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Mexico Is Staying Afloat Quite Nicely, Thank You

International Business: MEXICO


The country is borrowing again--but it's still vulnerable

Martin Werner, Mexico's chief foreign-debt strategist, speaks fluent English at a machine-gun pace--a trait that's coming in handy these days. Why? Rebounding from 1995's peso crisis and $50 billion international bailout, Mexico is back in the global debt market in a big way, and Werner is doing a deal a minute with investors from America, Europe, Asia, and even South Africa.

In his most recent financing, Werner sold 40 trillion yen ($375 million) worth of six-year bonds in Japan. After converting the proceeds to dollars, the Mexicans ended up paying 390 basis points over the yield on comparable U.S. Treasury debt--about 10% today. That's down from the 550-point spread they faced after the peso was devalued at the end of 1994. Says Werner, a 32-year-old with a doctorate in economics from Yale: "Last year, we were chasing the bankers. Now, they're starting to chase us."

"STILL SKATING ON THIN ICE." So accomplished have the Mexicans been at convincing investors their economy has bottomed out that Mexico now leads Latin America in international debt transactions. Of the $30.8 billion issued by Latin American corporate and sovereign borrowers last year, $7.8 billion went to Mexico. The Mexicans have raised an additional $3.1 billion since Jan. 1. In fact, they have passed Brazil as the largest debtor in the developing world, with foreign obligations estimated at $157.2 billion (charts).

Much of Mexico's new debt is going to pay off the $29 billion in dollar-denominated short-term instruments called tesobonos, which the country issued in 1994 to replace foreign investment that fled during that politically turbulent year. But although the Mexicans surprised money mavens with their ability to raise fresh cash--they even have repaid $2 billion in U.S. bailout loans--they aren't home free.

Mexico is still vulnerable to a variety of shocks that could spook foreign investors again, just as the bulk of $24.5 billion in bailout debt owed to the U.S. and the International Monetary Fund starts coming due in 1998 and 1999. Mexico's risk factors include possible increases in American interest rates that could lure investors back into less risky U.S. debt, a worsening of the country's banking crisis, and an increase in political turbulence as scarce resources needed to spur growth and ease social tensions continue to be diverted into servicing overseas debt. Corporate borrowings could also pose a problem. Foreign corporate debt surged to $26 billion by 1994 as companies scrambled to outfit themselves for free trade. On top of that, scores of midsize companies are heavily in debt to local lenders. If too many recession-plagued debtors run into liquidity problems, investors could lose confidence in the country. "They are still skating on thin ice," worries Shafiq Islam, chief emerging-markets strategist at Credit Suisse in New York.

Mexican officials insist they have the right strategy. After Mexico's 1982 debt crisis, seven years passed before it could resume international borrowing. But last June, seven months after the devaluation, Mexico issued a two-year, $1 billion bond. "The success of that deal was very important in making people believe you can make money again in Mexico," says Werner. "We were conscious that we had to start almost from scratch in building credibility."

Despite Mexico's recent record abroad, Werner is in no hurry to build up a large reserve to repay huge slugs of U.S. and IMF bailout loans maturing in 1998 and '99. Arguing that the Mexican economy will be in better shape by next year, Werner insists that "we'll have no problem refinancing under much better conditions." Others disagree. Says Islam: "If there is another collapse of confidence and they aren't able to go back to Uncle Sam another time, they run the risk of not being able to service their debt."

Indeed, even Werner is cautious. Gross domestic product is expected to contract 3% in the first quarter and expand only by 2.5% for the entire year. Says Werner: "We're in a transition phase, coming out of the worst but not yet with clear signs of recovery."

If things start to unravel again, Mexico still can draw up to $8.5 billion more from the U.S. Exchange Stabilization Fund and $4.8 billion from the IMF. But most analysts think the Mexicans will go to great lengths to avoid such a move. And the Clinton Administration, concerned about criticism of its Mexico policy during the Presidential campaign, would prefer the Mexicans not make headlines. But the Washington-led bailout has given Mexico breathing space. Werner has converted enough investors to his cause to bring in some $10 billion in new cash--and has gone a long way toward raising even more.By Geri Smith in Mexico City, with Dean Foust in WashingtonReturn to top

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