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.


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.

III. Public Sector Debt Management1,2

A. Introduction

1. Mexico has made substantial progress over the past few years in reducing the risks associated to its public debt. The rapid recovery from the 1994–95 crisis and the macroeconomic stability achieved since then, together with its well–regarded debt–management practices, have earned Mexico an investment grade rating on its sovereign external debt from the three main credit rating agencies.

2. The main achievements in debt management in recent years include the reduction in the share of public external debt, the development of a yield curve for sovereign bonds in international capital markets, the improvement in the amortization profile of external debt, and the conduct of liability management operations such as the Brady–bond buybacks and swaps. Hedging strategies have also further reduced currency risk. On the domestic front, the authorities have promoted the development of a market for public sector debt instruments by adopting a regular program of issuance and introducing a system of market makers. This has allowed the government to extend the average maturity and duration of its domestic debt first by issuing long–term bonds indexed to inflation or to short–term interest rates and, more recently, through the issuance of long–term fixed–rate bonds.

3. This chapter reviews the composition of public debt and the debt–management strategy pursued by the authorities in recent years with a view to identifying potential remaining vulnerabilities and propose tentative suggestions for enhancing the debt–management strategy. The chapter finds that the debt policy followed by the federal government has produced impressive achievements in reducing the roll–over and interest rate risks of domestic debt, as well as in lowering the share of external debt in recent years. However, the risks related to domestic debt still remain relatively high. In addition, the authorities could further enhance their debt–management strategy by developing a benchmark for public–sector debt, streamlining the types of instruments available in the domestic market, and improving coordination among public sector issuers. This should be possible in the near future, if the strategy pursued in recent years continues to be applied.


PIDIREGAS (Projectos de Inversión de Impacto Diferido en el Registro del Gasto) are public sector investment projects undertaken by the private sector. This project–financing mechanism was developed to allow the government to undertake priority investment projects by contracting them out to the private sector, while deferring their registration as government expenditure in the budget. The private sector provides the financing during construction and until the government acquires the assets.

While the information on the stock of PIDIREGAS liabilities is publicly available, the public–debt statistics do not consolidate this information with the external debt, as Article 18 of the General Law of Public Debt establishes that only the next two years of the debt service of PIDIREGAS must be consolidated with public debt and the remainder is classified as a contingent liability. Here we report as PIDIREGAS liabilities both these components plus the obligations that the public sector acquires due to projects that are not yet completed and transferred to the public sector, and hence that have not yet been recognized as public debt or as a contingent liability. The authorities have been publishing this information since 2001.

Of the total outstanding liabilities on PIDIREGAS projects, Petroleos Mexicanos (PEMEX) accounts for almost US$15 billion, of which US$12 billion have been issued by PEMEX Master Trust and $3 billion have been provided directly by private sector contractors. PEMEX Master Trust is an offshore affiliate of PEMEX that was created to obtain financing for PIDIREGAS projects. It issues debt in international capital markets and provides financing to private sector contractors undertaking PIDIREGAS projects for PEMEX.

4. The rest of this chapter is structured as follows: Section B presents the institutional framework for debt management; Section C describes the current composition of public sector debt in detail; Section D discusses the authorities’ debt–management strategy; and Section E offers some concluding remarks.

B. Institutional Framework for Debt Management

Debt–management objectives

5. The authorities view debt management as a key element in their goal of generating macroeconomic stability and strengthening public finances. While they do not have a detailed debt–management strategy, their current policy is adequately geared towards reducing external vulnerability, diversifying their sources of financing, and developing a domestic debt market. The authorities’ objectives are:

  • To finance the public sector deficit fully in the domestic market; this means that there are no net additions to the stock of external debt (with the exception of PIDIREGAS projects).

  • To extend the maturity profile of external debt—reducing the rollover risk by avoiding large concentrations of maturities in a given year—and reducing its costs, as well as to diversify the investment base and currencies.

  • To improve the maturity profile and extend the average life of domestic debt, and develop a long–term yield curve of domestic fixed–rate instruments.

