Mexico Is Staying Afloat Quite Nicely, Thank You
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 sharply from the 550-point spread they faced after the peso was suddenly devalued at the end of 1994. Says Werner, a 32-year-old with a doctorate in economics from Yale University: "Last year, we were chasing the bankers. Now, they're starting to chase us."
So adroit 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.
THIN ICE? 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 rising 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.
Or maybe not. Mexican officials, buoyed by the market's appetite for their debt, insist they have the right strategy. They note that after Mexico's 1982 debt crisis, seven years passed before the country could resume international borrowing. But last June, just 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."
And the Mexicans have gone to great lengths to gain that credibility. They are learning to live with frequent inspections by IMF and U.S. Treasury analysts, who pore over Mexico's books as often as once a month. Werner's team posts up-to-date financial indicators on a World Wide Web page (http://www.shcp.gob.mx or http://22.214.171.124), and they coddle big foreign investors with quarterly conference calls. "We have to behave like a quoted company on the New York Stock Exchange," says Werner, "giving out a constant flow of information."
The payoff: good deals. Last August, Mexico sold a three-year bond deal, worth 100 trillion yen, or about $1 billion. The Mexicans then swapped their yen for dollars just in time for the greenback's value to climb 25% against the yen. By repaying the yen loan with stronger dollars, Mexico slashed its borrowing costs to 150 basis points above U.S. Treasuries, Werner figures.
From Japan, Mexico went on to Germany, where it successfully marketed a five-year, 1 billion German mark ($700 million) issue in October despite investor jitters over a weakening peso. In February, the national development bank, Nafin, even tapped the South African market for $68 million worth of rands. Now, Finance Secretary Guillermo Ortiz says at least one investment bank is suggesting that Mexico could even try selling a 10-year bond. Indeed, having raised $10.9 billion since the middle of 1995, the government is optimistic that it can raise $5 billion to $7 billion annually in 1996 and beyond.
But not in haste. As much as half of the Mexican foreign debt falling due each year consists of loans from government export-import banks, trade creditors, and multilateral lending agencies. These credits likely will be rolled over. And even with Mexico's recent success abroad, Werner is in no hurry to accelerate his borrowing campaign 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 and borrowing costs will be lower by next year, Werner insists that "we'll have no problem refinancing under much better conditions"--a point with which some Wall Streeters concur. "They don't need the money at this point," says David L. Roberts, group vice-president of rating agency Duff & Phelps. Others disagree. Says analyst 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."
BREATHING ROOM. Even Werner is cautious. Gross domestic product is expected to contract 3% in the first quarter and, figures Roberts, expand only by 2.5% for the entire year. High interest rates needed to stabilize the peso at around 7.5 to the dollar are pushing up delinquencies on loans to individuals and businesses and increasing the price of government efforts to rescue failing banks. That effort is already costing the equivalent of 1.3% of GDP per year. But the governing Institutional Revolutionary Party is hoping to find some spare cash to rev up growth in time for congressional elections next year. Acknowledges Werner: "This recession has been very painful. 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 in another emergency. But most analysts think the Mexicans will go to great lengths to avoid such a move. And the Clinton Administration, concerned about possible criticism of its Mexico policy during the Presidential campaign, would prefer the Mexicans not make headlines for the duration of the year.
Then again, the Washington-led bailout has given Mexico breathing space. That has allowed the country to start replacing its emergency loans and get back in the business of financing its economy by more normal means. Werner and his colleagues haven't convinced every skeptic that Mexico won't stiff global investors once again. But he has converted enough of them to his cause to bring in some $10 billion in new cash--and has gone a long way toward raising even more.