The president of Mexico, Andres Manuel Lopez Obrador was ridiculed for his stinginess in the face of the outbreak of the pandemic. His unwillingness to dole out more than the bare minimum of emergency aid pushed millions of Mexicans deeper into poverty.
But now, at least some reward for those sacrifices is emerging. Mexico has maintained access to international bond markets at a time when many other developing nations find themselves isolated.
With the increase in United States Interest Rates, investors have become very selective. They often outright refuse to buy bonds offered by countries with impaired finances.
Thanks in part to López Obrador’s austerity, Mexico is in good shape for the most part. His budget deficit and its debt levels are below the average of its peers.
So when Mexican financial officials tested the demand abroad for the country’s bonds, they found many willing buyers. Last week, Mexico sold 75.6 billion yen ($553 million), bringing the government’s take from foreign markets this year to $9.47 billion.
Much of those sales, to be clear, were just to refinance maturing debt. But at a time like this, when hard currency suddenly becomes a scarce resource in much of the world, even a simple debt refinancing is an important step in keeping a steady flow of money into a country, propping up the local currency. and help curb inflation. The peso is one of the few currencies in the world that will avoid sinking against the dollar this year as the Federal Reserve raises interest rates.
The “AMLO’s fiscal prudence then allowed the country to better navigate this”, said Carlos Legaspy, executive director of Insight Securities. “For debt investors it has been good: the creditworthiness has been maintained at an attractive rate of return”.
Mexican-dollar debt has an average yield of about 7.6 percent, lower than the 8.2 percent for emerging-market sovereign bonds as a whole, according to indexes from JPMorgan Chase & Co.
Mexico’s discount has been widened this year and is around the largest since late 2018, before the President took office. The additional yield on emerging-market dollar bonds over Treasuries has widened by 144 basis points over the past year, while Mexico’s spread increased about a third of that pace.
The country has issued more hard currency debt than any other in the developing world this yearaccounting for 13 percent of total sales, down from an average of 4.9 percent over the past 10 years, according to data compiled by Bloomberg.
As governments around the world scrambled to spend to save their economies from the chaos of the pandemic, Mexico’s fiscal deficit only rose to 2.3 percent of gross domestic product from 1.8 percent in 2020. The median for rated peers The like rose to 5.8 percent, according to Fitch Ratings data.
Even after three o’clock major rating agencies cut Mexico’s rating at the start of the pandemic, it maintained its investment-grade status. In July, S&P Global Ratings raised its outlook to stable from negative, citing Mexico’s fiscal prudence. Moody’s Investors service downgraded the nation’s rating one notch, saying the pandemic would hurt growth prospects for years to come.
In fact, Mexico had its worst economic contraction in almost a century during the COVID-19 crisis, and growth remains anemic. The average forecast of economists surveyed by Bloomberg is for a 2 percent expansion in 2022. Meanwhile, the International Monetary Fund sees the Mexican economy growing just 2.4 percent this year, below the global estimate of 3.2 percent. .
“They decided to maintain fiscal discipline and deal with the fallout in terms of economic activity,” said Mauro Roca, managing director of emerging markets at TCW Group in Los Angeles. “Mexico has now benefited from maintaining that fiscal discipline.”
‘Less dirty shirt’
It is also a long way from the war in Ukraine and, unlike its South American neighbors, there is little political uncertainty to cloud the country’s near-term prospects.
Colombia’s new leftist president, Gustavo Petro, has vowed to halt exploration for oil, the country’s biggest export, which pushed local bond yields to record highs last month. In Chile, nervousness over a referendum to approve a constitutional bill sent five-year credit default swaps soaring to briefly outperform Mexico, which has a lower rating, for the first time in history. Meanwhile, investors are closely watching the upcoming elections in Brazil that will set the course for public spending for years to come.
Despite all that, creditors get a heavier reward for holding Mexican debt than their main Latin American peers. The nation’s spread over similar US Treasuries is approximately 4 percentage points, higher than that of Chile, Peru, Brazil and Colombia, according to a JPMorgan indicator.
“It’s kind of like the least dirty shirt in the region,” said Valerie Ho, portfolio manager at DoubleLine Group in Los Angeles.