The recent issuance of Mexican debt bonds on international markets, according to the government “the largest offering in its recent history,” was met with such interest from Wall Street that it demanded three times the amount offered. This is despite criticism of the government of Andrés Manuel López Obrador for protecting the state monopoly in the energy sector and seeking confrontations with its main trading partner in agriculture. The nearshoring narrative, exchange rate strength and surprising economic growth contributed to the country paying relatively low interest rates.
Mexico raised $7.5 billion in debt on Tuesday, making it the country with the most debt outstanding in international markets among BBB-rated countries such as Italy, Peru, Cyprus, Hungary and Indonesia. The Treasury Department went to market on the first business day of the year, as has been the custom in Mexico for a decade, to send a sign of fiscal and economic strength and differentiate itself from the competition.
To measure the magnitude of this month's stunning government bond offering, all you need to do is compare the numbers. The $7.5 billion in this first week of the month exceeds the total amount of debt issued in the last 12 months. It is more than the 5 million in 2016 and almost double the 4.8 in 2019. The sweet moment that the Mexican economy is experiencing is represented in a sentence that is circulating through the trading floor of Wall Street: “Mexico is the darling of the markets.” “.
From abroad, lawmakers and analysts have expressed dissatisfaction with legislation sponsored by López Obrador that guarantees a monopoly for state-owned companies in the energy sector, which is considered protectionist and a violation of the trade agreement with the United States and Canada, the USMCA, represents. Additionally, the president's insistence on a ban on genetically modified corn imported from the United States has caused tensions between trading partners. But the narrative of Mexico as a country that has everything it needs to attract foreign investment in the coming years has prevailed, says Luis Gonzali, a mathematician and financial strategist at Franklin Templeton in Mexico City.
“We start 2023 with a higher country risk,” says Gonzali, referring to the 130 basis points that the credit default swaps (CDS) marked. These are currently trading at just under 90 basis points. “This has to do with several factors. These include the fact that we grew more than last year, the fact that the exchange rate has risen so much, making it easier to pay off debt in dollars, and the narrative that now exists in Mexico around nearshoring, the narrative that “Mexico has a… The robust economy there is improving.”
This reduction in the country's risk premium makes this time optimal for issuing new debt, and the interest rates negotiated by the Treasury reflect this. According to the agency, $1,000 was placed for five years at an interest rate of 5.07%, 37 basis points cheaper than in January 2023. $4,000 million was placed with a maturity of 12 years and an interest rate of 6.09%, 30 basis points cheaper than a year ago, and $2,500 million with a 30-year maturity that pays an interest rate of 6.45%, just 11 basis points more expensive than the bonds issued in April last year. “Debt has become more expensive worldwide,” explains Gonzali, derived from central banks raising interest rates to curb high inflation, “but for Mexico these interest rates are good.”
The Undersecretary of Finance and Public Credit, Gabriel Yorio, published on social networks on Wednesday that the debt in this edition is less than 48% of the gross domestic product (GDP). However, this implies a significant increase that has been announced since September, when the Treasury Department submitted its 2024 budget to Congress. The budget deficit is nearly 1.7 trillion pesos, equivalent to 4.9% of gross domestic product (GDP), an unprecedented level since 1989. The funds will be spent primarily on completing López Obrador's iconic infrastructure projects as well as increasing social spending used an “unprecedented” level of 12.8% of GDP.
The show we did yesterday @Hacienda_Mexico It is very important for several reasons:
🔸There was an unprecedented demand of 21 billion, demonstrating global confidence in Mexico.
🔸We achieved lower interest rates thanks to a positive perception of our economy that…
— Gabriel Yorio (@GabrielYorio) January 3, 2024
“We continue to issue debt, there is interest, credit remains stable and economic fundamentals remain good,” says Gonzali, “but all eyes will be on next year's budget.” Mexico will go to the polls in June, to elect a new president. “We have had large deficits for two years and fortunately we have had a favorable exchange rate and favorable growth, but we cannot be at the mercy of this development.” I think a future discussion will be this new government: How will they deal with debt? “
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