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Mexico is Ready to Lead Change Processes in Latin America

Karla Salinas | 22.09.2014

Mexico is close to rivaling Chile as a Latin American standard for creditworthiness as more investors anticipate that President Enrique Pena Nieto will deliver on his promises for economic growth.

Mexico is close to rivaling Chile as a Latin American standard for creditworthiness as more investors anticipate that President Enrique Pena Nieto will deliver on his promises for economic growth.

Their conviction stems from the constitutional changes pushed through by the 48-year-old president, from opening Mexico’s oil industry to private investment to spurring competition in a telecommunications industry dominated by billionaire Carlos Slim.

Now, two decades after the country needed a $50 billion U.S.-led bailout to avoid defaulting, the cost to insure the nation’s debt against non-payment has tumbled. Credit-default swaps dropped below Chile, the region’s highest-rated sovereign, for the first time ever in June.

“Mexico is truly a benchmark right now,” Gerardo Rodriguez, a former deputy finance minister and now a portfolio manager and investment strategist at BlackRock Inc., said in a telephone interview from San Francisco. “Mexico is probably right there at the top of a very small list of countries that have shown willingness to reform.”

n his first two years in office, Pena Nieto pushed through the biggest economic overhaul since the North American Free Trade Agreement took effect in 1994. The government estimates that allowing companies including Exxon Corp. and Chevron Corp. to produce crude on their own for the first time since the 1930s will help lift annual growth to above 5 percent, a level not seen since 2010, by the end of Pena Nieto’s six-year term in 2018.

Default Swaps

The cost to protect Mexico’s debt with five-year default swaps has dropped 16 basis points, or 0.16 percentage point, since Pena Nieto took office on Dec. 1, 2012, to 86 basis points, data compiled by Bloomberg show. Similar contracts for Chile cost 76 basis points. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The drop in Mexico’s bond risk during the first third of Pena Nieto’s term continues a trend from the end of Felipe Calderon’s presidency, when swaps tumbled from a record-high of 601 basis points amid the financial crisis in October 2008.

While Moody’s Investors Service raised the nation’s rating to an unprecedented A3 after the legal changes were passed, the country needs to generate faster growth and bolster confidence in the government before the nation will receive another boost, according to analyst Mauro Leos, who is based in Mexico City.

Latin America’s second-biggest economy is forecast to grow 2.5 percent this year after expanding just 1.4 percent in 2013, about a third the pace of Chile. Moody’s rates the South American country three steps higher at Aa3, in line with Japan and Belgium.

Investors’ Perceptions

“We need tangible evidence of an improvement in terms of Mexico’s institutions, the legal framework, transparency, the rule of law,” Leos said in an interview on Sept. 10.

Alejandro Diaz de Leon, Mexico’s head of public debt, said macroeconomic policies that the government has had in place for many years combined with structural changes to the economy are helping boost investors’ perceptions of the country.

Mexico has “prudent management of public finances, monetary policy and appropriate regulation of financial markets,” he said in a Sept. 9 telephone interview.

Mexico’s drive to keep spending under control has its origins in the so-called Tequila Crisis of the mid-1990s. In 1994, U.S. interest-rate increases helped spark a peso devaluation that fueled capital flight. The recession the following year, when the economy contracted 6.2 percent, was among the worst since the 1930s. The government cut spending in 1996 as the economy returned to growth.

Pimco Investment

The nation’s gross debt as a percentage of gross domestic product will be 48 percent this year, compared with 67 percent for Brazil, Latin America’s biggest economy, and a 53 percent average for the region, according to projections from the International Monetary Fund.

Pena Nieto enacted bylaws to break Mexico’s seven-decade oil monopoly on Aug. 11, a legal change that he estimates will help bring in about $250 billion in extra foreign investment. He has called it the centerpiece of his presidency, winning debt-market advocates including BlackRock Chief Executive Officer Laurence D. Fink and Pacific Investment Management Co., the world’s largest bond manager.

“Mexico is a leader in the region, both in terms of the open architecture of its capital markets and its leadership in undertaking significant and positive structural reforms,” Michael Gomez, the head of Pimco’s emerging-markets portfolio management team, said in a Sept. 17 e-mail.

Source: bloomberg.com