6. The importance given to debt management in the aftermath of the financial crisis of 1994–95 has complemented the authorities’ efforts towards fiscal consolidation and allowed them to improve the amortization profile of both their domestic and external debt via liability management operations. Until now, the authorities have not felt the need to develop an explicit benchmark3 for public sector debt, mainly because of the relatively high interest rates on domestic debt and the need to continue making progress in lengthening the average maturity and duration of their domestic debt portfolio. Nonetheless, they recognize that in the future, having a reference point for their debt structure and developing a framework to systematically assess the trade–offs in debt–management decisions could be desirable but they stress that this could not be the only instrument to analyze debt–management decisions.4 The authorities also stated that a benchmark for liability management could also pose problems because market conditions may not always allow debt managers to achieve the desired benchmark which would make it difficult to measure performance against the benchmark on a regular basis as is done with asset benchmarks.

Legal framework

7. The legal framework for debt management is well established. The constitution grants congress the power to establish the basis for federal government borrowing and to approve such borrowings and order repayments of the national debt. Congress approves separate annual limits on net external and domestic indebtedness of the federal government in the budget decree. The Law of the Federal Public Administration stipulates that the Treasury (SHCP) will be in charge of managing the public debt of the Federation and performing and authorizing all transactions involving public credit. Finally, the Law of Public Credit establishes which agencies are allowed to borrow and assigns to SHCP (through its General Direction of Public Credit—DGCP) the power to contract and manage the federal government’s debt and to provide the guarantee of the federal government in credit transactions.

8. It follows from this legal framework that the DGCP is entrusted with the power to: i) negotiate and execute all documents related to public financing and authorize and register all borrowings by public entities, including those of development banks and public enterprises; and ii) negotiate and execute all documents related to financial transactions and derivatives to which the federal government is a party. The SHCP has to present detailed quarterly reports to congress on the state of public sector debt and the use of federal government guarantees, including a detailed description of the main transactions undertaken during the period.5

9. Coordination between the SHCP and other public sector issuers is strong, although it is not subject to formal arrangements in the case of domestic debt. The three main domestic issuers (the federal government, the central bank, and the federal deposit insurance fund (IPAB)) announce quarterly issuance calendars, which provide guidance to the markets on the types of instruments and amounts to be issued during the quarter. Coordination is also evident in the segmentation of the market by type of instruments: each market segment is allocated to a single issuer and thus there is no competition between public issuers with similar instruments.6

C. Composition of Public Sector Debt

10. The most salient feature of the recent evolution of public sector debt is the sharp decline in the share of external debt following the authorities’ policy of reducing external vulnerability by limiting J their dependence on foreign funds and developing a domestic debt market for fixed–rate securities.7 The increase in domestic debt since the crisis is mostly explained by the increase in liabilities associated to bank restructuring and debtor–support programs that were implemented after 1995 to help resolve the banking crisis, as well as by the choice of financing fiscal deficits domestically for the most part (Figure 1).

Figure 1.
Figure 1.

Mexico: Public Sector Gross Debt 1990-2001

Citation: IMF Staff Country Reports 2002, 238; 10.5089/9781451825619.002.A003

Source: Ministry of Finance and Public Credit (SHCP).

Public external debt

11. At end–2001, the $98.4 billion of total public external debt (including PIDIREGAS) (16 percent of GDP) could be classified into six major groups (Figure 2 and Tables 1-5). About half of external debt is in the form of bonds and this share has been increasing in recent years. The share of multilateral, bilateral and bank debt has declined as has the share of Brady bonds as a result of several liability management operations. The only other component that is increasing is PIDIREGAS debt as a larger share of investment by the oil company, Petróleos Mexicanos (PEMEX) and the electricity company (Comisión Federal de Electricidad, CFE) has been undertaken in this form.

Figure 2.
Figure 2.

Mexico: Composition of External Debt 1994–2001

Citation: IMF Staff Country Reports 2002, 238; 10.5089/9781451825619.002.A003

Source: Ministry of Finance and Public Credit (SHCP).

12. Short–term external debt (by residual maturity) represents 15 percent of total external debt.8 Average maturity of external securities is close to eight years and there is no significant concentration of amortizations in a given year over the next 10 years (maximum amortizations of $9.7 billion in 2004 represent less than 11 percent of outstanding debt) (Figure 3).9 Hence, the relatively smooth amortization profile of long–term instruments combined with the low share of short–term debt, and an ample diversification of creditors, suggest that the refinancing risk of external debt is relatively low. Refinancing of liabilities other than with bilateral (official) creditors has been relatively smooth and this is expected to continue into the future. Bilateral creditor exposure, on the other hand, is likely to continue declining gradually, but the outstanding stock of $6 billion could potentially be accommodated in market instruments, especially given the enhanced access to a wider pool of investors that Mexico enjoys as a result of its recent upgrade.10

Figure 3.
Figure 3.

