Mexico: Selected Issues
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International Monetary Fund
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Publication Date:
30 Oct 2002
eISBN:
9781451825619
Language:
English
Keywords:
ISCR; CR; government; company; debt; pension scheme; financing; net FX position; debt structure; derivative operations; rollover ratio; FX position; Stock markets; Corporate sector; Exchange rates
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This Selected Issues paper assesses the potential financial vulnerabilities of the corporate sector in Mexico. It provides an overview of salient features of the Mexican corporate sector. The paper also presents the formal stress tests that estimate the potential effects of some macroeconomic and financial shocks, such as a sharp depreciation of the exchange rate, a sustained increase in interest rates, a slowdown in demand, and a prolonged international market closure on the corporate sector.

Abstract

This Selected Issues paper assesses the potential financial vulnerabilities of the corporate sector in Mexico. It provides an overview of salient features of the Mexican corporate sector. The paper also presents the formal stress tests that estimate the potential effects of some macroeconomic and financial shocks, such as a sharp depreciation of the exchange rate, a sustained increase in interest rates, a slowdown in demand, and a prolonged international market closure on the corporate sector.

I. The Mexican Corporate Sector: A Vulnerability Analysis1

A. Introduction

1. The Asian crisis in 1997–98 highlighted the possibility that vulnerabilities in the nonfinancial corporate sector can become of macroeconomic relevance despite generally sound fiscal positions and apparently solid financial sectors. However, no generally accepted methodology has been established on how best to include corporate sector analysis into Fund surveillance activity and program work. In particular, little work has been done outside of Asia, although there is a general recognition that corporate sector fragilities may constitute an important part of macroeconomic vulnerabilities in all member countries.

2. Mexico’s strides toward macroeconomic stability in recent years are well known and the country now boasts an investment grade rating from the three major credit rating agencies. Likewise, the banking system has been considerably strengthened, but at the same time has continued to reduce its credit exposure to companies. Hence, corporates have financed part of their operations by accessing capital markets directly, especially international ones, but more recently also the domestic corporate bond market, which, although still small, is now growing significantly.

3. This chapter attempts to assess the potential financial vulnerabilities of the corporate sector in Mexico, relying mainly on balance sheet and profitability analysis of the companies quoted on the stock exchange. Although this analysis is insufficient to draw definitive conclusions about the Mexican corporate sector at large, we believe it is sufficient to analyze the main financial vulnerabilities, as the set of quoted companies is close to the universe of companies that have had access to foreign capital and to the local bond market and captures a large share of domestic bank credit.

4. Our assessment is that the Mexican quoted companies are overall in good financial health, and that recent external payment difficulties experienced by some companies are either sector or company-specific. However, some second-tier companies are found to have significantly higher leverage, and to be more exposed to exchange rate and refinancing risk than the average quoted firm.

5. This assessment is supported by the stress tests conducted on the balance sheet and operational results of a group of the largest quoted companies. The solvency tests—which compare the capital losses from relative price changes to accounting capital of individual firms—show that widespread solvency problems are highly unlikely. On the other hand, the liquidity tests—which compare the gross financing need (in peso terms) to available financing during a period of adverse market developments—indicate that a sharp reduction in market access would likely generate liquidity difficulties in a number of firms.

6. The chapter is organized as follows. Section B provides an overview of salient features of the Mexican corporate sector. Section C analyses the key financial ratios of publicly traded companies. Section D presents the formal stress tests that estimates the potential effects of some macroeconomic and financial shocks, such as a sharp depreciation of the exchange rate, a sustained increase in interest rates, a slowdown in demand, and a prolonged international market closure, on the corporate sector. Section E concludes.

B. Key Structural Features

7. The Mexican corporate sector is very segmented between a first–tier of large companies and a large “under wood” of smaller companies. Typically, the first–tier companies have a significant share of their respective market and most of them are quoted on the Mexican stock exchange (Bolsa Mexicana de Valores, BMV), even though a few large companies remain privately owned. While most of the larger companies are mainly export oriented, some of them are giants in telecommunication, retail trade, and media. Overall, the smaller companies are more dependent on the domestic market. These are the companies that stand most to gain from a revitalization of the banking sector and collateralized lending and most to loose from a protracted slowdown in economic activity.

