fiscal

By Ye Xie and Lester Pimentel Feb. 24 (Bloomberg) — A year after a widening budget gap made Mexico a laggard in emerging markets, the country has “solid” finances that shield it from growing investor concern about countries’ ability to service debt, said Deputy Finance Minister Alejandro Werner . Mexico “frontloaded” budget cuts and tax increases last year while other countries buoyed spending to pull their economies out of recession, Werner said. Mexico’s fiscal measures, aimed in part at limiting credit-rating downgrades, have its markets “behaving correctly” as other governments slip into a “world of sovereign stress,” he said. “Under this international environment of fiscal laxity and fiscal doubts, our fiscal stance is very solid,” Werner said in an interview in New York. “Looking at what’s going on in Europe today, it looks like a good move.” A rally in Mexican debt has sent benchmark peso-denominated bond yields to a nine-month low while the currency has gained against 22 of its 25 emerging-market peers this year. The yield on the government’s 10 percent bonds due in 2024 has dropped 37 basis points, or 0.37 percentage point, this year to 7.9 percent, the lowest since May. By comparison, in Greece, 10-year bond yields are up 72 basis points to 6.49 percent after topping 7 percent in January for the first time since 1999 on concern the government will be unable to finance its deficit. Mexico’s dollar bonds have returned 1.3 percent this year, topping the average 0.1 percent gain on emerging-market debt, according to JPMorgan Chase Co.’s EMBI+ index. That’s a reversal of last year, when the 10 percent return on Mexican debt was less than half the 26 percent gain for developing-nation debt. Budget Cuts Mexico is winning over investors after President Felipe Calderon carried out spending cuts and tax increases totaling more than $10 billion to contain the deficit even as the economy shrank 6.5 percent last year in the worst recession since 1932. Standard & Poor’s has shifted the outlook for Mexico to stable from negative after lowering its rating one step to BBB, the second-lowest investment-grade level, in December, a month after Fitch Ratings made the same move. While the tax increases should have been more broad-based, the measures were key to restoring confidence in the country’s finances after falling output at the state oil company crimped government revenue, said Flavia Cattan-Naslausky , a currency strategist with RBS Securities Inc. in Stamford, Connecticut. “You have to give credit to them as they did fiscal tightening when the economy was tanking,” said Cattan- Naslausky, who predicts gains in the peso. During the global financial crisis, “everyone was spending money like crazy. Now you see fiscal deterioration everywhere. Certainly on the fiscal side, we don’t have to worry about Mexico.” Syndicated Bond Sale Mexico’s first-ever domestic bond sale through a syndicate of banks yesterday lured bids worth three times the 25 billion pesos ($1.9 billion) of 10-year debt on offer, Gerardo Rodriguez , head of the Finance Ministry’s Public Credit Department, said in a phone interview. The government sold the bonds to yield 7.66 percent. Pacific Investment Management Co., manager of the world’s biggest bond fund, has been adding Mexican debt because it’s “attractively priced,” fund manager Michael Gomez said in a Feb. 9 interview. Five-year credit-default swaps tied to Mexico’s bonds and used to hedge against losses traded at 1.30 percentage points yesterday, three basis points less than that for Brazil, according to data compiled by CMA DataVision. The cost of protecting Mexican bonds fell below that of Brazil on Feb. 17 for the first time since January 2009, reversing a gap that swelled to as much as 72 basis points last year. Deficits Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 a year on a contract protecting $10 million of debt. Last year’s fiscal measures, which were criticized by Mexico’s opposition parties, are helping spur demand for the country’s bonds, said Werner, an economist who earned his Ph.D at Massachusetts Institute of Technology. Mexico forecasts it will keep its deficit at the equivalent of 2.8 percent of gross domestic product this year after posting a 2.1 percent gap in 2009. The deficit in the Group of 20 developed economies will reach 6.9 percent of GDP this year, the International Monetary Fund said in November. ‘Debt Scares’ Mexico will “likely” hold its debt-to-GDP ratio at 37 percent this year as the economy grows 3.9 percent, Werner said. The ratio will resume a “declining trend” in 2011, he said. The IMF estimates debt in the advanced G-20 economies will reach 118 percent of GDP in 2014, up from about 80 percent before the crisis. “We can distinguish ourselves,” said Werner. “We have shown we have stable debt dynamics. We started doing the fiscal reforms in 2009 even when the country was still under a very stressful situation.” Kenneth Rogoff , a Harvard University professor and former IMF chief economist, predicted yesterday in Tokyo that there will be a “bunch” of government defaults over the next few years in the wake of the banking crisis. Werner said that while he doesn’t expect many defaults, there will be “debt scares” that shake global financial markets in the next two years. “We will be living in a world of sovereign stress,” Werner said. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net Lester Pimentel in New York at lpimentel1@bloomberg.net