Mexican debt is Wall Street’s new darling | Economy

The recent issuance of Mexican debt on international markets, “the largest offering in recent history” according to the government, was received with such appetite by Wall Street that it demanded triple the amount offered. This comes despite criticism of Andres Manuel Lopez Obrador’s government for defending the state’s monopoly in the energy sector and seeking confrontation with its main trading partner in agriculture. Story about coastal installationExchange rate strength and unexpected economic growth contributed to the country paying relatively low rates.

Mexico issued $7.5 billion in debt on Tuesday, becoming the country with the most internationally traded debt among BBB-rated countries such as Italy, Peru, Cyprus, Hungary and Indonesia. The Treasury Department entered the market on the first business day of the year, as has become a tradition in Mexico over the past decade, to send a signal of financial and economic strength and to get ahead of competitors.

To estimate the size of the vast majority of sovereign placements this month, it is enough to compare the figures. The $7.5 billion in the first week of the month exceeds the total amount of debt issued in the 12 months of recent years. That’s up from 5 million in 2016 and nearly double the 4.8 in 2019. The sweet moment the Mexican economy is experiencing is summed up in a phrase that makes its way across the Wall Street trading floor: “Mexico is the darling of the markets.” ”

Abroad, lawmakers and analysts have expressed dissatisfaction with Lopez Obrador’s proposed legislation guaranteeing a monopoly for state-owned companies in the energy sector, which is considered protectionist and violates the USMCA trade agreement with the United States and Canada. Moreover, the president’s insistence on banning imports of genetically modified corn from the United States has caused friction among trading partners. But the image of Mexico as a country well-positioned to attract foreign investment in the coming years has prevailed, said Luis Gonzali, a mathematician and financial strategist at Franklin Templeton in Mexico City.

“We’re starting 2023 with higher country risk,” Gonzali says, referring to the 130 basis points that mark credit default swaps (CDS). They are currently trading around 90 basis points. “This is due to several factors. These include the fact that we have grown more than last year, the fact that the exchange rate has strengthened so much that it makes it easier to pay off debt in dollars, and the story that exists now in Mexico around coastal installation

the perception that Mexico has a strong economy is improving.”

This decline in the country’s risk premium makes this an optimal time to issue new debt, and the rates agreed by the Treasury reflect this. The $1 billion was placed for five years at a rate of 5.07%, 37 basis points cheaper than in January 2023, the agency said. $4,000 million was issued for 12 years at 6.09%, 30 basis points cheaper than a year ago, and $2,500 million for 30 years at 6.45%, just 11 basis points more expensive than the bonds. released in April last year. “Debt has become more expensive around the world,” Gonzali explains, based on central banks raising interest rates to curb high inflation, “but for Mexico these rates are good.”

Deputy Minister of Finance and Public Credit Gabriel Yorio posted on social media on Wednesday that taking this issue into account, the debt level is less than 48% of gross domestic product (GDP). However, this assumes significant increases announced since September, when the Treasury presented its 2024 budget to Congress. The budget deficit stands at nearly 1.7 trillion pesos, equivalent to 4.9% of gross domestic product (GDP). since 1989. Resources will be used mainly to complete López Obrador’s landmark infrastructure projects, as well as to increase social spending to an “unprecedented” level of 12.8% of GDP.

“We continue to issue debt, the appetite is there, the credit rating remains stable and the fundamentals of the economy remain strong,” 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’ve had high deficits for two years and fortunately we’ve had a favorable exchange rate and economic growth, but we can’t depend on that. I think the discussion going forward will be about this new administration: How will it approach debt?”

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