8. Although a large majority of Mexican companies are of small and medium size, the present chapter will focus mainly on the larger companies, as these are the only companies with significant access to finance that is not internally generated. Companies quoted on the BMV, in turn, represent a large majority of the large companies. In particular, from the perspective of external vulnerability, it is relevant to note that companies quoted on the BMV account for over 80 percent of private corporate external debt.

Economic structure of the company sector

9. The structure of the Mexican economy is relatively well balanced between manufacturing, trade, services, and other sectors, both in terms of value added and employment (Table 1). Moreover, agriculture and fishing constitute a minor share of production compared to most other emerging market economies. Excluding the public sector, nearly three quarters of value added is produced by small and medium–sized companies (SMEs), that is companies with less than 500 employees. With a value added share of 95 percent, the concentration of SMEs is largest in the manufacturing sector. By contrast, large companies dominate sectors such as electricity and water production.

Table 1.

Mexico: Characteristics of the Corporate Sector, 1999

(In percent of total)

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Source: National Institute of Statistics and Geography (INEGI), Census 1999.

Construction, communications, electricity, water, transport, fishing, and mining.

10. The economy is heavily export–oriented, a reflection of an increasingly strong economic integration with the United States after NAFTA.2 In 2001, as much as 91 percent of exports were destined to NAFTA (Figure 1).3 Despite its small share in value added, the maquiladora industry, which uses relatively cheap labor to assemble intermediate products and re–exports the final product, has become increasingly important for the Mexican economy. Benefiting from a special tax and tariff regime, the maquiladora industry, mainly owned and operated by foreign companies, was responsible for about a quarter of all manufacturing goods exported (net of the sector’s imports) in 2001.

Figure 1
Figure 1

Mexico: Geographical Distribution of Exports, 2001

Citation: IMF Staff Country Reports 2002, 238; 10.5089/9781451825619.002.A001

Source: National Institute of Statistics and Geography (INEGI).

11. Mexico’s stock exchange is dominated by a few large service and consumer goods producing companies as well as some large exporters with significant market shares in their respective markets and high profit margins4 (most of the larger companies have at least a domestic market share of 50 percent). With a total market capitalization of nearly US$50 billion, the three largest companies are responsible for close to 40 percent of the market’s total capitalization. The sectoral distribution of publicly traded companies reflects quite well that of the overall economy (Table 2). About two thirds of the BMV companies are exporters, of which a third are large exporters (Figure 2, Table 3). In the aggregate, foreign sales account for about a fifth of total sales.

Table 2.

Mexico: Sectoral Composition of the Mexican Stock Exchange

(In percent)

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Source: Mexican Stock Exchange (BMV).
Figure 2
Figure 2

Mexico: Export Orientation of the Mexican Stock Exchange 1/

Citation: IMF Staff Country Reports 2002, 238; 10.5089/9781451825619.002.A001

Source: Mexican Stock Exchange (BMV).1/ Large, medium, and small exporters are defined as companies with foreign sales of more than 25 percent, from 10 to 25 percent, and less than 10 percent of total sales, respectively.
Table 3.

Mexico: Export Orientation of the Mexican Stock Exchange 1/

(In percent)

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Source: Mexican Stock Exchange (BMV).

Large (medium, small) exporters have foreign sales accounting for more than 25 (between 10–25 percent, and less than 10 percent) of total sales.

12. Although the companies quoted on the stock exchange are responsible for only a small share of private sector value added and employment (in 2001, total employment of quoted companies amounted to about 1 million or 7 percent of total employment; value added amounted to about US$41 billion5 or less than 7 percent of GDP), these companies play a key role in the Mexican economy. First, as most of the quoted companies are exporters their share in exports is significantly larger than their share in value added or employment: data on their foreign sales suggest that they are responsible for nearly 80 percent of non–oil exports of goods and services. Second, the quoted companies constitute important planks in the productive network as they depend on a large number of semi–dependent suppliers. Finally, the quoted companies often cement the vertical productive integration by the use of suppliers’ credits, which play a particularly important role in Mexico given the insufficient supply of bank credit to small and medium–sized companies (see Chapter II).