Mexico: Amortization Profile of External Debt

Citation: IMF Staff Country Reports 2002, 238; 10.5089/9781451825619.002.A003

Source: Ministry of Finance and Public Credit (SHCP).

13. Currency and interest rate risk of external liabilities are also relatively low. Some 71 percent of the sovereign’s total external debt is denominated in U.S. dollars, 4.8 percent in Japanese Yen, 4 percent in the basket of currencies used by multilateral banks, and 1.7 percent in euros and other currencies (see Table 5).11 This currency composition has been achieved despite the authorities’ issuance in markets outside the U.S. (e.g., Euro–zone and Japan) by the active use of currency swaps to convert these liabilities into U.S. dollars. The appropriately high U.S. dollar exposure is justified by the strong links between the United States and the Mexican economy and the fact that public sector’s foreign exchange earnings are all in dollars. In addition, the relatively low level of public external debt compared to other emerging market issuers (16 percent of GDP) and the high level of foreign exchange reserves, combined with the fact that 28 percent of government revenues are associated to oil exports or domestic sales of fuels denominated in U.S. dollars, reinforce the assessment that the public sector’s currency risk is currently relatively low.12

14. The share of external fixed–rate debt is close to 75 percent of the total which seems prudent in terms of reducing the market risk associated to interest volatility (see Table 3).13 However, the authorities could adopt a duration objective for their external debt benchmark and balance the share of fixed and floating rate instruments accordingly, taking into account the higher costs associated with higher duration instruments and the benefits of reducing market risk.14

Domestic debt

15. Total domestic debt at end–2001 was Mex$1.9 trillion ((32.7 percent of GDP).15 The two largest issuers in the domestic debt market are the federal government and IPAB. Each of these represents approximately 46 percent of the total outstanding debt, while the remaining 8 percent is composed of domestic liabilities of public enterprises and public sector trust funds.

16. The federal government’s debt can be classified into four types of instruments (Figure 4):

  • Cetes (Certificados de la Tesoreria de la Federatión), which represent 11 percent of total domestic debt, are short–term benchmark government securities issued at a discount for 28–, 91–, 182–, and 364–day periods in weekly auctions.16

  • Bondes (Bonos de Desarrollo del Gobierno Federal), which represent 18 percent of domestic debt, are 3– and 5–year bonds with coupons indexed to short–term interest rates (91– and 182–day Cetes, respectively) issued bi–weekly;

  • Udibonos (Bonos de Desarrollo del Gobierno Federal denominados en unidades de inversión), which account for 5.6 percent of domestic debt, are long–term bonds (5–and 10–years) indexed to inflation with a fixed real return issued every six weeks; and,

  • Fixed rate bonds (Bonos a tasa fija), which account for 6.4 percent of domestic debt, are 3–, 5–, 7– and, 10–year bonds with fixed coupons issued monthly.

Figure 4.
Figure 4.

Mexico: Composition of Domestic Debt, 2001 by Type of Instrument

Citation: IMF Staff Country Reports 2002, 238; 10.5089/9781451825619.002.A003

Source: Ministry of Finance and Public Credit.

In addition, IPAB and FARAC (a public sector trust fund that restructured liabilities associated to toll road concessions) issue their own bonds on a regular basis. IPAB issues BPAs (Bonos de Protectión al Ahorro), which represent 9.2 percent of total domestic debt; these are 3– and 5–year securities indexed to Cetes rates and are issued in weekly auctions.

  • FARAC, which accounts for 7.4 percent of the total stock of domestic debt, issues inflation–indexed long–term bonds called (Pagarés de Indemnizacidn de Carreleras (PICs) (5–, 10–, 15–, 20–, and 30–year bonds).

