Home' Trinidad and Tobago Guardian : May 3rd 2015 Contents SBG16 THE ECONOMIST
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MAY 3 • 2015
At the beginning of
investors made two
whopping bets by
snapping up the first-
ever 100-year bond
denominated in euros.
The first bet was that
the euro would still exist a century from now
- no bookie would give short odds on that.
The second was that the issuer, Mexico, which
has suffered three long cycles of boom and
bust in the past century, would continue to
be creditworthy for the next 100 years.
Mexicans, whose country has, as one eco-
nomic historian puts it, lived longer in mora-
toria than with access to capital markets, react-
ed with bemusement. A typically gloomy
columnist predicted that, since Mexico will
have run out of oil by 2115, it will have to sell
off the country s extremities to repay the bond-
Foreign creditors are more bullish. During
the past five years, they have extended the
equivalent of more than US$5 billion of 100-
year bonds to Mexico in three currencies: dol-
lars, pounds sterling and now euros. It is the
only country to have tapped the so-called
centennial market since China and the Philip-
pines in the 1990s, and it has done so at rel-
atively low yields of 6.1 per cent on its 2010
dollar bond and only 4.2 per cent on its euro
bond last month.
Those are extraordinarily good terms, given
Mexico s distinctly spotty credit record, which
raises two questions: How has Mexico managed
to pull off this "sale of the century," and what
are the chances of investors, or their grand-
children, getting their money back?
The answer to the first question is a com-
bination of salesmanship and timing. The
Finance Ministry s bright, American-educated
technocrats know how to attract attention
from investors who may not have considered
The euro-denominated bond, for instance,
was sold largely to insurance companies and
One advantage of its long life, for borrower
and creditors alike, is that it helps avoid the
sort of overcrowded redemption schedules
that contributed to Mexico s debt crises in
1982-1983 and 1994-1995.
In an era when the yields on the bonds of
many rich countries are negative, however,
Mexico s main selling point is a relatively high
return from a borrower that last year received
an A rating from Moody s. On the day Mexico
issued its euro-denominated centennial bond,
Switzerland sold a 10-year bond at a negative
yield, a first.
Mexico also stands out from other emerging
markets in several ways. Although the halving
of oil prices has hurt the public finances, the
peso has done better than many of its peers.
Agustin Carstens, governor of the central bank,
has said that Mexico has an "arsenal" of US$195
billion of international reserves and a US$70
billion credit line from the International Mon-
etary Fund in case of financial-market volatility.
That has helped to attract outsiders, who hold
US$144 billion of Mexico s domestic debt.
The government has further impressed
investors by tightening its belt before times
get tougher. It has cut spending in an election
year and is attempting to implement a string
of reforms aimed at bolstering competition in
areas such as energy and telecommunications
that have the potential to attract large sums
of foreign direct investment.
"Mexico is a bright spot among emerging
markets," said Andrew Stanners of Aberdeen
Asset Management, a big investment fund.
"It is one of the few countries that has been
fixing the roof while the sun shines."
So why are few Mexicans so sanguine?
Gerardo Esquivel of El Colegio de Mexico,
a university, described the government s
approach with a different home-improvement
analogy: He likened it to "putting a bright
coat of paint on the exterior of the house,
while the inside is rotting away."
The problem, he said, is that the 20 years
of macroeconomic stability and flexible
exchange rates that have endeared Mexico to
foreign creditors have been accompanied by
meager, narrowly based growth that depends
heavily on exports.
Growth in output per person has averaged
about one per cent a year since 1995. Poverty
levels have remained stagnant. President
Enrique Pena Nieto initially promised that his
reforms would bring annual growth of between
five per cent and six per cent, but since then
his government has had to lower its forecasts
Private-sector economists think that growth
will average 3.8 per cent during the next
decade, according to a poll from the central
The strength of Mexico s exports to America,
especially cars, has not translated into booming
domestic demand, economists say, due to
decades of miserly wages. A huge, unproductive
informal sector and general lawlessness also
drag down the economy.
The "pressure-cooker effect" of low growth,
low wages and rising inequality of income and
opportunity could explode, Esquivel said.
"The Pena Nieto administration doesn t
understand this," he said. "They still talk in
terms of trickle-down."
The government disputes this. Alejandro
Diaz de Leon, the finance ministry s point
man on the latest 100-year bond, acknowl-
edged that Mexico has underperformed in
terms of growth.
"Productivity, job creation and wealth cre-
ation are the key issues for the future," he
Nonetheless, he said that the president s
reforms aim to address those issues. Moreover,
he argued, the lessons learned from Mexico s
past booms and busts are so embedded among
politicians and officials that there is little
chance of a slide back into financial chaos.
He points to Mexico s independent central
bank, open financial markets and free-trade
agreements as guarantors of stability.
Demography is another card played by the
optimists. A whopping 46 per cent of the
population is younger than 25. Luis de la Calle,
an uncharacteristically upbeat Mexican econ-
omist, said that this alone could turn Mexico
into one of the world s biggest economies
within the next few decades. He believes that
the country soon will rue its 100-year issuance
at 4 per cent, because it will be able to borrow
far more cheaply.
"We ll prepay that bond, no doubt," he said.
Whether countries repay their debts comes
down to questions of political will as much
as economic performance, however. Some fret
that Mexico s past will return to haunt it.
The country inherited a habit of default
from the Spanish empire, which reneged on
its debts more than a dozen times between
the 16th and 20th centuries. Mexicans also
have alternated repeatedly between an embrace
of globalisation and a reversion to an inward-
For the first decade of the 20th century, for
instance, international bankers threw money
at Mexico because of its macroeconomic sta-
bility, its railway boom and a global liquidity
glut. Then came the murderous revolution of
1910, which erupted partly because the fruits
of that prosperity had not been shared. Mexico
defaulted on its debt in 1914. It was shut out
of capital markets for most of the next three
decades, and did not become a big borrower
again until the 1970s.
For bondholders to get their money back in
2115, Mexico must defy its history and remain
open to trade and foreign capital.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
Investment in Mexico:
The 100-year view
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