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AmericasNovember 3 2003

Safe spot for investment

Monica Campbell reports from Mexico City on why investment bankers’ optimism has not been dented by the slumping economy and political frustration.
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There is not much to be pleased about in Mexico these days. The economy

is slumping in tandem with the downturn in the US, leading to more

unemployment. Politics is also messy, with the government unable to

push critical structural reforms through a divided congress, fuelling

business leaders’ frustration. So why are investment bankers in Mexico

still cheery?

Perhaps it is because these tough times represent a mere speed bump

when compared with the financial abyss that Mexico entered in 1994,

when the banking system crashed after the peso collapsed. The

government spent an estimated $150bn on bailing out the financial

institutions.

The recovery was not easy. The outcome, however, did bring a

much-needed reworking to the financial sector. Banks received an

injection of discipline; their strengthening also coincided with a

respectable export-led economic recovery, as the 1994 North American

Free Trade Agreement took effect.

Foreign infiltration

Foreign financial heavyweights spotted opportunity. The outside

perception of Mexico had picked up considerably. Interest rates

stabilised. In 2000, ratings agencies granted the country investment

grade (BBB) credit. Soon, Mexico became one of the safest investment

spots in Latin America – a region where few countries can boast

economic or political stability. Plus, many domestic banks, despite

boasting better balance sheets and fewer bad loans, were still

crisis-weary and ripe for acquisition. Within a few years, foreign

banks, from US-based Citibank to Spain’s Banco Santander Hispano

Central, had taken over Mexican banking. Now, a fully Mexican bank is

an endangered species.

The reality of a banking sector controlled by outsiders may rile

nationalists but investment bankers are clearly spotting the perks.

They now operate in a more stable and liquid system – most investment

banking services in Mexico count on foreign backing – and are able to

broker deals that at one time were rendered unthinkable.

“Investment banking is still just starting in Mexico. There is still a

lot of money outside of the country and we are out to bring those funds

back home,” says José Ponce, an investment banking manager at Inversora

Bursátil, the brokerage arm of Banco Inbursa, a domestic player.

Boon for bonds

The local bond market best shows what investment banks in Mexico

are pulling off. The bond market nearly evaporated after the 1994 peso

crisis. Yet better economic times, along with the successful

liberalisation of Mexico’s private pension funds system in 1997, have

proved to be a boon for the market. “For the first time, we have a

massive amount of institutional money seeking long-term investment,”

says Francisco Hernández, vice-president of Standard Bank London, a

relative newcomer to Mexico’s investment banking scene.

The pension funds are mostly benefiting from the country’s young

workforce; with labourers not old enough to tap their retirement cash,

a $35bn pile has accumulated. A cautious regulatory set-up essentially

forces pension funds to snap up only government paper or the most

sterling corporate debt. Last year, the value of corporate debt issues

in Mexico totalled about $3bn – treble the figure from four years

prior. Most of those bonds went into pensions funds’ portfolios.

Pent-up pension funds

The number of local companies carrying the credit ratings strong

enough for local pension funds is limited to about 20. That leaves

pent-up retirement cash earmarked only for market darlings, such as

Cementos México, the cement giant,Teléfonos de México, the country’s

largest telephone operator, and Bimbo, Mexico’s largest bread maker (it

placed about $673m in corporate bonds in 2002).

New business in areas besides bonds will be welcome. The M&A market

is showing signs of life but most bankers agree that it is still too

uneven. “M&As are really divided into two segments,” says Jorge

Rodriguez, a senior investment banker at Bank of America México. “One

is made up of huge transactions but those elephants only occur once a

year. The other area is full of smallish deals.”

Mortgage promotion

The market for mortgage-backed loans is also brewing and offering

investment bankers another product option. A pillar of the Vicente Fox

administration is to deliver as many as 700,000 mortgages a year to

Mexicans in the lower and middle income sectors – an attempt to build

up employment in the construction sector while also addressing the

housing crunch.

“So you have a need for mortgages and a need to raise money to fund

them. Right now, though, the government’s demand is not being met

fully. You’re still seeing banks limiting their risk and only offering

bridge loans to developers,” says Mr Hernández.

Meanwhile, companies are only tip-toeing into the markets for equities.

“That type of activity is still non-existent for us,” says Mr

Rodriguez. “There has not been a real equity offering in a long time.”

It may be some time before Mexico’s investment engine runs at full

speed and thus allows for more growth into other banking areas.

According to Mexico’s finance ministry, the economy will only hit 1.5%

this year, as the all-important US market continues to drag. It does

not help that the government is doing little to give the economy a

push. President Fox does not enjoy a majority in congress and

opposition politicians are blocking his efforts to push through fiscal,

labour and energy reforms – changes that outside investors insist are

needed to make Mexico more competitive.

The tight economic climate makes for a competitive banking scene. “All

the players are attacking the same high-end clients,” says Mr Ponce.

“It is a bit tougher for us. We are much more limited because we do not

have a branch in the US. But we will continue to grow little by little.”

Survival methods

To Mr Rodriguez, survival in Mexico’s highly concentrated

investment banking market will depend on innovation. “The bond market

may have developed substantially in recent years but the issues are

still plain vanilla. So any new player trying to make inroads in this

market must come with new ideas. If not, you are just proposing what

everyone else is,” he says. “We try to offer our clients one-stop

shopping so they do not need to head anywhere else.”

Mr Hernández appears ready to accept the challenge of being a newcomer.

“We just opened up our representative office here three months ago. But

we are an emerging markets bank and know what it is to operate in tough

markets,” he says. “We are poised to be here for a long time. We will

not run away when things go bad.”

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