Contingent liabilities

17. One positive aspect of public debt statistics in Mexico is that to a large degree, they include contingent liabilities due to government guarantees. The authorities’ efforts to expand the coverage of the public sector fiscal and debt statistics resulted in the inclusion of contingent liabilities vis-à-vis other public sector agencies and the private sector via public sector trust funds. Also by including liabilities associated with debtor–support programs, the coverage of public debt statistics is very comprehensive. This means that the likelihood of sudden increases in public debt due to the recognition of previously undisclosed liabilities is low in Mexico.

18. There are however, two known sources of contingent liabilities aside from the pension system (see Chapter IV). One, is associated to a form of PIDIREGAS projects not included above (operating leases) where the government instead of purchasing assets from the private contractor commits to purchasing the services (e.g., electricity) for a period of time at a given price. Under these contracts the government bears a price risk which is a source of contingent liabilities.17 Another source of contingent liabilities is associated to interest coverage offered by the government in some of the debt restructuring programs implemented during the banking crisis.

D. Public Debt Management Strategy

Public External debt

19. The stock of total public sector external debt has remained relatively constant in dollar terms since 1995 and thus has declined considerably as a share of GDP. This is in part explained by the authorities’ policy of financing the federal government deficit in the domestic debt market to reduce their dependence on external funds, the repayment of the financing package associated with the Tequila crisis, and also liability management operations, involving mainly Brady bonds.18 Taking advantage of favorable international market conditions in recent years, the authorities have been actively repurchasing or swapping their Brady bond liabilities to improve the profile of their external debt and obtain debt service savings (in present value terms).19 As a result, they reduced the stock of restructured debt which in turn helped reduce the stock of external debt and provided considerable resources to the budget (from capital gains on both the principal and interest component of the collateral being released) (see Figure 5).

Figure 5.
Figure 5.

Mexico: Average Maturity of Domestic Debt 1990–2001

Citation: IMF Staff Country Reports 2002, 238; 10.5089/9781451825619.002.A003

Source: Ministry of Finance and Public Credit (SHCP).
Table 1.

Mexico: Composition of Public Sector External Debt

(In billions of U.S. dollars)

article image
Source: Secretariat of Finance and Public Credit

20. These debt–management operations were partly financed by new market issuance, which contributed to the development of a yield curve for sovereign dollar bonds. Since 1995, the federal government has issued close to US$25 billion in bonds in international capital markets, mostly in the dollar market. Currently, Mexico has liquid benchmark issues in all maturities up to 10 years and in key maturities up to 30 years. In 2001 Mexico issued its first 30–year bond in international capital markets.20

21. PIDIREGAS have allowed the public sector to undertake investment projects that would have otherwise been delayed, but have complicated debt management by fragmenting a significant portion of the debt into a large number of smaller project–finance operations. Coordination between the SHCP and PEMEX Master Trust (the main issuer for PIDIREGAS projects) is good, but the introduction of a separate issuer from PEMEX creates some confusion in the market regarding the consolidation of PEMEX liabilities. In addition, those projects not financed by PEMEX Master Trust and those of CFE—which are financed directly by contractors—may not be providing the least–cost and most appropriate financing available. Finally, domestic accounting rules governing PIDIREGAS are not consistent with international accounting practices for corporations, leading to problems in the consolidation of public sector debt statistics.

22. In the aftermath of the Asian crisis, PEMEX issued US$5 billion in oil account receivables through an offshore vehicle called PEMEX Finance Ltd. These issues were not guaranteed by the federal government or by PEMEX, but received an investment grade rating thanks to a structure by which PEMEX Finance purchased oil export receivables from PEMEX. While the authorities underscore that this structure was quite effective in raising needed liquidity in moments of adverse market conditions, they have stated that they do not plan to use structured instruments for their on–going financing program, under normal market conditions. The experience of PEMEX Finance indicates that Mexico could continue to have access to international capital markets using similar instruments under a temporary closure of markets or during an emerging market crisis. Nevertheless, the staff is strongly supportive of the authorities’ intention not to use credit enhancements in normal market conditions.

Investor relations

23. In response to investors’ concerns regarding the unavailability of some critical information at the time of the Tequila crisis, in July 1995 the SHCP established the Investor Relations Office (IRO). The IRO disseminates information via its website, emails through which it sends the latest publications or other relevant material, and its quarterly conference calls. It also maintains regular contacts with investors, analysts and credit rating agencies, is available to discuss issues or answer questions and to arrange meetings, calls, and road shows between policymakers and investors. Through its contacts with private market participants the IRO can also gauge market sentiment and become aware of investors’ concerns/suggestions, which can benefit the authorities in the design of their policies, including in designing their issuance program.

