(Editor's note: In this article, published earlier today, the scale for chart 1 was misstated. A corrected version follows.)
As Mexico prepares for its upcoming elections, Standard & Poor's Ratings Services is expecting a temporary lock on the country's local municipal borrowing activity. Once the electoral process has settled, likely by fourth-quarter 2006 or early 2007, a clearer picture of future local financing should come into focus.
Borrowing Is Stalling, But Only For Now
The July 2, 2006, presidential election is sure to galvanize the country as voters decide between the starkly different ideologies of leftist Andres Manuel Lopez Obrador; the leader of the institutional revolutionary party, Roberto Madrazo; and conservative ruling-party candidate Felipe Calderon. But 14 states among the Mexican local and regional governments (LRGs) are also holding elections for local legislature and municipal positions. Of these states, five—Guanajuato, Jalisco, Morelos, Chiapas, and Tabasco—will also elect new governors.
Consequently, these states are cutting back on their financing activities slightly from past years. Nevertheless, most entities have refinanced debt during 2005 and 2006 to improve payment conditions, and the most sophisticated Mexican LRGs have hedged their new debt, capping interest rates at a fixed, manageable, and relatively low level.
2006 Totals Should Roughly Match Those In 2005, But Bonds Will Regain The Lead Over Bank Loans
Despite the current slowdown, we're expecting only a tiny dip in Mexican LRGs' total borrowing in 2006—about 1% from 2005 (see chart 1). Last year, 15 LRGs issued more than US$1.26 billion (13.5 billion Mexican pesos; MxP) of structured debt backed by federal or local taxes.
Most Mexican LRGs relied heavily on bank loans to cover their financing needs last year; bank loans accounted for about 92% of total financing, while bond issuance represented only 8% (see chart 2). But for 2006, we're expecting only three or four states to raise money through capital market transactions, which will bring total volume closer to US$1.24 billion (MxP13.2 billion). Because of this drop in the number of issuers, we're also expecting a virtual flip in the ratio of bank loans to bonds (32% bank loans and 68% bonds; see chart 3).
Borrowing Beyond 2006
Certain Mexican LRGs should continue to have ample financing and refinancing needs in the medium term. As long as financial institutions and local investors maintain their support, and the proper administrative practices and processes and legal frameworks are in place, LRG debt obligations should continue to grow over the coming years.