Legal structure

13. A large majority of nonfinancial companies in Mexico are incorporated as limited–stock companies (sociedad anonima, SA); unlimited partnership (sociedad en nombre colectivo, SNC) are mainly reserved for professional services, while limited companies (sociedad de responsibilidad limitada, SRL) are mainly used by micro–enterprises. Any company can be incorporated as a limited–stock company as long as it has at least two shareholders with at least Mex$50,000 in paid–in capital. Every sociedad anonima needs to present audited annual accounts, have a board of directors, have an independent examiner responsible to oversee the interest of all the shareholders, and needs a reserve cushion based on retained net after–tax profits of at least 20 percent of original capital. Normally, a limited–stock company cannot issue additional shares unless it has changed its charter to permit such transactions to become a sociedad anonima de capital variable (SA de CVA).

14. A new bankruptcy law (Ley de concursos mercantiles) was approved in May 2000, replacing the 57–year–old bankruptcy code: the new bill is aimed at improving creditors’ rights, facilitate collateralized lending, and provide the appropriate incentives for stakeholders to maintain as much as possible of the economic value of the firm during reorganization. The old bankruptcy law was replaced since it had become clear that it did not achieve its objectives: the recovery rate of secured loans was not significantly larger than in the case of unsecured loans,6 the process was slow and debtors were able to lengthen its duration by employing delay tactics. In addition, it was considered particularly onerous to foreign investors as all debt was converted into peso–denominated debt. Although the experience with the new law is limited, the litigation process has become more transparent and efficient and creditors’ rights seem to have been enhanced.

Corporate governance

15. A new Securities Markets Law was enacted in April 2001 aimed at enhancing the protection of minority shareholders’ rights, increase market transparency, and improve corporate governance of issuers and intermediaries. Among the most important changes are those directed at making the capital structure of enterprises closer to “one share, one vote” by limiting the issuance of shares with restricted voting rights.7 To improve corporate governance, the new law also establishes the requirement that a minimum of 25 percent of board members be independent8. In addition, the Comission Nacional Bancaria y de Valores (CNBV) is explicitly granted the power to regulate tender offers in order to prevent the exclusion of minority shareholders from the benefits of these transactions: when an offer would entail a significant stake in a company, it has to occur via a public tender offer at the same price for all classes of shares. Higher standards for the release of information and measures to reduce the scope for the use of privileged information, market manipulation, and insider trading have also been introduced by the new legislation.

16. These changes are expected to improve the investment environment in the stock market considerably, even though in some cases, e.g., the minimum percentage of independent directors, the regulations still fall short of international best practices.9 Nevertheless, implementation will be key and the involvement of domestic institutional investors should bring about the required discipline to translate the good intentions of the legislators into practice.10

C. Balance Sheet and Profitability Analysis

17. This section focuses on the financial characteristics of Mexican firms, both in terms of financing structure and corporate performance, with the aim to bring out some stylized facts. The analysis suggests that while the leverage of Mexican companies seems relatively low on average, there are significant differences across firms with some second–tier companies with significantly higher–than–average leverage and rather low liquidity ratios. Further, the debt structure is less favorable because of the high share of foreign exchange debt, while the share of short–term debt does not appear to be particularly high. The share of foreign exchange debt would be of concern particularly if the sizable foreign exchange assets were to prove illiquid in a crisis situation. Finally, although profitability appears to be on average rather low, the data do not present a clear picture.

18. Two main data sets were used in this analysis:

  • The first data set is from Worldscope, consisting of 55 Mexican companies (all listed on the BMV) and allows us to carry out an international comparison of the main balance sheet characteristics (Appendix Tables I-V).

  • The second data set is from the BMV, which covers 117 publicly traded companies, and allows us to carry out an in depth and up–to–date analysis of the quoted companies’ balance sheet and income flow (Table 4).

Table 4.

Mexico: Size Indicators

(In millions of pesos, as of December 2001)

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Sources: Mexican Stock Exchange (BMV); Bank of Mexico; and Fund staff calculations.