24. The quarterly conference calls, as well as the road shows and at times ad–hoc conference calls to address a particular theme, are appreciated by the investor community, partly because very high level officials participate, and are one of the main strengths of the office. The IRO has contributed significantly to the improvement in transparency and is likely to help in reducing market volatility by providing a medium through which policymakers and market participants can exchange information, concerns, and suggestions.

Development of a domestic market for government securities

25. During the last two years, the authorities have made considerable progress in extending the yield curve of domestic debt instruments. In 2000 the authorities began to issue fixed–rate 3– and 5–year bonds and in 2001 they began issuing 10–year fixed–rate bonds. In July 2002, they introduced a 7–year fixed–rate bond. The gradual refinancing of floating–rate Bondes with longer dated fixed–rate instruments has allowed the authorities to increase the average maturity of domestic securities from 561 days at end–1999 to 786 days in May 2002 (Figure 5). In the case of Bondes, the intervals between yield revisions have been lengthened. In September 1997, all outstanding Bondes revised their yield every 28 days; at end–1999, 33 percent of them revised yield every 28 days and the rest every 91 days, and end–2001, 69 percent revised every 91 days and the rest every 182 days.

26. This strategy is expected to continue over the medium–term as fixed–rate bonds still represent a small share (14 percent) of the federal government’s outstanding domestic debt (and 5.5 percent of the total). In fact, planned net issuance of fixed–rate bonds in 2002 is equivalent to the budget deficit of the federal government and thus net additions to the stock of debt will be done via long–term bonds. Similarly, the authorities have made substantive progress in improving the profile of amortizations of IPAB liabilities by repurchasing and refinancing existing liabilities with market instruments. At end–1999 two thirds of all amortizations were concentrated in 2004–06, while at end–2001 amortizations during these years had been reduced to 38 percent of the total.21

27. Prudent debt–management practices are also reflected in the authorities’ decision, taken in 1995, to stop issuing dollar–linked debt after the Tesobonos were completely phased–out. With the elimination of dollar–linked domestic debt, holdings by nonresidents of domestic debt instruments declined from 50 percent in 1993 to 10 percent in 1995 and declined even further after the Russian crisis, and was around 2 percent during 2001.22

28. Notwithstanding these efforts, and in contrast with external debt, domestic debt is still subject to considerable refinancing and interest rate risks. Indexed securities, including inflation indexed bonds, account for 76 percent of total domestic debt. These instruments were introduced to extend the average maturity of debt in an environment which, until recently, was characterized by high interest rates. While substantial progress has been made in increasing the average duration of domestic debt and the authorities’ objectives are gradually being met, the share of short–term and indexed debt (which combined are equal to some 80 percent of total domestic debt) is still relatively large.23 Given the still short average maturity of domestic debt, the debt amortization profile shows large concentrations over the next three years (almost 60 percent of outstanding debt comes due before 2004, Figure 6). The duration of the Treasury’s domestic debt portfolio is 366 days, which means that the whole domestic debt portfolio will re–price once a year.

Figure 6
Figure 6

Mexico: Domestic Debt Amortization Profile 2002–10

Citation: IMF Staff Country Reports 2002, 238; 10.5089/9781451825619.002.A003

Source: Ministry of Finance and Public Credit (SHCP).

29. While the public sector has actually benefited from the relatively favorable liquidity conditions of domestic capital markets and the decline in domestic interest rates over the past few years, if market conditions remain favorable, the authorities could accelerate their efforts to reduce market risks by increasing the share of fixed–rate bonds. The reduction in interest rates and the rapid growth of domestic institutional investors will likely facilitate this process (see Chapter on Private Sector Financing in Mexico). The risk to the budget of this interest–rate exposure is high: it is estimated that a one percentage point increase in domestic interest rates would increase interest costs by 0.2 percentage point of GDP on an annual basis.

30. In addition, the authorities should continue with the adopted policy of gradually phasing out some of the vast array of indexed instruments issued by the federal government, and IPAB and replacing them with fixed–rate bonds. In fact, while the SHCP coordinates all public sector issuers, there is room for improvement over the medium term by having fewer and larger issues, preferably by a single government agency. The latter would facilitate the adoption of a comprehensive risk management system for the public sector as a whole, which would be desirable.

