Debt Management Strategy 2015 Roundtable on Treasury Markets and Debt Management November 2015
1. Public Debt Management Strategy Two Main Objectives Direct Indirect (intertemporal funding at an adequate cost-risk ( strategic role of the yield curve – externalities ) trade off ) Promote the development of the 1 1 Cost local and foreign debt markets Funding terms and Yield curve as a benchmark for Risk (refinancing, exchange 2 2 conditions other issuers rate, interest rate) Permanent access to 3 3 Develop a liquid yield curve several funding sources Option to issue Ability to withstand a wide 4 4 Short and long term instruments range of stress scenarios 2
2. Global Financial Markets Conditions To cope with the 2008-2009 crisis fiscal and monetary policies 1 provided unprecedented stimulus to support aggregate demand . Significant portfolio adjustment towards emerging markets 2 (push and pull factors) . Emerging markets have been strongly influenced by US 3 interest rates and changes in global risk appetite. Low and uneven growth among regions will continue to induce 4 FX volatility. Global conditions and lower growth in China have put pressure in 5 commodity prices and some emerging markets. 3
3. Debt Management Challenges and Opportunities Macroeconomic Dynamics Strategic role of the yield curve for aggregate demand management (externalities) Regular business-cycle Crisis/crash vs ( incentives well aligned: ( incentives may differ ) separability principle ) Links between monetary policy and public debt policies • Risk free vs. risky debt (spreads pricing/ratings) • Role of the central bank and firewalls Public debt sustainability (stress testing, etc.) Local (national) currency debt 4
3. Debt Management Challenges and Opportunities Global Portfolio Reallocation (pull-push factors) Increasing role of foreign investors • Diversification of the investor base • Improved price dynamics • Increased tail-risks (liquidity buffers are needed) Key role of global benchmarks Increased correlation in investors’ risk appetite Liquidity Regulatory challenges ( derivatives, capital ratios, etc .) Buy and hold investors Market-makers 5
4. Issuance Strategy Mexico’s debt management strategy takes into account the trade-off between expected cost and risk to optimize its debt portfolio. Local Debt External Debt Total Debt Risk-Cost Trade Off Risk-Cost Trade Off Risk-Cost Trade Off 8.0% 7.0% 7.5% 2009 2009 7.5% 6.5% 2009 7.0% 7.0% 6.0% Expected Cost Expected Cost Expected Cost 6.5% 6.5% 2011 2010 2011 5.5% 2010 2012 2011 2010 6.0% 2012 6.0% 2013 2012 2015 5.0% 2013 2014 5.5% 2013 2015 5.5% 2015 4.5% 5.0% 2014 2014 4.5% 4.0% 5.0% 2.5% 3.5% 4.5% 5.5% 6.5% 9.0% 11.0% 13.0% 15.0% 17.0% 2.70% 3.70% 4.70% 5.70% 6.70% Cost at Risk (95%) Cost at Risk (95%) Cost at Risk (95%) 6 Source: SHCP.
4. Issuance Strategy The Federal Government has sought to reduce costs and lower portfolio risks through an adequate mix of currencies, debt instruments and maturities. Financial Cost Gross Financing Needs (% of GDP) (% of GDP) 16.0 10.0 14.0 9.0 8.0 12.0 7.0 10.0 6.0 8.0 5.0 4.0 6.0 3.0 4.0 2.0 2.0 1.0 0.0 0.0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e e/ Estimated 7 Source: SHCP.
4.1. External Markets Strategy Diversify funding sources and extend average maturity Government Debt Breakdown by Average Maturity of Currency* External Government Debt (%) (years) 100 25.00 0.3 3.9 With UMS 100yr 22.0 2.7 90 Without UMS 100yr** 17.3 80 20.00 6.5 70 60 15.00 13.4 50 97.0 40 10.00 72.3 30 20 5.00 10 0 0.00 06-I 06-III 07-I 07-III 08-I 08-III 09-I 09-III 10-I 10-III 11-I 11-III 12-I 12-III 13-I 13-III 14-I 14-III 15-I 15-III 2006 2015 USD Yen Euro GBP * Considers only market debt. **Excludes UMS, EUR, USD and GBP 100 year bonds. 8 Source: SHCP.