19. The BMV data set is complemented by individual company data of a subgroup of the BMV companies consisting of the 25 firms that have the largest foreign exchange debt in dollar terms: this group is referred to as the top 25 companies and is used to analyze in detail company–specific vulnerabilities. These companies are responsible for about 90 percent of foreign exchange debt and 76 percent of assets of the quoted companies.

Leverage and debt structure

Debt to capital

20. While in the aggregate leverage is rather low, the most indebted firms are rather highly leveraged. The Worldscope data indicate that the leverage of Mexican companies is relatively low compared to most other large emerging market economies and a few selected developed economies (Appendix Tables I-V). With a median of less than 0.5, the debt to capital ratio of Mexican corporations is lower than any of the other countries in the sample. However, the third quartile, albeit still significantly lower than in the Asian countries, is at a relatively high level for Latin America, and has been on an upward trend since 1996. At the end of 2001, the average debt to capital ratio of the BMV data was unity, about 20 percent higher than in 1999 (Table 5). The third quartile of the top 25 sample was at 1.6 times, a rather high level (Table 6). In addition, small exporters are more leveraged than the average firm (Table 7).

Table 5.

Mexico: Financial Ratios

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Sources: Mexican Stock Exchange (BMV); Bank of Mexico; and Fund staff calculations.

Debt is the sum of short–term and long–term liabilities. The equity measure used here is accounting capital, which is a book value concept.

Current assets to current liabilities.

Operating profits (EBIT) to gross interest expenses. The underlying data are cumulative for the year, hence, Q4 data refer to the whole year.

Operating profits (EBIT) to gross interest expenses.

Gross profit in percent of sales.

Operating earning (EBIT) in percent of sales.

Net profit in percent of sales.

Net profit in percent of accounting capital.

Net profit in percent of total assets.

Table 6.

Mexico: Financial Ratios for the Top 25 Firms, end–2001 1/

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Sources: Mexican Stock Exchange (BMV); Bank of Mexico; and Fund staff calculations.

These firms are the top 25 terms of FX liabilities. These data refer to the last quarter of 2001. Flow data refer to the whole of 2001.

Debt is the sum of current and long–term liabilities. The equity measure used here is accounting capital, which is a book value concept.

Current assets to current liabilities.

Operating profits (EBIT) to gross interest expenses. The underlying data are cumulative for the year, hence Q4 data refer to the whole year.

Operating profits (EBIT) to gross interest expenses.

Gross profit in percent of sales.

Operating earning (EBIT) in percent of sales.

Net profit in percent of sales.

Net profit in percent of accounting capital.

Net profit in percent of total assets.

Table 7.

Mexico: Financial Ratios by Type of Company

(As of the 4Q2001)

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Sources: Mexican Stock Exchange (BMV); Bank of Mexico; and Fund staff calculations.

Debt is the sum of short–term and long–term liabilities. The equity measure used here is accounting capital, which is a book value concept.

Current assets to current liabilities.

Operating profits (EBIT) to gross interest expenses. The underlying data are cumulative for the year, hence, Q4 data refer to the whole year.

Operating profits (EBTT) to gross interest expenses.

Gross profit in percent of sales.

Operating earning (EBIT) in percent of sales.

Net profit in percent of sales.

Net profit in percent of accounting capital.

Net profit in percent of total assets.

Short–term debt to total debt

21. The ratio of short term to total debt was 52 percent at end–2001: this is not particularly high by emerging markets’ standards, although it is by advanced markets’ standards. This ratio has been broadly stable since 1999. The top 25 companies have a better maturity structure of debt, with short–term debt accounting for 46 percent of total. The third quartile of the distribution was at 55 percent. This ratio had a mean of 37 percent in 2000 in the Worldscope sample. Further, the third quartile stood at 53 percent, suggesting that few firms have a maturity structure of debt highly skewed toward short–term debt.11

