Mexican debt, Wall Street’s new darling economy

The recent issuance of Mexican debt bonds in international markets, “the largest placement in its recent history”, according to the government, was so eagerly received by Wall Street that three times the amount offered was demanded. This, despite criticism of the government of Andrés Manuel López Obrador for protecting the state monopoly in the energy sector and seeking confrontation with its main partner…

The recent issuance of Mexican debt bonds in international markets, “the largest placement in its recent history”, according to the government, was so eagerly received by Wall Street that three times the amount offered was demanded. This, despite criticism of the government of Andrés Manuel López Obrador for seeking to protect state monopolies in the energy sector and confrontation with its main trading partner in agriculture. legend of near shoreThe strong exchange rate and rapid economic expansion contributed to the country paying relatively low rates.

On Tuesday, Mexico reached $7.5 billion in debt, making it the country with the highest debt spread among BBB-rated international markets like Italy, Peru, Cyprus, Hungary and Indonesia. The Finance Ministry went to the market on the first trading day of the year to convey a message of fiscal and economic strength, as well as to get ahead of the competition, as has been customary in Mexico for ten years.

To gauge the size of heavy placements of sovereign paper this month, it is enough to compare the figures. The $7.5 billion this first week of the month exceeds the total amount of debt issued during 12 months in recent years. This is up from 5 million in 2016 and almost double from 4.8 in 2019. The sweet moment the Mexican economy is experiencing is captured in a phrase running through Wall Street trading floors: “Mexico is the darling of the markets.” ,

From abroad, legislators and analysts have expressed their dissatisfaction with legislation promoted by López Obrador that guarantees monopolies for state companies in the energy sector, considered protectionist, and with the trade agreement with the United States and Canada, the USMCA. There is a violation. Additionally, the President’s insistence on banning genetically modified corn imported from the United States has created friction between trading partners. But Luis Gonzali, a mathematician and financial strategist at Franklin Templeton in Mexico City, believes the story of Mexico as a country that has everything to capture foreign investment in the coming years prevails.

“We start 2023 with higher country risk,” Gonzali says, referring to the 130 basis points that mark credit default swaps (CDS). They are now trading around 90 basis points. “It has to do with a number of factors. Among them, the fact that we grew more than last year, the fact that the exchange rate has become so strong, making it easier to pay off debt in dollars, and the narrative that now exists in Mexico. Is. near shore“The statement that Mexico’s economy is resilient is improving.”

This reduction in the country risk premium makes this an optimal moment for new debt issuance and the rates set by the Treasury reflect this. According to the agency, the $1,000 was fixed for five years at a rate of 5.07%, which is 37 basis points cheaper than in January 2023. The $4,000 million was mated over 12 years at 6.09%, 30 basis points cheaper than a year ago, and the $2,500 million over 30 years at 6.45% were issued in April. Only 11 basis points more expensive than bonds. Last year. “Credit has become more expensive around the world, but for Mexico these rates are good,” Gonzali explains, resulting from interest rates being raised by central banks to control hyperinflation.

Gabriel Yorio, Undersecretary of Finance and Public Credit, published on social networks on Wednesday that with this issue, the level of debt remains below 48% of gross domestic product (GDP). However, this implies a substantial increase, which has been announced since September, when the Treasury presented its budget for 2024 to Congress. The budget deficit is approximately 1.7 trillion pesos, equivalent to 4.9% of gross domestic product (GDP), a level not seen since 1989. Resources will be allocated primarily to complete López Obrador’s symbolic infrastructure projects, as well as to increase social spending to an “unprecedented” level of 12.8% of GDP.

“We continue to see debt issuance continue, appetite remains, credit ratings remain stable and the fundamentals of the economy remain good, but all eyes will be on next year’s Budget,” Gonzali says. , Mexico will vote to elect a new president. “Our deficit has been very high for two years and fortunately our exchange rate and growth have been favourable, but we cannot be at the mercy of that continuing,” he said. “I think that’s going to be the discussion going forward with this new administration: What will be the treatment of the debt?”

Subscribe here Receive the EL PAÍS Mexico newsletter and all the important information on current events in this country