The domestic debt market—market makers

31. Liquidity in the secondary market of domestic debt instruments has improved substantially since the introduction of market makers in October 2000 (volume increased 10– fold and average daily transactions in 3– and 5–year bonds through brokers is approximately Mex$4 billion). The emerging market traders association (EMTA) reported that Mexican domestic debt was the most traded emerging market instrument. The main rights and obligations of market makers are:

  • Rights. Market makers have the right to participate in a “green–shoe” auction following the auction of government securities in which they can buy up to 20 percent of the initial auction amount at the weighted average price of the auction; and 2) market makers have access to a BOM window where they can borrow securities (collateralized with other government instruments) for a small commission. In addition, the DGCP holds monthly meetings with market makers to exchange views on the development of the market where suggestions are made for changes and improvements in the regulation.

  • Obligations. Market makers have to bid for the minimum between 20 percent of the amount of each government security being auctioned and the inverse of the number of market participants; and 2) they have to make two way quotes at all times for fixed–term bonds and Cetes through the brokers. Minimum transactions are Mex$20 million and there is a cap on the bid–offer spread of 125 basis points.

32. Market makers can be either banks or stock brokers. They are evaluated quarterly with an index measuring their participation in both the primary and secondary markets.24 All participants who exceed a minimum threshold are selected as market makers. Currently there are six market makers.

33. With the purpose of increasing the liquidity of Federal Government debt instruments, the issuing strategy in the domestic markets has been modified to allow for fungibility. For this purpose, Cetes, Bonos, Bondes, and Udibonos issues are reopened several times in the primary auctions until they reach an acceptable amount outstanding that guarantees liquidity in the secondary market. Additionally, the authorities are considering modifying even further the policy of issuance of fixed–rate bonds in order to have fewer references along the yield curve with higher outstanding amounts for each one of them.

E. Conclusions

34. The recent progress in improving the maturity profile of both public external and domestic debt and the reduction in external vulnerability, constitute the main strengths of debt management in Mexico. In addition, the investment grade rating has given Mexico access to a broader base of institutional investors which should guard its access to international capital markets relatively to other lower rated emerging markets in times of market closures. This position is reinforced by the possibility of issuing oil–backed securities in times of crisis as was done in the past. The main remaining weaknesses in debt management are associated to the interest and refinancing risks of the domestic debt.

35. Consequently, despite the success achieved so far there are certain aspects of debt management that could be improved:

  • Adopt a comprehensive risk management system for the public sector as a whole. While SHCP has full responsibility over all activities related with public debt at the federal level and coordinates with all public agencies in determining the types of instruments to be issued, the amounts, market access and timing, there are instances where risk management of public sector debt as a consolidated portfolio could improve debt management practices. In particular, there does not seem to be a concerted strategy to administer all liabilities of the federal government with the same criteria. This task is complicated because these liabilities are held by three different agencies despite being fully guaranteed by the federal government.25

  • Develop a benchmark for public sector debt. A benchmark can provide a reference point for the desired composition of the debt to be achieved over the medium term. The benchmark could consider the share of fixed and floating rate bonds, the currency composition, the amortization profile, the type of instruments, and market diversification as well as the composition of public sector assets and foreign currency earnings. Once the benchmark is approved this would provide an additional valuable instrument to assess all debt management decisions.

  • Make further progress in the disclosure of information on public debt and coverage of debt statistics. While the government publishes a vast array of public debt data, this information is dispersed in different publications and does not lend itself to easy analysis. To further improve the quality of public sector debt information, the government could consider:

    • Integrating debt management associated with PIDIREGAS projects with that of the federal government; external financing plans should explicitly include the financial requirements of PIDIREGAS.

    • Streamlining the number of public sector issuers and the types of issues in the domestic market.

    • Making clearer to the market the distinction between the broadly disseminated financing data in the budget and the total borrowing requirement for the nonfinancial public sector.

Table 2.

Mexico: Total Public Sector Gross and Net Debt, 20011/

article image
Source: Secretariat of Finance and Public Credit.

Excludes Bank of Mexico and subnational governments.

Includes financial assets of the federal government only.