Share of foreign currency debt

22. About two–thirds of total debt is denominated in foreign currency and has been broadly stable since 1999: although lower than prior to the Tequila crisis, this ratio remains very high, probably reflecting the low availability of domestic credit, as well as the importance of trade credits and the integration of the Mexican economy with the United States. Further, foreign exchange debt accounted for 88 percent of long–term debt and 43 percent of short–term debt (Figure 3).12 This means that firms’ long–term financing needs, i.e., related to investment expenditure, are satisfied mostly with foreign resources, while domestic resources are used mainly for short–term financing, mostly working capital. For the top 25 firms, foreign exchange debt was 72 percent of total, with a median of 83 percent and the third quartile at 91 percent. This is easily explained by the fact that only a few firms have had access to foreign capital and hence foreign exchange debt is concentrated in relatively few firms and by the choice of the top 25 firms as the most indebted in foreign exchange terms (based on the absolute dollar amount). In addition, as could be expected the larger exporters have a larger proportion of debt in foreign exchange.13 Nevertheless, increased availability of domestic credit, especially provided by domestic institutional investors, could lead to a gradual change in the currency composition of corporate debt in the future.

Figure 3.
Figure 3.

Mexico: Corporate Debt

Citation: IMF Staff Country Reports 2002, 238; 10.5089/9781451825619.002.A001

Sources: Mexican Stock Exchange (BMV): and Capital Data.

Net foreign exchange position

23. The net aggregate foreign exchange position of all BMV firms was a negative US$14.2 billion at end–2001 (18 percent of capital), of which US$11.5 billion was accounted by the top 25 firms (24 percent of capital). However, the 25–firm sample illustrates very well the inadequacy of aggregate data to examine the net foreign exchange position, because in practice long foreign exchange positions of some firms cannot be netted out by the short positions of others. The median negative position of the top 25 firms amounts to 52 percent of capital while for the first quartile it is 95 percent of capital, which indicates that several firms are assuming sizable foreign exchange rate risk. Moreover, if we were to consider only the negative foreign exchange positions of individual companies, the negative position of the top 25 firms would amount to US $18.5 billion, equivalent to 56 percent of capital. Finally, small exporters were found to be in a particularly weak position, as their net negative foreign exchange position was even larger at 61 percent of capital.

24. The major uncertainties in evaluating the exposure of Mexican corporations to foreign exchange risk are the liquidity of foreign exchange assets and the extent of their foreign exchange derivative operations. No breakdown exists for foreign exchange assets and anecdotal evidence suggests that a significant part of these are equity holdings and participations abroad and hence are not likely to be very liquid. Information on corporations’ foreign exchange derivative operations is not available. Both the authorities and market participants have indicated that a few sophisticated corporate treasuries do use foreign exchange derivatives in both directions, that is both to hedge their foreign exchange risk, but also for example to swap proceeds of peso funding into dollars, which would increase foreign exchange risk. However, the general view seems to be that these operations are not very sizable and hence the on–balance sheet exposure should not be too far from the effective exposure: nevertheless, we were unable to confirm this.

25. While Mexican corporations obtain the majority of foreign exchange credits from banks, the part that is most exposed to refinancing risk are international bonds, especially for non–investment grade companies, as this market is subject to episodes of closure. International bond redemptions are sizable, especially in 2004, and given that a significant share of these bonds were issued before the Russia crisis, when risk appetite was much higher than at present, there could be difficulties refinancing them. Nevertheless, the fact that the domestic bond market is growing very rapidly and conditions are now favorable for a resumption of domestic bank credit which would reduce the refinancing risk over time (see Chapter II).14

Liquidity indicators

26. The current ratio15 for BMV firms is not particularly high: it was 1.2 as of end–2001 and had declined slightly from 1.4 in 1999 (see Table 5). This ratio was not very different for the top 25 firms, but the variation across firms was very wide, with the first quartile at 0.86, a very low level, reflecting the fact that this sample includes two firms that have either restructured external debt or defaulted and four other firms that are experiencing some financial difficulties. In the Worldscope sample, the median was 1.5 percent and the first quartile was 1.1 in 2000, which were higher than Argentina and Brazil, but lower than Chile. These ratios were also higher than for Korea and Thailand before the crisis, although they have been declining since 1997.

27. While the interest coverage ratio,16 an indicator of liquidity and profitability, of the BMV firms appears to be at a relatively healthy level, the sample of the top 25 firms have a significantly lower ratio, reflecting the fact that several companies in this sample have very low or even negative ratios, as the top 25 firms are more exposed to cyclical sectors (e.g., mining, commercial construction, and telecommunications) than the whole BMV sample and some had negative earnings in 2001.

