Mexican debt, the new darling of Wall Street

The recent issuance of Mexican debt bonds in international markets, “the largest placement in its recent history” according to the Government, was received with such appetite by Wall Street that triple the amount offered was demanded. This, despite criticism of the Government of Andrés Manuel López Obrador for protecting the State's monopoly in the energy sector and seeking confrontations with its main trading partner in agriculture. The narrative of nearshoringthe strength of the exchange rate and the surprising economic expansion contributed to the country paying relatively low rates.

Mexico placed $7.5 billion in debt on Tuesday, becoming the country with the most debt circulating in international markets among those with a BBB rating, such as Italy, Peru, Cyprus, Hungary and Indonesia. The Ministry of Finance went to market on the first business day of the year, as has become customary in Mexico for ten years, to send a message of fiscal and economic strength, as well as to get ahead of the competition.

To measure the size of this month's overwhelming placement of sovereign paper, it is enough to compare figures. The $7.5 billion in this first week of the month exceeds the total amount of debt issued during the 12 months of recent years. 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 phrase that runs through the Wall Street trading floor: “Mexico is the darling of the markets.”

From abroad, legislators and analysts have expressed their discontent with the legislation promoted by López Obrador that guarantees a monopoly for state companies in the energy sector, considered protectionist and in violation of the trade agreement with the United States and Canada, the USMCA. Furthermore, the president's insistence on banning genetically modified corn imported from the United States has generated friction between trading partners. But the narrative of Mexico as a country that has everything to capture foreign investment in the coming years prevailed, considers Luis Gonzali, 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 marked the credit default swaps (CDS). These are now trading close to 90 basis points. “This has to do with several factors. Among them, the fact that we grew more than last year, the fact that the exchange rate strengthened so much, which makes it easier to pay a debt in dollars, and the narrative that exists now in Mexico around the nearshoring“The narrative that Mexico has a resilient economy is improving.”

This reduction in the country's risk premium makes this moment optimal to issue new debt and the rates negotiated by the Treasury reflect this. 1,000 dollars were placed for five years at a rate of 5.07%, 37 basis points cheaper than in January 2023, according to the agency. 4,000 million dollars were placed at 12 years at 6.09%, 30 basis points cheaper than a year ago, and 2,500 million dollars at 30 years that will pay a rate of 6.45%, only 11 basis points more expensive than the bonds issued in April of last year. “Debt has become more expensive around the world,” explains Gonzali, derived from the increase in interest rates by central banks to contain high inflation, “but for Mexico these rates are good.”

The Undersecretary of Finance and Public Credit, Gabriel Yorio, published on social networks on Wednesday that with this issue, the level of debt is less than 48% of the Gross Domestic Product (GDP). However, this implies a considerable increase, announced since September, when the Treasury presented its budget for 2024 to Congress. The budget deficit is almost 1.7 trillion pesos, equivalent to 4.9% of the Gross Domestic Product (GDP). , a level not seen since 1989. The resources will be allocated, mostly, to completing López Obrador's emblematic infrastructure projects, as well as to increasing social spending to an “unprecedented” level of 12.8% of GDP.

“We continue issuing debt, there is appetite, the credit rating remains stable and the fundamentals of the economy remain good,” says Gonzali, “but all eyes will be on next year's budget.” In June, Mexico will go to the polls to elect a new president. “We have had high deficits for two years and luckily we have had a favorable exchange rate and growth, but we cannot be at the mercy of this continuing. I think that a discussion going forward is going to be this new administration: What is going to be its treatment of debt?”

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