seriousness of the situation, the US government stepped forward
with a plan to prop up the peso and stem the
hemorrhage of capital from the beleaguered country. The IMF
also came to the table, committing an unprecedented amount of
funds—up to $17 billion. Meanwhile, Citibank and JP
Morgan attempted to rally commercial banks to provide a private
package of funds for the country.
Investors represent the wild card
of the equation. Having unceremoniously dumped Mexican stocks
and bonds following the devaluation, questions remain as to how
soon, if ever, they will return to the table in significant
numbers. Will the international aid package entice investors
back to Mexico? And if not, where will Mexico get the financing
it needs to continue its economic development?
In the following pages,
LatinFinance addresses several aspects of the crisis.
First, Victoria Griffith touches on the root causes of the
crisis, how it will affect the Mexican government and its
ability to roll over short-term debt and convert it into
long-term financing, and where new financing will and will not
likely come from. The Mexican banking sector faces serious
problems as well, as high domestic interest rates lead to
rising defaults and low levels of capital restrict further
lending, writes Jim Freer. Finally, Paul Kilby assesses the
difficulties faced by Mexican corporations in refinancing
existing debt and locating sources of new financing.
There are bright spots in the
otherwise dim picture. Mexican exports will likely get a boost
from a weaker currency, while foreign direct
investment—the type of stable, long-term investment
that Mexico desperately needs—should assume a more
prominent role. And, as always during difficult periods, new
and innovative forms of financing may emerge to add new levels
of sophistication to Latin markets in the long run.
Debt-ridden Mexico struggles to find new sources of
by Victoria Griffith
Will Mexico be able to service its
debt? The question, uttered only by a handful of doubting
Thomases just a few months ago, is now on the lips of nearly
every Mexico-watcher. Money is fast draining out of the Mexican
system, and both the public and private sectors will have to
cope with a new tight money environment.
"The only dollars that will arrive
in Mexico this year will be those given by Washington," said
Arturo Porzecanski, chief economist at ING Bank. "The US
Treasury, the IMF, the World Bank, these will be the funding
resources of Mexico in 1995."
The new Mexican liquidity crunch
conjures up nightmarish memories of the 1982 debt crisis.
Throughout the build-up of Latin American debt in the 1990s,
lenders and investors comforted themselves that the debt was of
a very different nature than in the 1970s—largely
private this time, rather than public.
"Mexico has attracted $150 billion
in foreign capital since 1989, most of which was for the
Mexican private sector," Porzecanski said.
In early 1994, however, faced with
$30 billion in foreign capital flight on the back of the
Chiapas uprising and Colosio assassination, Mexico shifted its
policy and began to take on large amounts of government debt as
well. The country issued tesobonos to finance the shortfall,
with some $50 billion worth outstanding at the end of 1994. The
tesobono issues meant the new Mexican debt was not as private
in nature as it had been earlier in the decade.
In any case, that most of the
capital had been issued to the private sector proved a false
comfort. Fittingly, the 1995 debt crisis kicked off with a
private sector default—$20 million in commercial paper
payments by Grupo Sidek. Although Sidek made payments two days
later, it seems almost inevitable that more defaults will
Short-term interest rates in
Mexico were boosted in late February to 50%, conforming to US
demands. Many companies simply won’t be able to
withstand those levels. Mexican banks seem particularly at
risk, with expensive dollar-denominated debt and hefty bad loan
portfolios. Several large institutions may be merged out of
To pull itself out of the crisis,
the government will have to live within limited means. Budget
cuts are necessary to ensure long-term fiscal health. What
frightens economists and investors is that President Ernesto
Zedillo’s administration has not yet come to terms
with its diminished resources.
"We haven’t heard
anything about spending cuts," Porzecanski said. "This attitude
can be dangerous."
The private sector also will need
to cut back to survive, and layoffs and slow growth are in the
cards. Companies will need some form of financing, though, and
it still is uncertain where that money is going to come from.
Certainly, it won’t be coming from the financially
squeezed Mexican banks. US banks also seem unwilling to step up
to the plate, and instruments like ADRs, which have become a
mainstay for Mexican capital raising, probably will not recover
until 1996 at the earliest.
With debt-to-GDP levels rising
from about 30% just a few months ago to about 50% today, Mexico
now can be classified as a high-debt country.
"Mexico is on the borderline
between being a country with a serious debt problem and being a
country with easily serviceable debt," said Luis Luis,
principal with fund manager Scudder, Stevens & Clark.
Although that debt may fall
abruptly with a peso revaluation, the current
situation is dicey. The Clinton rescue package failed to shore
up confidence, and Mexico was unable to roll over its debt in
weekly tesobono auctions.