Profitability

28. Overall, despite a few very profitable companies, the listed companies seem to have a rather low level of profitability:

  • The Worldscope data shows that Mexican companies had one of the lowest median operating margins in Latin America and typically lower than in Asian countries, with the exception of Korea.

  • On average, the return on assets (ROA) calculated on the BMV sample was about 4.6 percent and the return on equity (ROE) 10 percent in 2001, a relatively low level even taking into account the recession.17

29. The gross margin and operating profit18 for all BMV firms was on average higher, however, partly reflecting the fact that the largest firms are the most profitable (as it is clear also from the sample of the top 25 firms), partly due to their high market share and concentrated markets in which they operate.19 It is noticeable that despite the recession margins did not fall significantly in 2001, indicating that quoted firms overall are not very exposed to cyclical sectors. The top 25 firms had higher margins on average than all the BMV firms, but the median was lower.

D. Stress Tests

30. This section attempts to assess the sensitivity of the corporate sector to potential adverse events, such as a sharp drop in the exchange rate, a sustained increase in interest rates, a prolonged closure of international capital markets, and a downturn in demand. It builds on the analysis presented in the previous sections and attempts to evaluate the risk of large–scale losses in the corporate sector on the basis of a combination of shocks. Often, different types of adverse developments occur at the same time. For example, a sharp depreciation of the exchange rate is generally accompanied by a sharp increase in domestic interest rates and a slowdown in growth. It is the combined effect of negative shocks that may be critical for the health of the corporate and financial sectors: dwindling profits are unable to absorb large balance sheet losses and increased interest costs, leading to liquidity difficulties, which in emerging markets may translate into solvency problems. Liquidity concerns may also work together with solvency problems to the extent that weak companies are the ones that are most likely to experience liquidity problems as investors and creditors start having doubts about companies’ ability to honor their debt.

31. The tests assess the risk of default in the case of combined adverse shocks in the top 30 firms,20 using end–2001 individual company data. The use of company–specific data is important since different companies do not typically share their credit risk: large gains for a company do not prevent the default of another with large losses unless the two companies are closely integrated. Thus, disaggregated data on potential company losses in stress situations are needed in order to evaluate the extent of potential systemic repercussions, e.g., through large losses on banks’ loan books, or a chain reaction in corporate bond markets.

32. Two series of tests were performed:

  • The first series of tests assessed the balance sheet effects of a sharp movement in the foreign exchange rate, interest rates, and sales. The balance sheet loss from a combination of shocks was then compared to each company’s end–2001 accounting capital in order to identify the risk for technical insolvency, defined as a loss larger than accounting capital.

  • The second series of tests assessed the potential liquidity effects of a combination of adverse shocks. These tests attempted to assess the risk of a serious liquidity squeeze if market conditions were to prevent the full rollover of maturing debt in the context of an exchange rate depreciation, an increase in domestic and foreign interest rates, and/or reduced growth. A company was considered to be illiquid if its available cash flow (net profits plus non–cash deductibles such as depreciation) and available finance was insufficient to cover maturing debt.

33. While both tests may be relevant in a crisis situation, companies generally fail because of a lack of liquid funds and only rarely due to a massive shock that jeopardizes its long–term solvency. Moreover, as noted above it is hard to distinguish liquidity and solvency problems since companies that are close to being insolvent are also the ones that are most likely to be hardest hit by reduced liquidity. In performing a liquidity test, however, it is necessary to make a series of assumptions concerning the availability of finance, expressed in the rollover ratio of short–term debt, that are only imperfectly based on previous crisis periods.

34. The shocks were calibrated using historical observations of the exchange rate, interest rates, and the real growth in GDP. The standard deviation of the variables were calculated on the basis of percent changes in the exchange rate;21 percentage point changes in the three–month treasury bill rate (expressed as annual rates),22 and the annual growth rate of GDP. All observations covered January 1997 through December 2001. The use of standard deviations ensures some kind of normalization of the shocks. It can also be shown that regardless of the stochastic distribution of the series, the probability of an observation more than 1 standard deviation away from the mean is smaller than 50 percent. In the case of two independent variables the probability falls to below 25 percent (and for three the probability is less than 6.3 percent).23

35. The stress tests presented in Table 8 suggest that Mexican companies would be able to withstand even large adverse developments in the exchange, interest rates, and sales, as long as capital markets are willing to roll over their debt. In solvency terms, a combined shock of eight standard deviations would be needed to have any significant impact on the companies’ technical solvency ratios. Such a shock has a probability of less than 1.6 percent to occur in any given year.24

Table 8.