Includes public enterprises.

Includes financial assets of the federal government, IPAB, trust funds and development banks.

As published in public sector debt statistics. The total public sector debt concept used in the table corresponds to the Saldo Histórico de los Requerimientos Financieros del Sector Público. Stocks of external debt are valued at the period average exchange rate.

Table 3.

Mexico: Composition of Public Sector Debt 2000–01

(In percent of total)

article image
Sources: Secretariat of Finance and Public Credit and Fund staff estimates.

Percent of long term debt.

Of competitively traded securities (valores gubernamentales).

Table 4.

Mexico: Public Sector External Debt by Type of Creditor, 2001

article image
Source: Secretariat of Finance and Public Credit.

Includes suppliers credits and “Base Monetaria 1990–92”.

Table 5.

Mexico: Public Sector External Debt by Currency, 2001

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Source: Secretariat of Finance and Public Credit.

Refers to PIDIREGAS liabilities not included in the traditional public sector debt statistics, but these are mainly in U.S. dollars.

Table 6.

Mexico: Public Sector External Debt, Amortization Profile 2001–12

(In millions of U.S. dollars)

article image
Source: Secretariat of Finance and Public Credit

Amortization projections as reported in the March 2002 “Informe sobre la Situación Económica, las Finanzas Públicas y la Deuda Pública”.

Table 7.

Mexico: Public Sector Domestic Debt by Debtor and Type of Instrument

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Sources: Secretariat of Finance and Public Credit and Fund staff estimates.
Table 8.

Mexixo: Amortization Profile of Domestic Debt, 2002–10

(In billions of pesos)

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Sources: Secretariat of Finance and Public Credit, IPAB and Fund staff estimates.


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  • Giugale, M.; O. Lafourcade; and V. Nguyen, 2001, (eds). Mexico: A Comprehensive Development agenda for the New Era. Chapter 9: Public Debt Management Stocktaking and Challenges Ahead. (Washington: D.C.: The World Bank).

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  • International Monetary Fund and The World Bank, 2001, Guidelines for Public Debt Management, March, (Washington, D.C.: IMF).

  • Wheeler, G.; and F. Jensen, 2001, Sound Practices in Sovereign Debt Management. The World Bank, Debt Management Advisory Services, Unpublished draft, July, (Washington D.C.; The World Bank).

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  • Secretaría de Hacienda y Crédito Público, 2002, Informe sobre la Situación Económica, las Finanzas Puúblicas y la Deuda Pública, Fourth Quarter of 2001. (Mexico, D.F.: SHCP).

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This paper was prepared by Juan Pablo Cordoba (WHD) and Laura Papi (ICM).


This chapter will deal with debt management at the federal level only. Throughout this paper public-sector debt will refer to the gross adjusted federal government public-sector debt. This corresponds to the authorities’ definition of Saldo Historico de los Requerimientos Financieros del Sector Publico on a gross basis and includes the gross debt of the federal government, public enterprises (including accrued liabilities on direct PIDIREGAS projects (Box 1)), development banks, Instituto para la Protection al Ahorro Bancario (IPAB), Fideicomiso de Apoyo al Rescate de Autopistas Concesionadas (FARAC) and of other financial trust funds (e.g., Fondo de Operacion y Financiamiento Bancario a la Vivienda (FOVI), Fideicomisos Instituidos en Relation con la Agricultura (FIRA). It excludes gross debt of subnational governments which at end-2001 was less than 2 percent of GDP. Subnational governments cannot borrow abroad, they need to register all their debt with the Secretariat of Finance and Public Credit (SHCP) and in order to issue debt domestically they need to be rated by credit rating agencies and establish a fiduciary account with transfers from the federal government to partially ensure the debt service costs.


A debt benchmark is used as a reference or desired portfolio that an issuer wishes to maintain and it balances the risks and costs confronting that issuer. This is different from the definition of a benchmark issue which is an expression used in the market to refer to large liquid issues whose price is a good reference for the cost of funds for that specific issuer at that duration.


A debt benchmark is used as a reference or desired portfolio that an issuer wishes to maintain and it balances the risks and costs confronting that issuer. This is different from the definition of a benchmark issue which is an expression used in the market to refer to large liquid issues whose price is a good reference for the cost of funds for that specific issuer at that duration.


