Latin Finance - May 2008 - 34

mexico outlook Still the Leader? by Ben Miller or decades, Mexico has led the way in LatAm on the back of close ties to the US. Its debt markets are the region’s deepest, and it trails only Brazil in stock market capitalization. Growth may slow to 3.0% this year, after hitting 3.7% in the previous three-year period, according to the International Institute of Finance, but 13 crisis-free years have given market participants the ability to plan more than in any period in memory. The manufacturing sector which has benefitted so much from NAFTA, requires major infrastructure development for continued growth. As peso-denominated capital markets have grown, the country’s unsophisticated but quickly growing pension funds should lead the way forward. The first step is navigating the slowdown. “The impact this time around has been less than on previous occasions, such as 2001,” says Gerardo Rodríguez, the Hacienda’s director of public credit. This is due mainly to the diversification of Mexican trade, as non-oil exports going outside the US are now up to 20% of the total from 10% ten years ago, he says. Currency depreciation against the euro has also helped the tourism and other industries against any drop in demand from the US. Still, the full effects of a US slowdown remain to be seen. “You can’t talk about Mexico being decoupled from the US,” says Alejandro Valenzuela, recently appointed CEO of Grupo Financiero Banorte. “I think that’s an impossible word. It has a better shield than it has in the past, and I think the capital markets are reflecting that.” US recession would hit the service sector harder than manufacturing. With the dollar weak, US exporters are doing a brisk trade, which is good for the Mexican exporters who supply raw materials. To raise funds, borrowers are relying on local debt markets. “Now we can provide F Mexico’s lead is menaced by proximity to wobbly US markets and Brazil’s rapid ascent. Challenges include bringing more firms to market and funneling private cash to infrastructure. The music plays on for Mexico but the song must change loans in pesos of up to 30 years, something that 10-12 years ago was unthinkable,” says Valenzuela. “The deepening of the market has been an important element which also protects a lot of firms that need to obtain foreign financing.” backed issuance. “We are in a relatively comfortable position of not needing funds,” says Rodríguez, regarding plans for another dollar issue. “With all this uncertainty in this environment, it makes sense to wait and see how markets go back to a more normal dynamic.” State oil producer Pemex plans to raise about $2 billion from local and international capital markets, and it is among the borrowers seeking cover in local debt markets during international volatility. But while government debt goes out to 30 years, corporates struggle to obtain fixed rates beyond 10 years. The government is hoping its 270 billion peso Fonadin infrastructure fund can continue to deepen the local markets and add a point or two to GDP in the next five years. Last year’s $4 billion sale of the Farac Sovereign Curve Tidy Up Rodríguez says that with elevated volatility not over yet, the government can concentrate on cleaning up its curve and micro market issues. This year it has begun regular debt buybacks, and also executed a warrant transaction, as it did in 2007, to swap expensive external debt for pesodenominated – and for the first time UDIdenominated – notes. The government is working to increase liquidity in benchmark inflation-indexed bonds and support their use in the private sector, particularly for infrastructure and residential mortgage 34 LATINFINANCE May 2008

Latin Finance - May 2008

Table of Contents for the Digital Edition of Latin Finance - May 2008