"In a credit crunch you
don’t want to roll over enormous amounts of debt
once a week," said Kristin Landow, Moody’s
Investors Service’s leading sovereign analyst for
Mexico has two options. It can
either try to restore faith in itself as a short-term creditor,
or it can try to convert its short-term debt to medium and long
term. In the end, the country will probably try to do a little
of both. If it is successful, some of the focus will shift to
the country’s longer-term solvency.
Oil and other exports probably
will be key sources of revenue for the government.
Privatization will help but will not provide any major impetus.
Total privatization revenues this year are estimated at about
$1.5 to $3 billion, and after this phase, the government will
be left with little to sell off.
There are too many factors
involved to say with any certainty whether the country will be
able to service its debt five or ten years from now.
"No one’s predictions
five years out are credible," said Ernest Brown, Latin
strategist for Morgan Stanley. "You have to consider too many
things. Exports, currency rates, GDP growth, and other factors
all play into the equation."
One of the scariest factors for
investors is that Mexico’s sovereign debt is set
to rise this year, by some $29 billion, according to Lindow of
Moody’s. Although most analysts see this increase
as a temporary blip on the Mexican debt screen, the prospect is
bound to make investors nervous.
To make matters worse, the Mexican
political situation, whose stability investors had seen as a
selling point, now is in turmoil. The Chiapas uprising
continues to haunt Zedillo, and observers fear that the income
compression caused by the peso collapse may cause the
public to lose faith in the Mexican government.
Economists are more optimistic
about the longer run, however, when they hope that a surge in
exports will buoy the country. "In the longer run, export-led
growth should kick in," said Riordan Roett, head of Latin
American studies at Johns Hopkins’ School of
Advanced International Studies.
The Mexican corporate sector has
been even more shell-shocked by the crisis than the public
sector. Sidek’s refusal to honor its debt in
February sent shivers through the bond and stock markets in the
entire region. A number of Mexican companies have large
commercial paper programs, including Cementos Mexicanos, and
Grupo Alfa. Although these are considered blue chip stocks,
with investors demanding rates of 60% or more, anything could
The main impact of the crisis on
Mexico’s private sector, however, probably will be
in the form of dashed expansion plans. "We will see a major
scale back of investment plans for Mexican corporations," said
Brown of Morgan Stanley.
The construction group Tribasa was
one of the first companies to publicly acknowledge the
devastation the peso collapse had wreaked on its
operations. Tribasa has announced plans to cut its work force
by 50%, and to drop most of its construction projects. As a
result, investors in the company cannot expect big returns for
some time to come.
In fact, construction probably
will be one of the hardest hit sectors in the Mexican economy.
"Access to financing is the life blood of this industry," said
Federico Laffan, Mexican analyst for fund manager Foreign &
Colonial. "Their future growth depends on it."
However, with, interest rates
nearing three digits in some cases, most projects will have to
be dropped. Returns of 30% or more, which looked attractive
just a few months ago, would now provide investors with a loss
if financed with borrowed capital, as is the case with most
will probably be followed by much of Mexico’s
private sector. "Companies will enter into a vegetative state,"
said Laffan. Companies with high overheads will have a harder
time idling their engines and will be among the hardest hit.
Low-geared companies are among the most promising
Some Mexican sectors may even
benefit from the crisis. Exporters are often identified as an
obvious winner, but companies which have faced fierce
competition from US products recently may also score some
points in the long- run. "Many companies look set to recapture
market share lost to US products," said Carmen Campollo,
analyst at the IFC.
Among the most favoured
post-crisis industries are beverage and food groups which have
been losing share to US imports. "People will always have money
to buy Pepsi, products like that," said Roett of Johns Hopkins.
"Companies like Gemex (a bottler) may suffer, but
they’ll do better than other sectors."
In the medium-term, some financing
should come on line for Mexican companies. "Mexican companies
will have to be more imaginative in finding ways to tap the
capital markets," said Luis of Scudder.
One of the first forms of finance
to recover may be mergers and acquisitions. Wal-Mart set a sour
note for direct investment shortly after the peso
collapse by scuttling plans for a major Mexican invasion.
However, analysts are predicting renewed interest in mergers
& acquisitions by the end of the year.
Foreigners apparently were already
gearing up for more direct investment before the peso
debacle. One of the few pieces of good news in the finance
ministry’s February report was that foreign direct
investment had surged 64% last year. Although that figure is
coming off a low base (foreign direct investment totalled $7
billion a year at last count), it’s moving in the
right direction. Direct investment often has been hailed as the
kind of long-term commitment Mexico needs to jump-start
Two factors may contribute to a
strong mergers and acquisitions revival. One is that Mexican
companies are severely strapped for cash. Selling off pieces of
themselves, either in the form of spin-offs or large equity
blocks, is a preferable alternative to bankruptcy. And foreign
companies may be in the market for bargains. Although most
interest probably will come from the US, a few European and
Asian groups may get involved. Samsung of South Korea was
rumored to have been sniffing around the Mexican market
recently for some good deals.
