The Daily Update - Mexico

So far this year, the new issue market for sovereigns has been relatively active with Saudi Arabia, Turkey, Indonesia, Philippines and now Mexico being among the notable issuers. The Mexican Government issued USD2bn of 10 year dollar denominated bonds on Wednesday in an issue that was oversubscribed. The bonds were issued at a spread of 185 bps over US Treasuries and according to our models are trading ~1 credit notch cheap using a best A3 rating.

Investor interest in Mexico seems to have recovered somewhat: President AMLO shocked investors announcing the cancellation of the airport project in October last year although the government reached a settlement with investors in December. Also AMLO’s administration put forward a prudent budget in December that was well received by the market and eased concerns about the risk of profligate spending to meet some of his socialist objectives. One aim of the budget was to be more efficient in its spending. Importantly, it targets a primary surplus of 1% of GDP for 2019 which Moody’s note ‘If met, these targets should be enough to sustain debt-to-GDP at around 46% for the public sector and 35% for the federal government, supporting the sovereign's credit profile.’ The government has also hedged the oil price for 2019 to protect revenue forecast in the budget of USD55 per barrel.

However, at this stage we see more value in Pemex, the 100% government owned dominant oil producer. For example, Pemex 6.625% 2035 trades on a yield of 7.47% which using a best rating of BBB+ puts it trading just over 4 credit notches cheap. Undoubtedly, Pemex faces a number of challenges and greater clarity on the government’s energy plans and Pemex’s involvement and funding would be helpful. This week, the FT reported that the Deputy Finance Minister Arturo Herrera stated that government support would include ‘support for Pemex’s fiscal position…additional help from the federal government to boost cash flow so they can use it for exploration and production to increase output.’ The article goes on to note that further details will be announced in coming weeks.

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