Mexico Positive Public Debt Management Strategy

The Ministry of Finance informed that the paper "Efficiency in Emerging Local Debt Markets: The Case of Mexico" was selected to be presented this year at the second edition of the Conference on Public Debt Management, organized by the World Bank, the Organization for Economic Cooperation and Development (OECD) and the Italian Department of the Treasury.

Mexico's presentation was made by the Deputy Finance Minister, Gabriel Yorio, and the Head of the Public Credit Unit, María del Carmen Bonilla. The officials highlighted "the importance of the integral development of sovereign debt, derivatives and sustainable financing markets, which, under the best international practices, pursue the development of the debt market and to strengthen its efficiency."

According to data from April 2022 published by the finance ministry, Mexico's public finances remained solid and presented positive results regarding tax revenues, spending and the public debt balance. In 1Q22, tax revenues grew by 14.2 percent compared to the same period of 2021. The performance of Income Tax (ISR) and Value Added Tax (VAT) stood out, with a year-on-year growth of 35.3 and 14.8 percent, respectively.

Despite the increase in international interest rates, the financial cost of debt was lower than expected, at MX$12.45 billion (US$637.4 million). The debt-to-GDP ratio stood at 45.2 percent, benefited by the government's active strategy to refinance its liabilities in both international and local markets.

The good performance of Mexican public debt has had a positive impact on the exchange rate. In recent weeks, the peso has strengthened its position against the dollar and other currencies.  One of the factors contributing to this rise was the administration's decision to keep public spending under control during the pandemic. President López Obrador resisted the pressure and refused to increase spending to contain debt, unlike countries that implemented extensive social assistance programs, which has allowed Mexico to contain debt below 50 percent of its GDP.  "A tight fiscal stance is something that investors in the fixed-income markets like," said Bank of America analysts.

Another factor that has supported the Mexican peso’s comparative position has been the monetary policy driven by the Bank of Mexico (Banxico), which has raised its interest rate steadily since mid-2021 to address inflation. Mexico's interest rate went from 4 percent in March 2021 to 7 percent in May 2022. Banxico is expected to continue to raise interest rates at its next scheduled rate adjustment on June 23. A higher interest rate makes it more attractive to save in pesos, increasing demand for the Mexican currency and strengthening its position.

The recognition of Mexico's successful public debt management arrives against a backdrop of economic stagnation. Mexico has not been able to recover from the economic stagnation caused by COVID-19. Experts estimate that the country will not recover its pre-pandemic activity levels until 2024. Both good debt management and the rise of the peso are positive indicators in the current economic context.