The man behind Mexico's increasingly spectacular bond transactions spoke to Emerging Markets about the country’s recent century sterling deal, its funding plans for the future and Mexico’s decoupling from the wider emerging markets
EM: What drove you to issue the 100 year sterling transaction – a PR exercise to draw attention to the country’s credit story?
Financial markets have been volatile lately, particularly for emerging markets. We believe that Mexico’s story is different to other emerging market countries. We are a manufacturing economy with lots of exposure to US, rather than a commodity- reliant economy exposed to a slowdown in Chinese growth. Before our 100 year deal we had not issued in sterling for almost 10 years and had not issued since Moody’s upgraded us to A3. All these elements made the centennial sterling bond a good idea.
I wouldn’t call it a PR exercise. But it was a transaction that sent a clear message that Mexico can differentiate itself in terms of its economy and the markets it has access to. We want to decouple Mexico as much as possible from the average EM economy, which is under more financial stress than we are. Mexico’s fundamentals and the potential for the structural reforms that the president and congress have agreed to – that will lead to strong GDP growth – have already helped differentiate Mexico. Our goal is to continue this trend.
EM: Do you plan to issue in any non-G3 currencies?
One other factor in the choice of sterling for the 100 year deal was diversification. In that deal 80%-85% of the demand came from UK accounts, and as we hadn’t been present in sterling for some time those accounts hadn’t necessarily been participating in our other deals.
Diversification is an important element, and we’re always open to evaluating alternatives. But we have relatively narrow needs in external markets. We issue about 80% in the local currency market and 20% on the international market. From this 20% we have two objectives. The first is to maintain a strong presence in key markets and develop benchmark bonds and liquid yield curves, which allows us to return to these markets and open the door for our private sector issuers. The second is to diversify our investor base. We’ve chosen to consolidate our presence in the euro, yen and sterling markets. Unless we have a very good opportunity or reason to diversify further, we’ll keep to this strategy.
EM: Do you swap the proceeds from deals in these currencies?
Traditionally we keep the exposure in the currency in which we finance. So we have maintained the exposure from the euro, yen and most recently sterling deals that we’ve done.
EM: Investors have high expectations for Mexico and its reform programme. Can the country deliver, and if expectations are not met is there a risk of higher borrowing costs?
The most common question from investors recently has been on the structural reform agenda, and how it will be implemented. They want to know when the reforms will be implemented and when they are going have results.
Every time a country implements these types of reforms you have a risk that there are particular expectations that might not be met. But it’s also possible to exceed these expectations. There is a strong conviction in Mexico that these reforms have the potential to change the face of the economy in a very meaningful way, just as the North American Free Trade Agreement did with the tradable sector some 20 years ago. These new reforms are aimed at the non-tradable sectors, but I’m sure their implementation will have just as meaningful an impact on economy as NAFTA did.
EM: Does the risk of slower Chinese growth or the effect of the US tapering its quantitative easing policy worry you?
Mexico’s strongest relationship with the US is in the manufacturing sector. Tapering has started because the US economy is getting stronger. For Mexico that’s a good thing. In terms of how our financial markets have coped with tapering, Mexico has had an orderly adjustment in both our external benchmarks and our domestic markets. A significant part of the tapering strategy has already been laid out. The next challenge is how the short end of the yield curve will move, but so far we’ve seen our bonds adjust in a very orderly way.
EM: Are there challenges that the Latin America region faces that could affect Mexico?
When you first see risks increase, whether it’s a slowdown in Chinese growth or changing US monetary policy, everything is highly correlated. But as the risk factors become better understood you start to see differentiation taking place. So any increase in uncertainty, for instance from the factors I mentioned, can have a similar effect across financial markets in different countries. In the short term the EM asset class is highly correlated, but then differentiation occurs. A key theme going forward, particularly with the end of monetary stimulus in the US, is that credit spreads are going to become much more relevant. An adequate evaluation and determination of spreads will be critical.
— Interview by Steven Gilmore