IFR Mexico Roundtable 2014
The Mexican economy is on the cusp of dramatic changes, if prognostications about the impact of the country’s sweeping reform process hold true. In July, IFR hosted a roundtable in Mexico City where bankers, public credit officials and treasurers at some of the country’s largest corporates discussed what these changes might mean for the country’s capital markets – and some of the challenges that lie ahead.
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As with the passage of the North American Free Trade Agreement (NAFTA) in the 1990s, the nation’s recent wave of reforms brings with it much optimism but also the potential to disappoint.
Energy reform finally became a reality in August when President Enrique Pena Nieto effectively signed it into law, and that is an impressive achievement in itself.
There had long been talk about breaking the government’s tight grip on the oil and gas sector, but the political sensitivities surrounding Mexico’s energy resources made this task particularly difficult – until now.
It has been a similar story in education and telecommunications, where the Pena Nieto administration has also managed to push through similar reforms. Both the rating agencies and the wider market have taken note.
Moody’s responded in February by upgrading Mexico to A3, placing it among an elite group of Latin American sovereigns this far up the ratings spectrum.
Morgan Stanley recently drew parallels between what is happening in Mexico and the unification of East and West Germany in 1990, in terms of the impact on the economy, human capital and infrastructure.
The country has already seen a surge of corporate bond issuance this year, as both junk and high-grade borrowers take advantage of investors’ newfound love for Mexico to raise cheap money - in some cases at historically tight levels.
A strong demand for the country’s assets will be essential if the government wishes to finance a close to US$600bn plan to improve Mexico’s infrastructure between now and 2018.
This will also require a deepening of the peso-denominated bond market for corporates and project issues, much in the same way that the government has built a Treasury market that enjoys strong appetite from foreign investors.
Getting local pension funds - AFORES - to dedicate more time to the credit work required to invest in infrastructure issues and corporate debt will be a vital part of attracting large foreign institutional players.
Pemex also faces the task of transforming itself into a more efficiently run company, while also remaining a public entity that remains a vital contributor to the government’s coffers.
The state-owned oil company got the ball rolling in August with the so-called Round Zero - in which the government has decided which assets it can or cannot keep.
Next on the agenda, the government will transfer other assets and farm out projects to the private sector for the first time in 75 years.
America Movil, the telco owned by billionaire Carlos Slim, has also been forced to rethink its business model and funding strategies in the wake of recent reforms designed to make that sector more competitive.
The company now must shed assets if it wishes to compete in the new environment. Proceeds from those sales will likely go to pay down debt and hence could reduce capital markets activity for the frequent borrower.
However, diminished issuance from America Movil is expected to be quickly replaced by new Mexican names seeking to raise funding as the country’s economy starts to pick up speed.
As participants at the roundtable explain, the depth of Mexico’s capital markets is second to none in the region, but it still has some way to go if it wishes to accommodate the massive funding needs required to move the country forward.