IFR Mexico Roundtable 2016
IFR’s Mexico Capital Markets Roundtable was held in Mexico City on November 5 2015, near the end of a rocky year for emerging markets and about a month before the much-anticipated interest rate hike in the US, which was expected to bring more troubles for the asset class.
A more circumspect tone prevailed in contrast to a year earlier, when euphoria over the passage of historic structural reforms had markets seeing Mexico as the newfound darling of Latin America.
Mexico is certainly better-placed than most emerging market countries to endure a tightening of monetary policy in the US, and the country has justly won praise for quickly adapting to the tougher macroeconomic environment.
Not only have policymakers kept a cap on fiscal deficits and held inflation in check despite a dramatically weaker currency, but energy reforms have slowly started to bear fruit following a successful third auction of oil and gas fields in December.
Nonetheless, the bloom is somewhat off the rose for the oil-exporting nation. Enthusiasm for recent energy reforms has been followed by more guarded optimism about the country’s prospects, following last year’s dramatic decline in oil prices and a more blatant risk-off stance by investors towards emerging markets.
State-owned oil firm Pemex, for example, is already suffering some growing pains after energy reforms put it on track to becoming a more independent entity, though it is likely to be closely tethered to the government for quite some time.
Shortly after the IFR Roundtable, Moody’s downgraded Pemex to Baa1 from A3, bringing it in line with the BBB+ it carries from other agencies. As justification for the move, Moody’s cited a deterioration of credit metrics following the drop in crude prices, and it expressed concerns about rising debt levels and a heavy tax burden.
Despite this challenging environment, however, the Roundtable participants insisted that Mexico’s blue-chip credits and quasi-sovereigns were still well placed to weather any storm.
Companies like Pemex have large liquidity facilities to tide them over during times of trouble. Pemex has also made strides to find alternative funding sources, and in November it reached an agreement with its unions to significantly lower pension liabilities that amounted to around US$90bn as of September 30 2015. The federal government will provide funding equal to the savings made on that deal.
Pemex said it has been working hard on diversifying its investor base — a sukuk bond is in the works — and it is soon expected to test the market with the first Master Limited Partnership, or Fibra-E as they will be called in Mexico, as it seeks ways to fund brownfield projects.
Company officials recognise that change comes slowly. But they believe Pemex now has the tools to adapt to the new reality.
Telecoms giant America Movil, which stayed out of the international debt markets in 2015, is also seeking to raise to several billion dollars in the international capital markets this year, partly through an SEC-registered peso note program targeted at both foreigners and locals.
The issuance of the country’s first Euroclearable local bond by Pemex last year marked a milestone in the development of a peso debt market for corporates.
This is important for Mexico’s mid-tier and lower-rated credits, whose financing options remain limited, and who prefer to raise local currency debt at a time of greater volatility for the peso.
But for such credits, enticing international accounts into buying their peso debt, which is largely an illiquid product, may prove to be a tough slog.
All these factors and more were on the minds of some of the leading figures in Mexico’s capital markets, who sat down with IFR’s Paul Kilby in November to discuss the future of financing in the country.