Markets divided on prospects for Mexican sub-sovereign borrowing
September 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
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
“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
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
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