In addition, the SHCP presents summarized reports to congress on a monthly basis. The annual accounts (Cuenta Publico) which include detailed information on the stock of public sector debt is presented to congress before June of the following year and audited accounts are to be approved by congress by August of that year.


For example the central bank issues bonds indexed to daily interbank interest rates (BREMS), IPAB issues long-term bonds (3- and 5-year) indexed to 28- and 91-day Cetes rates (BPAs), and the federal government issues different types of instruments (Cetes, Bondes, Bonos Tasa Fija, Udibonos) but none with the same structure as above.


The ratio of public debt to GDP rose sharply as a result of the 1994-95 crisis, reversing all of the gains that had been achieved during the previous period following the restructuring of external liabilities in 1989-90 (the Brady bond program) and the fiscal consolidation of the early 1990s. Due to the large share of external debt before the crisis (over 60 percent), the increase can almost be fully attributed to the devaluation of the peso, to the substitution of external liabilities for dollar-linked domestic bonds (Tesobonos) that had been issued prior to the crisis, and to the large external financing package led by the Fund.


Short-term debt by original maturity at end-2001 was $3.7 billion (5 percent of the stock) and amortizations of long-term debt coming due in calendar year 2002 were $8.3 billion (10 percent of the stock).


Average maturity was calculated using residual maturity of external debt (loans and bonds) of the federal government and PEMEX external debt, excluding short-term debt by original maturity (trade finance).


As one of the largest emerging market issuers, Mexico’s sovereign debt not only features prominently in the major emerging market indices (it has the largest weight in the EMBI+, 23.46 percent), but has also been included in the major global fixed income indices, most notably in the Lehman Aggregate, thus widening Mexico’s investor base to U.S. high grade investors.


Of the federal government debt (excluding PIDIREGAS), 87 percent is denominated in U.S. dollars.


Furthermore, a depreciation of the exchange rate benefits the fiscal position, as dollar receipts associated with oil exports are significantly higher than the external interest payments in any given year.


For federal government debt (excluding PIDIREGAS), the share of fixed rate debt is 90 percent.


There is a tradeoff between reducing interest rate risk and the interest cost that would have to be paid (assuming an upward sloping yield curve, which is the case for Mexico’s external debt at present).


Excluding the central bank. As mentioned above, the BOM sterilizes the accumulation of international reserves resulting from the purchases of foreign currency from the Treasury and PEMEX. The outstanding stock of BOM bonds was Mex$156 billion (2.7 percent of GDP) at end-2001.


The 28- and 91-day Cetes are auctioned weekly, the 182-day Cetes bi-weekly and the 364-day Cetes monthly.


In addition, these contracts (PIDIREGAS condicionados) include a transfer clause in case of natural disasters or default by the government, but the transfer price is pre-established in the contract.


By swapping new bonds for Brady bonds, authorities may reduce the nominal value of gross debt if the bonds being retired trade at a discount and also because the release of the collateral can be used to repurchase some of the outstanding bonds.


In 2000-01 alone, $ 18 billion of Brady bonds were repurchased.


The US$1.5 billion bond was issued in July 2001 and reopened for an additional US$1 billion in November. Mexico had issued another 30-year bond in 1996, but as part of a Brady bond exchange.


This has not only improved the amortization profile of IPAB but it has allowed creditors (mainly banks) to substitute tradable securities for non-tradable ones, improving the flexibility of their portfolio management.


However, the official measure of direct holdings by non-residents is likely to underestimate their exposure to domestic debt instruments, to the extent to which they enter into derivate contracts whose underlying asset is a domestic debt instrument with a resident entity.


Short-term debt by residual maturity represents 20 percent of the total stock of domestic debt. Long-term instruments indexed to short-term interest rates represent 60 percent of the total stock of domestic debt.


The components of the index are: volume purchased in primary auctions (20 percent); volume traded with clients (nonfinancial intermediaries) (30 percent); volume traded with financial intermediaries through brokers (30 percent); volume traded with financial intermediaries over the counter (20 percent).


Not all IPAB liabilities are explicitly guaranteed by the federal government; however, the Law of IPAB establishes that if IPAB is be unable to meet its financial obligations, congress would adopt the necessary steps to ensure that these obligations are paid.

Mexico: Selected Issues
Author: International Monetary Fund