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Markets divided on prospects for Mexican sub-sovereign borrowing

Sep 30, 2013

A series of landmark reforms could make capital market funding for state and local governments more likely, but markets remain skeptical

Mexico’s indebted local governments could be poised for more borrowing following a series of landmark economic reforms that seek to streamline public sector debt while encouraging private capital for infrastructure finance.

The use of public-private partnerships for financing projects, under proposed infrastructure sector reforms, would also help minimize the burden on local government expenditure, Alfredo del Mazo, director general of national development bank Banobras, told a LatinFinance forum in Mexico.

"One of our fundamental challenges is the management of resources," del Mazo said, adding that  "debt is useful for governments to meet requirements and demands of its citizens."

Mexico’s government has sought this year to rein in excessive borrowing by states and municipalities, which have seen their debt soar in recent years.

But new rules being discussed at the national level to limit local government debt are helping to ease concerns over creditworthiness, said Eduardo Hernández at Fitch Ratings. "Debt in itself is not bad and has been utilized to leverage growth," he said, speaking at the LatinFinance  Infrastructure and Sub-Sovereign Finance in Mexico Summit.

New legislation would likely mean more responsible debt management from Mexican states – a fact which could mean a greater role for debt capital markets.

Lawmakers earlier this year passed an accounting and transparency law for states and municipalities raising the standard for local governments and Congress is weighing up fresh initiatives on state and municipal debt management.

Alberto Ramos, CEO of HR Ratings said that although Mexico boasts one of Latin America’s deepest and most liquid local debt capital markets, sub-sovereign issuers must still rely on bank debt because investors have shown "little interest" in buying such debt.

Ramos said a mismatch between states’ short-term borrowing needs and the longer-term horizon of institutional investors was largely to blame, but he added that the mismanagement of short-term debt by some state borrowers remained a source of investor concern.

Investors may also be wary of the reputations of local governments, following the travails of several heavily indebted states since 2009 – most notably Coahuila, which was forced to renegotiate with creditors in 2011.

"Mexico is a young debt market of around 12- 13 years old. In comparing the debt metrics of Mexico to other countries like Brazil, Mexican debt levels are very low," Alejandro Olivo at Moody's said.

Recent cases of non-compliance with debt payments are characteristic of a market still at a "basic phase of development," he said.

Experts told the LatinFinance forum that state and municipal debt is nevertheless "manageable" and is lower as a proportion of GDP than that of countries including Canada and Brazil.

Sub-sovereign debt represents around 2.8% of GDP, compared to 11.6% in Brazil, 18% in the US and 38% in Canada, according to Banobras.

On sub-sovereign financing, at least 29 Mexican entities count on Banobras financing which represents at least MXP5bn and represent 27% of total debt of those entities

A financial sector reform as well as legislation to overhaul infrastructure development could also boost the finances of state and municipal governments.  

Del Mazo said it was "the responsibility" of public and private sector lenders, local governments and investors "to make use of these tools and contribute to national infrastructure development."

"The country is going through a transformational period, and now is the moment to make urgent changes to move Mexico forward," he said.

Proposed reforms will enhance Banobras’ role as responsible creditor, Del Mazo added. Banobras aims to help states and municipalities boost their revenues and transparency, make efficient use of their resources, while promoting responsible debt management, he said. LF



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