Mexico Seeks to Increase External Debt

Source: Bloomberg

Mexico is seeking to step up overseas borrowing in 2012 after raising $3 billion this year from international offerings, more than any other country in Latin America.

The government is asking Congress for authorization to boost net external debt by $7 billion in 2012, up from the $5 billion increase it was granted for this year, according to the budget proposal presented Sept. 8.

While developing nations from Brazil to Colombia are paring debt sales abroad to contain gains in their currencies, Mexico has tapped global markets three times this year to lock in record-low borrowing costs in the U.S. and bolster foreign reserves. Mexico has sold $15 billion of bonds outside its local market since 2009, up from $7 billion in the previous three years, while Brazil cut its sales 12 percent over that period to $6.9 billion.

A lack of “high-quality sovereign debt” issues from developing nations will help fuel demand for more Mexican bonds, said Jeremy Brewin, who helps manage about $3.5 billion in emerging-market debt with Aviva Investors in London. “The appetite for external sovereign debt is quite robust so for Mexico to issue an extra $7 billion, I don’t think that’ll be a challenge.”

Yields on the government’s benchmark dollar bonds due 2020 have tumbled 92 basis points, or 0.92 percentage point, this year to 3.57 percent, according to data compiled by Bloomberg. The yield is 1.80 percentage points more than that on similar-maturity U.S. Treasuries and one basis point more than Brazilian bonds.

Reserves Growth

Mexico sold $1 billion more of the bonds due 2020 in February at about 4.85 percent, 13 months after an initial offering fetched a yield of 5.27 percent.

A press official in the Finance Ministry didn’t respond to an e-mailed message seeking comment.

The issues are bringing dollars into Latin America’s second-biggest economy, helping the government’s efforts to bolster foreign reserves after they plunged 11 percent in one week alone during the global financial crisis in 2008. Reserves climbed to a record $137 billion on Sept. 2 from $75.1 billion in October 2008, when policy makers were selling dollars to slow the peso’s tumble, according to data compiled by the central bank.

The increase in foreign reserves warrants a credit-rating upgrade, central bank Governor Agustin Carstens said Sept. 8 during a conference in Mexico City hosted by Moody’s Investors Service. Mexico is rated Baa1 by Moody’s, the third-lowest investment grade ranking and one level above Brazil, the region’s biggest economy.

Brazilian Real

Brazil’s reserves have climbed 74 percent since October 2008 to $352.7 billion as policy makers bought dollars as part of a push to stem the real’s rally and shore up manufacturing exports. The real has advanced 35 percent since the end of 2008, the most among 25 major emerging markets tracked by Bloomberg, while the peso gained 6.2 percent. Brazil has also raised taxes on foreigners’ local bond purchases and restricted banks from betting against the dollar, measures that Mexico has avoided as it looks to bolster reserves.

“Mexico hasn’t tried to put restrictions on the movement of investors,” Sergio Luna, head of economic research at Citigroup Inc.’s Banamex unit in Mexico City, said in a telephone interview. “The Mexican peso is a currency that’s pretty liquid with few restrictions.”

The peso has slumped in the past six weeks as concern mounted that Europe’s debt crisis and sluggish U.S. growth will push the global economy into recession. The peso has fallen 8.6 percent since July and touched a one-year low of 12.9945 to the dollar yesterday. Yields on the country’s benchmark bonds due 2020 jumped 19 basis points since Sept. 2 to 3.57 percent.

Greece Concerns

Investor demand for Mexican bond offerings may wane should concern grow that Greece will default and deepen Europe’s crisis, said Guillermo Rodriguez, who helps manage about $5.5 billion at Corp. Actinver SAB in Mexico City.

“On days with higher risk aversion, yields have been flying,” Rodriguez said in a telephone interview. “It all depends on what happens in Europe.”

The extra yield investors demand to own Mexican dollar bonds on average instead of Treasuries fell four basis points to 226 at 10:40 a.m. New York time, according to JPMorgan’s EMBI Global index.

The peso fell 0.4 percent to 12.8930 per U.S. dollar.

The cost to protect Mexican debt against non-payment for five years rose six basis points yesterday to 173, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

‘Open Approach’

Yields on peso-denominated interest-rate futures contracts due in October, known as TIIE, rose six basis points yesterday to 4.69.

Alejandro Diaz de Leon, head of public debt, said in an interview in August that the government was planning more sales abroad this year.

The government’s sale of 100-year bonds, which yielded 5.96 percent, lifted its international issuance this year to $3 billion. While down from $4.1 billion in the year-earlier period, it is still more than any other government in the region, according to data compiled by Bloomberg.

Deficit Financing

Next year’s foreign bond issue plans will complement sales in the local market, which the government will use as its main source of financing, according to the budget proposal. President Felipe Calderon’s administration is seeking authorization to boost net local debt to 395 billion pesos from a ceiling of 375 billion pesos this year.

The government plans to issue more local bonds linked to inflation, which slowed to 3.42 percent in the 12 months through August from an annual rate of 3.55 percent in July, to help extend maturities, the Finance Ministry said in the budget proposal. The bond sales would help finance a projected budget deficit of 36.7 billion pesos ($2.84 billion), equal to 0.2 percent of gross domestic product, the proposal says. The government forecasts a deficit of 0.5 percent of GDP for this year.

“These guys are being fiscally prudent,” Roberto Melzi, a Latin America strategist at Barclays Plc. in New York, said in a telephone interview. “They have a very open approach for investors.”