Mexico: Corporate Sector Stress Tests

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Mexican Stock Exchange (BMV); and Fund staff estimates.

36. The liquidity test shows that, combined with an adverse exchange rate and interest shock of one standard deviation, the overall debt rollover ratio would have to fall to 60 percent before any major defaults of the magnitude that is likely to have systemic repercussions would occur. The liquidity test was thus run for a range of values which permits us to gauge the sensitivity of the companies to deteriorating market conditions. While a reduction in the rollover ratio to 60 percent may not likely occur for all companies and in all markets simultaneously, several companies may, however, be subject to such a rollover squeeze if they are also subject to more fundamental difficulties affecting their solvency or sector–specific events.

E. Conclusions

37. The Mexican corporate sector is highly segmented, with access to bond and bank financing available almost exclusively to top–tier companies, which enjoy significant market power in highly concentrated markets.

38. The vulnerability analysis conducted in this chapter suggests that the overall financial health of the corporate sector is relatively good and hence, that the external payments difficulties recently experienced by some companies are sector–and company–specific. Leverage is low on average, although the top 25 firms have significantly higher leverage. The maturity structure of debt relatively comfortable, even though the currency composition of debt is highly skewed toward foreign currency, especially for long–term debt. The aggregate net foreign exchange position appears manageable. Liquidity indicators are adequate, while profitability is relatively low, even though this partly reflects cyclical developments.

39. Nevertheless, disaggregated data pointed to significant differences across companies. In particular, some second–tier companies are significantly more leveraged, and exposed to foreign exchange developments (especially small exporters) and refinancing risks than the average company. Some of them are also more sensitive to the business cycle and hence, their earnings have suffered noticeably because of the recession, while the overall market and the majority of the top–tier firms are not very sensitive to the business cycle. Further, a more detailed analysis of the net foreign exchange position is hampered by the lack of information on the composition and hence the liquidity of foreign exchange assets, and on the foreign exchange risk/hedge resulting from derivative operations.

40. The main conclusion from the stress tests is that the large Mexican corporations appear to be relatively robust to even a combination of a sharp drop in the exchange rate, a sustained large increase in interest rates, and a sharp slowdown in growth. Technical insolvency of a significant proportion of the quoted companies requires a very dramatic combination of shocks. The risk of liquidity difficulties, which could turn into default, would, however, be significantly larger if—in addition to an adverse shock to the exchange rate and interest rates—the rollover ratio of maturing debt were to fall significantly, especially if a large part of the companies’ foreign exchange assets turned out not to be readily marketable.

41. Passage of a new Securities Markets Law in 2001 represents a significant step forward and has significantly improved the regulatory environment in the BMV by enhancing corporate governance, even though some provisions of the new law fall short of international best practices. The real test of the new law will be in its practical application and in its effectiveness in improving minority shareholders’ rights. The development of domestic institutional investors should help in enforcing the discipline that the new law establishes.

References

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Appendix I

Mexico: Total Debt to Common Equity 1/

(Indicator of Leverage)

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Source: Worldscope.

In percent.

Appendix II

Mexico: Short–Term Debt to Total Debt 1/ Indicator of Vulnerability to Temporary Cut–off from Financing

(In combination with leverage)

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Source: Worldscope.

In percent.

Appendix III

Mexico: Current Ratio (Current Assets to Total Liabilities)1/ Indicator of Liquidity

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Source: World scope.

Number of times.

Appendix IV

Mexico: EBITDA (Earnings Before Interest, Taxes, and Depreciation) to Interest Expense on Debt 1/ Indicator of General Financial Soundness

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Source: Worldscope.

Number of times.

Appendix V

Mexico: EBITA (Earnings Before Interest and Taxes minus Income and Other Taxes) to Sales 1/ Indicator of Profitability

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Source: Worldscope.

