A3/BBB+/BBB+ rated Mexico had established itself as one of the most stable EM borrowers thanks to years of prudent fiscal and monetary policy, but left-wing Amlo’s comprehensive victory in July’s elections had cast doubt over whether the country could retain this status.
With the president’s October 29 decision to cancel Mexico City’s proposed new airport — and throw the $6bn of airport bondholders into uncertainty — having punctured previous market optimism that Amlo would not bring too much disruption, his first budget brought some encouragement.
“The budget signals fiscal discipline with realistic macro and oil price assumptions and a steady debt to GDP ratio through the medium term, similar to the previous government’s 2019 planning document,” said Fitch on Monday.
State-owned oil company Pemex, which has become something of a barometer for investor sentiment given its vital role for the economy, saw its January 2029 bonds rally 1.35 cash points on Monday.
Spreads on the 6.5% bonds, issued in October, rallied 16bp to 399bp — the first time they have dipped under 400bp in over a month, and 80bp inside their levels of just 10 days ago, according to MarketAxess.
Capital Economics called the budget “prudent” and “probably an attempt to get investors back onside after a series of policy moves which have spooked markets”.
Before the budget had been presented, the research firm had said that if spending had been projected to rise “by much more than the 7%-8% most expect”, the peso and bonds “would come under pressure”.
As it happens, the budget proposes real spending growth compared to 2018 of just 2.3% — just beneath the fiscal rule ceiling, according to Fitch.
The budget also projects a non-financial public sector deficit of 2.5% of GDP, compared to an estimate 2.4% this year. Furthermore, it also proposed a primary surplus of 1%, though Capital Economics said this was “unrealistic”.
Fitch retains its negative outlook on Mexico’s sovereign rating, which it assigned in October despite already having conservative fiscal policy as its base case, due to “elevated policy uncertainty in other areas that could hurt investment”.
No more Mexcat amendments
Investors will soon have news on whether Amlo has successfully negotiated his first engagement with bond markets: the partial tender offer and consent solicitation for the $6bn of bonds issued by Mexico City Airport Trust (Mexcat).
The finance ministry confirmed on Sunday that it would not make any further enhancements to its offer, which it had improved last week as it tries to persuade Mexcat bondholders to amend documentation to allow it to cancel the new airport without triggering default.
“Mexcat does not intend to make any further modifications in the terms of the transaction announced on December 11,” said the ministry in a statement. “We believe the transaction as amended is a balanced and commercial approach to the interests of the noteholders, Mexcat and the Mexican public.
“If the revised offer is not successful on the terms currently proposed, Mexcat and the Mexican government will reconsider what alternatives are available to achieve the government's objectives.”
A group of bondholders being represented by Hogan Lovells at Houlihan Lokey had earlier rejected the improved offer, and said on Monday it was “encouraged” that the government was open to alternatives.
Despite the group’s opposition, Mexico said that it understands the reaction of the market has been “strongly positive” to the revised terms.
“The financial institutions appointed by Mexcat as dealer managers have been in regular, direct communication with noteholders with positions of all sizes, which was the basis of the revised terms,” said the finance ministry.
Citi, HSBC and JP Morgan are dealer managers on the tender offer, which expires at 5pm on December 19.