Healthy Mexican companies may take
advantage of a weakness in the stock market to grab some
bargains themselves. Already, we’ve seen some
activity. Grupo Carso, for instance, has increased its holdings
in a number of Mexican companies, including Apasco and Telmex.
Although Telmex profits have not shined recently, the company
does generate large amounts of cash, which Carso could use to
finance other purchases.
Share buy-backs also seem to be an
early trend. Grupo Carso and Grupo Sidek have both taken
advantage of weaknesses in their stock price to pick up their
In addition to purchases of
Mexican companies, analysts predict that American groups soon
will take advantage of the peso’s
weakness to set up shop there. "US companies will want to use
Mexico as an export base," forecast Lindow of
However, interest in foreign
direct investment in the country will depend on
investors’ faith in Mexico’s ability
to stabilize its exchange rate. Plant and equipment are not as
easy to abandon as equities or debt. If companies put their
money into Mexico because it is a low-cost export base, they
must be assured that the currency will not become seriously
overvalued in the future. The government’s success
in convincing foreign investors of the involatility of the
peso will be key to foreign direct investment.
Portfolio investment will probably
be anemic throughout 1995, although a few companies may test
the waters with capital-raising issues towards the end of the
year. Commercial paper also will fail to offer companies any
substantial stream of capital, since interest rates are almost
prohibitive and short-term confidence poor.
Neither will bank debt be a
solution, either for the Mexican government or for the private
sector. Spirits rose on the back of JP Morgan and
Citibank’s rollover of Cemex debt. However, the
same two institutions failed to put together a $3 billion
syndicated loan for the Mexican government in February.
Memories of the 1982 crisis still
loom large and few banks were willing to put up $200 million
each, the amount Citicorp and JP Morgan had requested. Mexico
currently owes some $68 billion to foreign banks, about $18
billion of which is to US banks.
Mexican banks look ill-equipped to
provide much financing. Many are suffering from liquidity
problems themselves, having been caught out in the crisis with
blocks of unhedged dollar-denominated debt. Mexican banks also
are likely to suffer from a ballooning bad-debt portfolio, as
the private sector faces a declining growth and surging
Asset-backed securities stand to
make a comeback. "At times of uncertainty, the markets usually
turn to collateralized transactions to secure their
investments," said Luis of Scudder. Exports, which are set to
surge on back of the weak peso, may prove one of the
most popular forms of collateralization.
Exports may prove the key to
solving many of the country’s financial problems
over the next few years. Exports could eventually pull many
corporations into a growth phase, and a boost in exports will
help to erase Mexico’s current account deficit,
the source of many of its macroeconomic difficulties.
With financing sources limited,
though, extreme budgetary discipline also will be necessary, in
both the private and public sectors. A lot will depend on the
Mexican government and Mexican corporations’
ability to adjust to tougher times. Unless both sectors show a
willingness to penny pinch, Mexico probably will take a long
time to get back on its feet again.
Money in the Banks?
Mergers likely as government strives to keep system
by Jim Freer
Mexico is looking to its
beleaguered banks to see if they can help it through its
financial crisis by living up to this challenge: With the peso
severely weakened and with interest rates at sky-high levels,
will banks be able to restructure loans to businesses and
consumers? If they do, will they still have enough resources to
stay alive and help the economy through an almost certain
Mexico’s banks are
restructuring some loans (permitting delayed payments, etc.)
and preparing for losses on others—a step that would
erode capital which already is low at some banks.
A consensus among securities
analysts and other observers is that those steps will leave
Mexico’s banks seriously damaged, but that they
will be able to meet their tests with the help of
"I believe the Mexican government
will do whatever it can to keep the system afloat," said Rafael
Bello, vice president for Latin American equities research at
Morgan Stanley & Co. "If you let it (the banking system)
lose liquidity it would send terrible signals to the
In doing "whatever it can,"
Mexico’s government is considering an aid program
that could give it a future stake in some banks. It also is
ready to approve mergers that would enable healthier banks to
take over seriously troubled ones. In addition, it has proposed
legislation that would let foreign banks help in a bailout of
Mexican banks—by permitting foreign investors to own
as much as 49% of a Mexican bank, rather than the current 30%
Meanwhile, some observers expect
that several of the US and other foreign banks that recently
opened full-service Mexican subsidiaries might use their
resources to take some stronger corporate clients away from
Even Mexican banking leaders admit
the situation is extremely serious, although they believe their
industry can maneuver through the crisis.