Number of times.
1

Prepared by Ketil Hviding (PDR) and Laura Papi (ICM).

2

Exports and imports of goods and services constitute about 40 percent of GDP, even when only the outward processing industry’s (maquiladoras) net exports are included in total trade.

3

Markets outside of NAFTA, including other Latin American countries, are not very important for Mexican companies. Of total merchandise exports, less than 5 percent is shipped to other developing countries in the Western Hemisphere. Moreover, most exports that are sent south of the border go to Central America. Noticeably, exports to two large Latin American countries, Argentina and Brazil, are negligible: in 2001, only 0.6 percent of merchandise exports were to these countries.

4

For example, UBS Warburg (2002) reports that Mexican “blue chips” have higher EBITDA margins, higher return on equity, and higher return on assets than their international counterparts.

5

Based on gross operating surplus (net sales excluding cost of goods sold but including operating costs and depreciation).

6

See, for example, Fitch IBCA, Duff and Phelps, 2001.

7

Previously, the existence of several classes of shares, some of which without voting rights, entailed that several companies were controlled with a small percentage of the shares.

8

The law also establishes stricter rules concerning governance of financial intermediaries, including the requirement that at least 25 percent of board members be independent.

10

See also Chapter II: “Private Sector Financing in Mexico.”

11

The third quartile of this ratio reached about 70 percent in Korea and almost 90 percent in Indonesia just before the crisis.

12

However, these ratios take only long–term and short–term debt liabilities into account. In total liabilities, there are some non–classified peso liabilities. If they are mainly short–term such as accounts payables/suppliers credits, then the ratio of foreign exchange debt in short–term liabilities is at about 30 percent.

13

See Martinez and Werner (2002) for a discussion of the development in firms foreign exchange exposure since the early 1990s.

14

Firms that have been able to issue bonds in international markets have been those that have maintained contact with domestic banks. This should also mitigate the refinancing risk.

15

The current ratio is defined as current (liquid) assets to total liabilities. As a measure of liquidity this ratio should preferably be comfortably above unity.

16

The interest coverage ratio is defined as EBIT (earnings before interest and taxes) over interest expenses.

17

ROA and ROE are calculated as net profit over assets and over capital, respectively. It should be noted that net profits are quite volatile because they include foreign exchange losses/gains, as well as monetary losses/gains and other extraordinary items.

18

Gross margins are calculated as the ratio of gross profits to sales, while operating margins are calculated as earnings before interest and taxes (EBIT) to sales.

19

International comparison for the operating surplus (or gross margin) should be treated with caution, as it is affected by the value added content of production (i.e., firms with lower value added products tend to have lower operating margins).

20

These 30 companies include the top 25 and the remaining 5 companies are large companies, so that the sample of 30 companies is a cross section between the 25 largest companies by assets quoted on the BMV and the 25 companies most heavily indebted in foreign exchange.

21

The resulting standard deviation was annualized, reflecting the assumption that the nominal exchange rate follows approximately “a random walk.”

22

Please note that the standard deviation of the nominal interest rates was based on the first difference of the nominal interest rate, which removes the downward trend in the series. The estimate of the population standard deviation may, however, still be (upward) biased as a few sharp spikes during the Russia crisis may disproportion ally affect the calculated standard deviation.

23

The assumption of independence of the shocks, however, is likely to be violated, in particular in crisis situations, as a sharp fall in the exchange rate is generally accompanied by an increase in interest rates, and a contraction in output. The probability may thus be somewhat higher than suggested by the theory.

24

By the Chebyschev inequality, for any well–defined probability function, the probability of an outcome of more than k–standard deviations from the means is less than 1/k2.

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Cover IMF Staff Country Reports
Mexico: Selected Issues
Author:
International Monetary Fund
Volume/Issue:
Volume 2002: Issue 238
Publisher:
International Monetary Fund
ISBN:
9781451825619
ISSN:
1934-7685
Pages:
112
DOI:
https://doi.org/10.5089/9781451825619.002
Figure 1

Mexico: Geographical Distribution of Exports, 2001
Figure 2

Mexico: Export Orientation of the Mexican Stock Exchange 1/
Figure 3.

Mexico: Corporate Debt