The 31 states of Mexico are bonding again. But unlike independence in 1821 this time it is purely financial.
| Tijuana: growing fast but on a meagre budget | ||||||
Legislation passed in April allows Mexican states and municipalities to issue debt for the first time. Bonds are the order of the day and many states are preparing new issues for later this year.
In a country propelled forward by rapid economic growth but burdened by a mounting population the stretched finances of states and municipalities have been unable to keep up with the country’s infrastructure needs.
Tijuana, one of Mexico’s fastest-growing cities, is expanding by 3.2 hectares a day and survives on a meagre budget of $150 million a year. By comparison, San Diego, its sister city just over the border in California, has an annual municipal budget of $2.3 billion. Mexico City faces an annual budget shortfall of some $500 million and improvements in public services in the central state of Morelos have been paralyzed by its $40 million debt. The states need fresh capital.
Morelos is set to be the first state to test the new law and is expected to issue an eight-year, Ps222 million ($24 million) tax-free bond this month to fund school and hospital infrastructure.
It is not for nothing that Morelos is leading the field. The state’s finance minister, Claudia Mariscal, is the brains behind Mexico’s foray into the issuance of state debt.
Mariscal has been preparing the Morelos bond since she took office last year. After convincing the local state congress that an issue would bring in much-needed funds, she took her idea to Mexican president Vicente Fox, who helped pave the way for the necessary legislation.
“I met again with the president just two weeks ago and we saw eye to eye on the advantages for the country. I really believe this will help us,” Mariscal says.
One of the biggest advantages is cost savings. “Issuing debt is cheaper than borrowing from banks,” says Mariscal. “The banks charge a 10% interest rate while the bond’s rate is around 9.5%. That half a per cent makes a big difference when you are talking about millions of pesos.”
Fitch is expected to award an A+ status on the back of Morelos’s strong regional economy. Although the yield has yet to be set, the bond will be guaranteed by federal transfer payments, which represent the bulk of the Morelos budget revenue.
Mariscal’s enthusiasm for this new opportunity is setting off a trend. Mexico City, the central states of Zacatecas and Aguascalientes, and Tijuana are all studying the possibility of issuing bonds early next year. The money garnered is likely to be used for innovative causes.
Zacatecas, a state without debt, is hoping to raise $150 million to deal with its growing refuse problems. “Garbage is a big challenge here,” says Jorge Miranda, director of treasury. “Simply burning the rubbish is unpopular because of the toxic fumes the fires give off. We hope the bond can help us introduce new recycling and rubbish-shredding techniques to reduce this environmental burden.”
Mexico City is also banking on the bonds to get it out of an environmental scrape. Built on the site of a lake 2,240 metres above sea level, it needs $30 million a year to prevent the water table from rising. “We use huge hydraulic pumps, but it is very costly. We are in need of funds to allow us to introduce new technology,” says the city’s finance minister, Carlos Urzua. The city, which has a $2.8 billion debt, would also use the bond to buy 30 metro trains at a cost of $1.4 million each, to try to improve the capital’s strained transport system. “We are looking at a bond of upwards of $100 million. The plans are in the pipeline for an issue next year,” Urzua says.
Aguascalientes is also close to an issue, with a Ps90 million tax-free bond. It wants to improve its road network with the cash.
There are obstacles, however. Peso debt does not compare with the lower rates and longer terms of dollar-denominated bonds, despite Mexican interest rates being at 30-year lows.
Tijuana is trying to get around these limitations through a cross-border bond with San Diego to fund joint projects, including a railway and a binational airport. Mexico could provide the cheap labour and land, while the US could issue debt in dollars.
The scheme is part of a larger Mexican proposal to revamp the North American Development Bank that funds projects along the US-Mexican border. Despite having raised $304 million in six years, the bank has made just seven loans totalling $11 million and many observers say its loan programme is a failure. Loans, with interest rates of up to 25%, have proved too expensive for low-income communities that face drinking-water shortages and inadequate sewerage.
“Mexican towns do not have the collateral to put up against huge infrastructure project loans. Bonds may be the way forward,” says Keith Pezzoli, professor of urban planning at University of California, San Diego.
Tijuana’s mayor-elect, Jesus González Reyes, is keeping his options open and not ruling out a purely Mexican bond. He has been in talks with BBVA Bancomer, Mexico’s largest financial group, among others, and aims to unveil details of a peso bond of at least Ps500 million when he takes office on December 1.
