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Coming of Age for Mexican Capital Markets
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According to Felipe de Y’Turbe, director general of Scotia Capital Mexico, there have been significant changes in the Mexican capital markets over the past five years: “They have grown dramatically, and we are seeing much more depth to the markets, especially on the debt side.” This has a lot to do with the government’s proactive approach to debt management. By pre-paying much external debt in recent years, the Mexican government has substantially reduced exposure to exchange rate risk. Neil Dougall, head of emerging markets economic research at investment bank Dresdner Kleinwort Wasserstein (DrKW), says, “By pre-financing well ahead on international capital markets—indeed, through until the end of 2007—the government has helped reduce vulnerability to any abrupt change in global liquidity conditions, either before or after the July elections.”
The activity of private pensions and institutional investors has buoyed the market beyond expectations. Says de Y’Turbe: “It has grown from non-existent to a significant market on the world scene in a matter of years. We are at the point where the Mexican government is issuing 20-year paper, which is just incredible.” Within the credit space, the real standout development of the past year is the phenomenal growth of the local currency bond market. This market has been heating up and looks set to continue to grow. Global corporates and sovereigns have been taking advantage of local demand to tap the Mexican market regardless of whether their ultimate exposure is in pesos or not. Merrill Lynch’s Garza says, “These successes show the resilience not only of the debt markets but also the FX and interest rate derivative markets.” The yield curve for domestic peso-denominated debt now extends to 20 years, but the Mexican authorities have signaled that they plan to launch a 30-year bond soon. DrKW’s Dougall says: “Conservative monetary and fiscal policies have ensured a stable macroeconomic backdrop. In turn, this has encouraged a steady rise in foreign participation in the local bond market.” Market growth has really been driven by the increasing appetite, from both local and international investors, for investment that yields higher-than-average returns for a given credit rating even when adjusted for currency risk, says Garza. “This is more manageable now with the development of the local IR and FX derivatives market,” he notes. And as local pension funds and mutual funds look to diversify their growing pool of investments into a broader array of issuers, this should also open the door for more structured products, such as securitization and other asset-backed deals from local and international issuers.
However, with the election coming up, the debt capital markets are slowing down and will probably continue to lose momentum as election day approaches. De Y’Turbe says: “We will see some issuance, but perhaps less so than last year because the big Mexican names have already cleaned their balance sheets. Many Mexican issuers went into the market last year in anticipation of the electoral process.”
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Election concerns
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Mexico will hold presidential elections on July 2 this year, and some observers are concerned about the impact the elections might have on the financial markets. According to Ian Craig, treasurer at Coca-Cola Femsa in Mexico, the full impact is likely to be relatively small, though. “There might be some volatility, at most three months prior to the election, and we will probably see the local capital markets shut down for that period,” he says.
The worst-case scenario for the markets would be a close and disputed result. This would result in adjudication by the independent electoral institute—the IFE—and could lead to a prolonged period of uncertainty. Notes Craig, “If either candidate wins by a small margin and there is a tight outcome, there might be some noise within the markets.” Throughout most of the run-up to the elections Andrés Manuel López Obrador of the leftist Partido Revolucionario Democrático—PRD—has had a clear lead in most opinion polls over his nearest rival, conservative Felipe Calderón from president Vicente Fox’s Partido de Acción Nacional—PAN. While some market participants may feel uncomfortable with a left-wing president, Neil Dougall, head of emerging markets economic research at investment bank Dresdner Kleinwort Wasserstein, counters that it is unlikely that a López-Obrador-led government would risk triggering macroeconomic instability by shifting dramatically away from responsible fiscal policies. “We therefore believe the short-term market reaction to a López Obrador win would be fairly muted,” he says. Steve Sullivan, corporate finance manager at Coca-Cola Femsa, adds that it is very unlikely there would be a problem in the market. “Outside the presidential race, not all of congress is up for election in the executive branch,” he notes. “Even if there is a new president from a different party, that party is not going to share the same majority in congress.” Dougall adds, “Compared with previous end-of-session episodes, we are expecting both the run-up and immediate aftermath to the elections to be relatively smooth for financial markets.” |