Alfonso Gonzalez Migoya, chief
financial officer of Bancomer, Mexico’s second
largest bank, said he believes his industry is facing "a
deterioration in asset quality" and that it "will consolidate
faster" this year. But, in written responses to
LatinFinance questions, he said he believes that "bank
defaults will be completely prevented" because Banco de Mexico,
the nation’s central bank, will "provide temporary
equity support through Fobaproa (Mexico’s Banking
Savings Protection Fund) or a similar mechanism."
Those steps, or other urgent
measures, could prove necessary because anticipated loan
defaults would result in heavy 1995 losses for most Mexican
The Mexican banking
system’s problem loans were growing steadily even
prior to the crisis that began with the December 20
peso devaluation. According to a recent analysis by
Salomon Brothers Inc., the share of the Mexican banking
industry’s loans carrying "high-risk" grew from
32.7% on September 30, 1994 to 41.5% at the end of last
Bello and other analysts say they won’t be able to
gauge the full impact of the crisis until next summer, when
banks must report their June 1994 data to regulators. In
Mexico, as well as many other countries, banks can carry
problem loans for at least several months before classifying
them as non-performing or taking writeoffs.
As of last December 31, several
major Mexican banks already had capital-to-total assets ratios
below or near 4% (see chart on next page), the minimum level
that generally is considered adequate under international
The industry’s total
non-performing loans, those 90 days or more delinquent, were at
a dangerous level of 7.4% at the end of last year, according to
Salomon Brothers’ estimates. Analysts anticipate
those numbers will grow steadily this year.
With those problems and with
quoted rates on 28-day loans in the 40% range in February, bank
lending has become virtually non-existent in Mexico, Bello
Bello said his firm’s
research indicates that only several of Mexico’s
30 banks will not need assistance this year from Fobaproa. He
said Banamex, Mexico’s largest bank, and Banorte,
its 14th largest, are among those that would not require aid
under a proposed government program in which Fobaproa would
inject capital certificates—through purchase of
subordinated debt which the government could convert to stock
if a bank does not repay within three years. Under the plan,
all banks whose capital falls below 8% of risk-based assets
would be eligible for assistance.
The $50 billion international aid
package, announced by President Clinton last month, should
assist Mexico in restoring liquidity to its banking system,
Bancomer’s Gonzalez said.
Once it adds those dollars to its
reserves, Mexico’s Treasury would again be able to
start providing dollars to its banks in exchange for
"The aim of the aid package is to
increase confidence in the country and to therefore avoid a
capital flight," he said. "Liquidity in foreign currency will
be available, eliminating pressure on the exchange rate and
therefore driving domestic interest rates down."
Rates on the vast majority of
Mexican loans carry floating rates, a factor that has led to
huge increases in payments that businesses and consumers must
make to banks.
Bancomer is among major Mexican
banks that are giving customers considerable leeway. In
January, it introduced a restructuring program under which
mid-sized companies with peso loans are granted a
seven-year restructuring, including a two-year grace period on
principal payments and a partial refinancing of interest
Last year, Mexico’s
Ministry of Finance permitted 18 foreign banks to open
full-service offices under terms of the North American Free
Trade Agreement. Gonzalez said he doesn’t
anticipate that foreign banks will make major inroads into
Mexican banks’ business this year.
But John Donnelly, managing
director of Chemical Bank Mexico, the new full-service
subsidiary of New York-based Chemical, said he believes his
bank will have opportunities to attract major Mexican companies
as clients. "A big difference between now and December is that
Mexican companies won’t have the dollar funding
that they were able to provide to large corporations," Donnelly
said. He said Chemical will be "looking at the top 100
corporate clients" in Mexico.
Bello said he does not expect
foreign banks to be major lenders in Mexico this year. "I
don’t see banks like Citibank and First Interstate
quickly setting up units to lend money to corporations and
individuals in Mexico."
Bello added that foreign banks
should be very cautious about potential purchases of Mexican
banks, even if the government permits 49% ownership.
"The situation is changing every
minute in Mexico," he said.
Data provided by Morgan Stanley
(see chart) show that four major banks reduced their percentage
of problem loans during last year’s fourth
quarter. But Morgan’s research indicates those
reductions stemmed from decisions by those banks to write off
heavy volumes of loans during the quarter. Most other Mexican
banks took similar end-of-year clean-up steps. That enabled
those banks to reduce their volumes of problem loans—
and thus lower their ratios of problem loans to total loans.
But the writeoffs cut into those banks’ critical
reserves for problem loans. During the quarter most Mexican
banks also made heavy additions to their reserves for problem
loans, thus cutting into their capital.
Morgan Stanley’s data
indicate that Mexico’s banks have a combined $4
billion in dollar-denominated debt, mostly in short-term
certificates of deposit. Mexico’s banks had a Mal
of $116 billion in total deposits at the end of 1993.