4.1. External Markets Strategy Maturity extension objectives: lower refinancing risk, increases diversification, broadens the investor base and helps differentiate from other issuers. New investors in USD and EUR 100-year issuances* UMS Yield Curve (million) (%) 6.0 1,843 1,500 UMS 2110 5.0 30.7% 30.7% UMS 2046 45.8% 45.8% UMS 2026 4.0 UMS 2115 UMS 2045 3.0 69.3% 2.0 69.3% UMS 2024 54.2% 54.2% 1.0 USD EUR 0.0 USD 100 YEAR EUR 100 YEAR 0 5 10 15 20 25 Duration Investors in previous 10 and 30 year bonds New Investor Base * Order book compared to immediately prior 10 and 30 year bond issuances in each currency. 9 Source: SHCP.
4.2. Local Markets Strategy The relative importance of short-term and floating rate notes has diminished and duration has been increased (between 7-8 years since 2011). Mexico’s Yield Performance Composition of Local Government Average Maturity of (USD and Peso) Debt Local Government Debt (%) (years) 10 yr UST 10.0 9.00 100 10 yr UMS 5.9 8.0 10 yr Mbono 9.0 90 8.00 22.9 14.1 8.0 80 7.00 7.0 70 6.00 25.1 22.0 6.0 60 5.00 5.0 50 9.9 4.00 4.0 40 3.00 3.0 30 54.8 2.00 45.2 2.0 20 1.00 10 1.0 0 0.00 0.0 06-I 06-IV 07-III 08-II 09-I 09-IV 10-III 11-II 12-I 12-IV 13-III 14-II 15-I ene.-08 jul.-08 ene.-09 jul.-09 ene.-10 jul.-10 ene.-11 jul.-11 ene.-12 jul.-12 ene.-13 jul.-13 ene.-14 jul.-14 ene.-15 jul.-15 2006 2015 Fixed Rate Bonds Inflation Linked Bonds Cetes Floating Rate Notes 10 Source: SHCP.
4.2. Local Markets Strategy Local debt markets have coped well with complex and challenging external conditions in the last years. M Bonds Yield Evolution Quarterly Issued Amounts of M Bonds 2008-2015 2008-2015 (%) (million pesos) 35,000 12.0 Max 24oct08 24oct08 24oct08 11.0 30,000 10.0 Max 24oct08 24oct08 25,000 9.0 20,000 8.0 7.0 15,000 6.0 10,000 2may13 2may13 5.0 Min 9may13 5,000 4.0 9may13 9may13 Min 3.0 0 3 year 5 year 10 year 20 year 30 year 3 year 5 year 10 year 20 year 30 year Average 4Q-15 Average Actual The box limits are the 75th and 25th percentile. 11 Source: SHCP.
4.3. Stress Tests Foreign holdings of local securities have been resilient to volatility episodes. Exchange Rate (USD-MXN) and 10yr M Bond 18 12 Financial European Tapering Current Crisis Crisis jun13-dec13 aug14-sep15 11 16 oct08-dec09 mar11-jun12 10 Exchange Rate 9 14 Yield 8 12 7 Exchange Rate 6 10 5 Yield 8 4 2007 2008 2009 2010 2011 2012 2013 2014 2015 M Bond Foreign Holdings 1.000 % of total M Bonds outstanding 60% 0.800 0.600 50% 0.400 0.200 40% 0.000 -0.200 30% -0.400 -0.600 20% European Financial -0.800 Tapering Current Crisis Crisis 10% -1.000 2007 2008 2009 2010 2011 2012 2013 2014 2015 12 Source: SHCP.
5. Final Remarks Debt Management Strategy A sound debt management strategy is a key element of strong macroeconomic fundamentals Importance of flexibility in debt issuance programs (consider market conditions - local and external risk appetite) Debt Managers should maintain a wide range of options regarding funding alternatives (option to issue) Diversify the investor base (look for less correlated investors) Consider the strategic role of the yield curve: o Aggregate demand tool o First building block in any funding in national currency (corporates and households) Importance to be perceived as a regular and predictable issuer in local currency funding Consider flexible issuance and hedging strategies (timing) in markets where you are not a price setter (funding vs exposure) 13
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