- Shortly before my recent trip to Mexico City, the United Mexican States issued another 100-year bond. This bond – due in 2114, and issued with principal of sterling 1 billion – was issued with a coupon rate of 5.625% and a yield to maturity of 5.75%. The merits of lending or borrowing money for terms longer than thirty years is the topic for another essay, but the coupon rate and tenor of this recent bond issuance are proof positive that Mexico continues to be able to differentiate itself from other “emerging” economies. The country’s sound foreign accounts, low inflation and healthy public sector finances endear it to international investors.
- Aside from continued drug violence, which is no small problem, the largest issue facing Mexico is a deep-seated and omnipresent bureaucracy. While the pace of President Peña Nieto’s reforms has been slow, progress is being made, and these reforms are a good first step in helping the country chip away at this institutionalized bureaucracy. The most impactful reforms are occurring in the energy sector.
- Greater metropolitan Mexico City has a population approaching 21 million, making it the world’s sixth largest metropolitan area. Built atop an ancient civilization, this metropolis has endured terrific earthquakes and fantastic mismanagement, yet Mexico City has somehow escaped much of the country’s awful drug war violence. On a recent trip to this beautiful, dirty and endlessly interesting city, I met with eighteen companies over the course of a week – and I, for one, am excited to see some real and positive changes underway, both in Mexico City and across the country as a whole.
In the two years since my last visit to Mexico City, the Benito Juárez airport opened a newly renovated international terminal, a vast improvement for both inbound and outbound travel. And this new terminal is just the beginning of the changes that the capital has seen. The newly elected administration of President Enrique Peña Nieto has proposed more reforms in its first fifteen months in office than an entire generation of Mexicans has seen in their lifetime, with few sectors of the economy left untouched. The reforms range from education (instituting independent evaluation of teachers), to banking (“democratizing” access to credit), to the fiscal budget (the implementation of a sugary beverages tax and an increase in the value added tax), to telecommunications (de-regulation and opening up the sector to competition), to energy (opening up the sector to private investment), to reforms of the political system itself.
With the Mexican economy growing just over 1% in 2013, it is hard to argue that these reforms did not have a negative impact on consumption and the economy in general. A series of new taxes on sugary beverages and junk food has hit Mexico's consumers and also the producers of these products. Meanwhile, a change in the tax code related to the deductibility of employee benefits is hitting the bottom line of every company in the country. Of the eighteen companies that I met with over the course of a week, no meeting ended without concern being articulated that the weakness in the Mexican economy in 2013 is continuing well into 2014, driven by the pull back from the consumer but also by corporates waiting to see the actual implementation and impact of the reforms. Most companies, however, expressed optimism that the reforms in aggregate will ultimately boost consumption and growth in Mexico in the years ahead.
A highlight of several company visits was a discussion of the in-progress energy reforms. The banks that I met with are excited about increasing lending to SMEs (small and medium sized enterprises), which would appear to benefit from the bulk of the reforms. Also, the infrastructure firms that I met with are expecting growth from entry into shale gas ventures, and everyone is anticipating increased private sector spending in general. Here is an interesting point: the EBITDA of Mexico’s state-backed petroleum company, “Pemex” (Petroleos Mexicanos), is roughly equivalent to the sum of the EBITDA of all the listed companies in Mexico. So each dollar spent liberalizing the energy market would ostensibly have a large impact on the broader economy, and also likely have the added benefit of shaking out corruption. While the pace of the energy reforms is slow with the first wave of investment not expected until 2015, we believe the resulting long-term benefits will be meaningful and lasting.
Mexico still faces bureaucratic hurdles, but the proposed reforms constitute many small steps in the right direction. The successful execution of even just some of the reforms will be a reason for Mexicans to celebrate and be optimistic about their future.Kate Jaquet
- The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect the writer's current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.
- Kate Jaquet is a Registered Representative of ALPS Distributors, Inc.