Shelly Shetty, head of Latin American sovereigns at Fitch Ratings in New York. “It is one of the front runners in the region.”


As if to confirm that view, Citigroup this month incorporated Mexico into its World Government Bond Index, marking the first time a Latin American country has been admitted to the index made up of bonds from 23 industrialised countries.


Ernesto Cordero, Mexico’s finance minister, said recently that the inclusion of Mexico – just over $100bn of the country’s domestic public debt now makes up part of the index, which represents a proforma weighting of 0.65 per cent, according to Citigroup – had led to an influx of Asian investors and had already helped drive down interest rates.


So what did Mexico’s transformation consist of? After all, the overall proportion of Mexico’s public debt to gross domestic product has come down only slightly from 26.4 per cent in 1994 to 24.9 per cent at present.


The first prong of the strategy has been to reduce the proportion of external debt, which has come down from 16.5 per cent of GDP to just 4.8 per cent today – or roughly 20 per cent of Mexico’s total federal government debt.


The effect, argues Ms Shetty, has been significantly to reduce traditional volatility arising from sudden swings in investor confidence as well as foreign-currency risk. “It has really helped reduce Mexico’s vulnerabilities,” she says. Fitch has rated Mexico at investment-grade BBB, with a stable outlook.


The second element has been to develop domestic debt markets – in size to make up for the shrinking proportion of external debt, but also to lengthen maturities of the government’s domestic debt.


Over the last decade, Mexico has established several important benchmarks, including the first-ever placement of 10-year peso-denominated bonds in 2001, a 20-year bond in 2003 and, most recently, a 30-year, peso-denominated bond in 2006.


The result, according to Mr Rodríguez, is that the average maturities of Mexico’s peso-denominated notes have gone up from about 1.5 years in 2000 to about seven years today. That is slightly higher than the average for members of the Organisation for Economic Co-operation and Development.


One of the more remarkable things about the strategy, begun in the aftermath of the country’s tequila crisis in 1994 and the subsequent economic contraction of more than 6 per cent, is that it was followed by all three subsequent governments regardless of political affiliation.


“The crisis was so deep and the lesson so great that it created the space to do technically what we had to do independently of the political cycle,” says Mr Rodríguez.


As for the future, Mr Rodríguez says that he wants policy to be as predictable as possible. “An effective public-debt policy is a boring one,” he says. “You don’t have to invent amazing new things to show that you are intelligent.”


Last week, the finance ministry announced that they would issue 150bn yen or $1.8bn in Samurai bonds with a maturity of 10 years in a near-repeat trip to that market that it made in December last year.


With that issue, which is expected to come towards the end of this month, the government of centre-right Felipe Calderón, president, will have covered all of its maturing external debt for the remainder of its term in office: $1.5bn next year and $1.4bn in 2012.


For Mr Rodríguez and his team at the finance ministry that is a pretty good feeling. “We might even be able to think about a holiday in the next couple of years.”


Copyright The Financial Times Limited 2010