Nearing Tequila Crisis-Era Debt Levels Gives Mexico a Hangover

  • Debt-to-GDP has risen 8 percentage points under Pena Nieto
  • Vows to cut spending not enough to ease all concerns: Barclays

Mexico’s surging debt load is raising red flags for Deutsche Bank AG and Barclays Plc.

The broadest measure of debt as a percentage of gross domestic product has swelled to 46 percent from 38 percent in President Enrique Pena Nieto’s first three years in office as plunging oil prices eroded government revenue and a weak peso made it more expensive to borrow in dollars. That compares with a 2 percentage-point increase in the three years before he took office, government data show. 

According to the Bank of International Settlements, the debt burden is the highest since 1995, during the so-called Tequila Crisis, when panicked investors sold off their short-term debt and sparked a peso depreciation. The International Monetary Fund estimates that the figure is at least as high as 1996.

Rising leverage threatens to once again erode investors’ confidence in a country that currently enjoys borrowing costs that are among the lowest in the region. Mexico, one of four investment-grade major economies in Latin America, is also the biggest issuer in international debt markets and pays on average 3.6 percentage points above U.S. Treasuries, according to data compiled by JPMorgan Chase & Co. That’s almost 2 percentage points less than the regional average.

"The speed of growth could be troubling," said Alexis Milo, Deutsche Bank’s chief Mexico economist, referring to debt levels. "A deterioration in Mexico’s fiscal perspective could have an impact on the cost of financing its debt, especially as sooner or later interest rates will rise around the world.”

Mexico’s public debt chief, Alberto Torres, said debt has risen in other emerging markets at a similar pace, while Mexico has distinguished itself by pledging spending cuts and carrying out a plan to close the fiscal deficit gap. Torres said debt levels couldn’t be compared to the Tequila Crisis-era because conditions are far different. Debt itself is mostly peso denominated and far longer term now, while indicators like inflation are much more controlled.

"There’s a clear signal of broad strength in the economy today that wasn’t there in the past," Torres said in an interview.

The peso weakened 0.8 percent to 18.2747 per dollar in Mexico City

‘Worrisome’

Mexico’s sovereign notes have lost an average of 5.48 percent in the past 12 months, compared with a gain of 0.9 percent for emerging markets, according to JPMorgan.

The government’s vow last week to eliminate more than 132 billion pesos ($7 billion) of spending from this year’s budget hasn’t totally eased concerns, said Marco Oviedo, the chief Mexico economist at Barclays. If economic growth comes in below forecasts, the package of cuts may not be enough to reduce liabilities as a percentage of GDP and, as a result, the debt burden could end up rising instead, he said.

"It’s worrisome that this trend has continued," Oviedo said. "We need to see those cuts reflected in debt levels."

Based on International Monetary Fund estimates, Mexico’s gross debt equals 52 percent of GDP. That compares with 17 percent for Chile, whose investment grade from Moody’s Investors Service is three steps above Mexico’s, and 20 percent for Peru, which shares the same rating as Mexico at Moody’s and Standard & Poor’s. Brazil, which lost its only remaining investment grade among the major rating firms this week, is struggling under a debt load of 67 percent of GDP.

‘Relatively Low’

Not everyone is alarmed by the surge in debt. Mexico is taking the necessary steps to address its fiscal position after debt deteriorated in 2014, said Carlos Capistran, chief Latin America economist at Bank of America Corp. The debt will continue rising, but the pace will slow, Capistran said.

Fitch Ratings affirmed Mexico’s credit rating at BBB+ on Friday, saying its economic performance has remained relatively resilient and authorities have taken measures to cushion the impact of low oil prices on its public finances. Fitch said Mexico’s government debt burden should peak in 2016 and reduce gradually thereafter, although it warned of risks that weak economic performance and fiscal deterioration could lead to worsening government debt dynamics.

For now, Oviedo of Barclays says it will be important for the nation to follow through with those cuts. Mexico sought similar reductions last year, only to boost spending in other areas for an overall net increase of expenditures after higher-than-expected revenue allowed it to do so while still reaching the deficit goal, said Milo.

"One of the solid fundamentals of the Mexican economy is that public debt as a percentage of GDP is relatively low," Milo said. "If it keeps growing at these rates, that won’t be the case anymore.”

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