Fearing “a large-scale crisis” in foreign currency debt.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Since central banks embarked on their madcap ZIRP and QE during the Financial Crisis, emerging-market companies have not been able to resist the fatal allure of cheap dollar debt. As the good times rolled, the risks were ignored.
In relative terms, dollar-denominated debt recently reached a record 17% of global GDP excluding the US, a ratio that has doubled over the past 20 years. Some countries are more exposed than others. In its latest report on Mexico, the IMF pointed out that almost a quarter of all of the corporate debt in circulation in the country is denominated in dollars. That’s roughly the equivalent of 25% of Mexico’s GDP ($1.1 trillion in 2015).
Foreign denominated liabilities jumped 83% over the past four years to 1.7 trillion pesos ($82 billion). During the same period, Mexico’s non-petroleum exports increased by just 10%, meaning that the ability of private companies to generate the dollars needed to continue meeting their burgeoning dollar-denominated debt obligations has weakened significantly.
To make matter worse, the Mexican peso can’t stop losing value, in particular against the U.S. dollar. The Bank of Mexico has already raised the country’s benchmark rate twice since February, from 2.3% to 2.8%, but to little avail: the peso has still fallen nearly 20% against the dollar so far this year.
Hence the debt problem. According to the IMF, Mexico’s corporate debt binge is no biggie. Having dollar-denominated corporate debt worth 25% of GDP is apparently “relatively low” by today’s standards, it says. What’s more, some of the exposure is hedged.
But not everyone seems to agree, including the senior executives of some of the debt-laden corporations in question, who have begun quietly warning about the risks of their dollar-debt exposure. At a meeting last week between executives, lobbyists, and officials from the finance ministry, the participants agreed to work “in a coordinated fashion” to achieve a “more efficient” exchange rate policy. According to El Financiero, some of the business owners and experts in attendance called for “new programs” to be implemented before the situation causes “a large-scale crisis” among Mexican companies.
In other words, things are getting serious.
“These erratic currency moves do not allow us to plan and that is where authorities have a window of opportunity,” said Gustavo de Hoyos Walther, the director of Coparmex, one of Mexico’s biggest corporate lobbying groups. What he means by opportunity is anyone’s guess, but it’s probably safe to assume that it involves moving funds off public ledgers on to private ones. It wouldn’t be the first time it’s happened.
In 1982, after the government defaulted on its external debt, marking the start of the country’s lost decade, it created a fund called Ficorca to help companies service their external debts. Then, 12 years later, at the height of the Tequila Crisis, the Zedillo government used a deposit insurance fund to directly bail out many of Mexico’s biggest banks, and indirectly its corporations. In one fell swoop one of the world’s first (and worst) “bad bank” entities was born.
Its name — or at least the first name by which it was known — was FOBAPROA and it, and its future incarnation, have cost the Mexican people an incalculable sum of money and hardship. At its launch, the government said it would need total funds of just 180 billion pesos (roughly $9 billion) to clean the banks’ balance sheets. As tends to be the case whenever governments lend or give banks taxpayer funds, it was a ludicrously optimistic ballpark figure.
In 2010 the Mexican daily La Jornada reported that close to 600 billion pesos ($30 billion) had been given to the banks, most of them now foreign owned, just to cover interest payments on the rescue package. In 2007, it was revealed that Banamex, Citi’s Mexican subsidiary, used just part of the funds provided by FOBAPROA (that is, Mexican taxpayers) to buy Mexico’s flagship airline Aeromexico — off the government itself!
In October this year La Jornada came out with a bombshell report that the revamped FOBAPROA, now going by the new acronym of IPAB (standing for Bank Savings Protection Institute), had racked up a total debt of 878 billion pesos ($44 billion). In other words, a debt that was supposed to have been liquidated in 20 years continues to grow, 22 years after its inception. Thanks to the wonders of compound interest, the total debt is now 35% higher than it was in 2000, when it was $648.56 billion pesos.
And now some of Mexico’s biggest companies are gently hinting that a new round of taxpayer-funded rescues may soon be in order. They allegedly include América Móvil, Mexico’s largest telecommunications corporation whose subsidiaries are spread all over Latin America. Its only unit producing revenues in US dollars is Tracfone in the US. It also has one unit in Austria and one in the Netherlands, producing revenues in euros. The company is majority-owned by Carlos Slim, once the world’s richest man but now relegated to eighth spot (in part due to the depreciating peso), and its balance sheets are filled to the gills with dollar- and euro-denominated debt.
According to its third quarter filing, the firm has $36.16 billion in “financial debt,” of which only $5.26 billion, or 14%, is denominated in pesos. The rest (86%) is denominated in US dollars ($10.7 billion), euros ($15.5 billion), and other currencies ($5.0 billion). These sums, set against the company’s scarce dollar- and euro-denominated cash flow and a plunging peso, do not bode well.
Such problems are not unique to América Móvil: in fact, as we reported a couple of weeks ago, 80% of the short and long-term debt held by 30 of the 35 firms listed on Mexico’s benchmark index, the BMV, is denominated in foreign currencies, mostly the dollar. And for many of those companies, the peso, not the dollar, is the staple currency of their revenues. Some, such as mega-retailer Liverpool, whose debt is 65% dollar denominated, earn no dollars at all.
It’s a recipe for a very serious debt crisis in a country that’s still paying the price for the last one 22 years ago. By Don Quijones, Raging Bull-Shit.
Last year, the Bank of Mexico tried to slow the stampede out of pesos by selling a small but growing fraction of its dollar reserves in open auctions, but to little avail. Read… Financial “Hurricane” Trump Is Approaching Mexico