Presentation - World Bank

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Presentation - World Bank

2AgendaI. IntroductionII.Key Developments● Fiscal Discipline● Monetary Discipline● Development of the Domestic Debt MarketIII.IV.Main ResultsConclusions


Why develop a local fixed income market?3• To reduce vulnerability to external factors• To reduce exchange rate risk• To promote long term domestic borrowing-allowing access to resources for long term private projects-allowing adequate coverage of long term liabilities of the privatesector• To reduce the possibility of a financial crisis due torefinancing risk


Causes of underdevelopment in local debtmarkets4• Macroeconomic instability and recurrent crises• Lack of a solid institutional investors base• Financial Intermediaries unable to increase the durationof their portfolios• Generalized short term investment mentality


Agenda5I. IntroductionII.Key Developments● Fiscal Discipline● Monetary Discipline● Domestic Debt Market DevelopmentIII.IV.Main ResultsConclusions


Fiscal Discipline: The fiscal deficit has beendecreasing continuously6In order to achieve a lower fiscaldeficit, the Federal Government will:Fiscal Deficit(% of GDP)1998 1999 2000 2001 p/✓Improve tax administration.✓Reduce governmentexpenditures.✓Enforce regulation in taxcredits-0.5 / -0.65-1.10-1.25 -1.24p/ Projected


Government efforts will be directed towardsenhancing public revenues7• During 2001, emphasis will be placed on reinforcing taxcompliance and administration of the Mexican tax system• Actions will be carried out to strengthen tax payer’s legalsecurity, facilitate voluntary compliance of fiscalobligations, adjust tax requirements to an evolvingeconomic environment and close existing loopholes• The Federal Government recently sent a Tax Reformproposal to the Congress. This Reform, when approved,will enhance tax collection


Monetary Discipline: Inflation has been trendingdown for the past two years.8CPI Inflation and Core Inflation 1999-2001(%)20.0Core Inflation18.016.014.012.010.0CPI Inflation8.06.0Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Ene-01 May-01


The main objectives on domestic debt policyhave been:9• To improve the maturity profile and extend the averagelife of the domestic debt• To promote liquidity along the yield curve and increasemarket depth• To encourage the development of a derivatives marketfor these instruments


The main steps undertaken with respect todomestic debt issuance are:10• Preannounce auctions schedule• Select a group of Market Makers (Primary Dealers)based on their activity in the primary and secondarymarkets• Extend the average life and duration• Reopen outstanding issues to increase size and liquidity• Reduce the auction frequency of long term securities


Quaterly, the Government announces the amountsof government securities to be auctioned.InstrumentoMontos Mínimos Ofrecidos por SubastaCifras en millones de pesos1er trimestre2001PeriodicidadNueva Subasta2do trimestre2001PeriodicidadCetes28 días 4,000 Semanal 4,000 Semanal91 días 4,500 Semanal 4,500 Semanal182 días 2,800 Cada 2 semanas 2,800 Cada 2 semanas364 días 3,800 Cada 4 semanas 3,900 Cada 4 semanasBono 3 años tasa fija 1,600 Cada 4 semanas 1,800 Cada 4 semanasBono 5 años tasa fija 1,000 Cada 4 semanas 1,200 Cada 4 semanasBondes 5,000 * 5,300 *Udibonos**(Millones 200 Cada 6 semanas 200 Cada 6 semanasde UDIS)*Monto quincenal a subastar de Bondes, independientemente de su plazo y periodicidad de revisión de tasa.** Monto total a subastar, independientemente de su plazo.11


The published calendar gives certainty to themarket regarding the supply by type of instrumentCalendario de Valores Gubernamentales Abril-Junio de 2001InstrumentoFechaFija Corto Plazo Fija Largo Plazo Flotante* Udizado3 de abril Cetes 1, 3 y 6 meses Bondes9 de abril Cetes 1 y 3 meses Bono 5 años Bondes Udibonos17 de abril Cetes 1, 3, 6 y 12 meses Bondes24 de abril Cetes 1 y 3 meses Bono 3 años Bondes30 de abril Cetes 1, 3 y 6 meses Bondes8 de mayo Cetes 1 y 3 meses Bono 5 años Bondes15 de mayo Cetes 1, 3, 6 y 12 meses Bondes22 de mayo Cetes 1 y 3 meses Bono 3 años Bondes Udibonos29 de mayo Cetes 1, 3 y 6 meses Bondes5 de junio Cetes 1 y 3 meses Bono 5 años Bondes12 de junio Cetes 1, 3, 6 y 12 meses Bondes19 de junio Cetes 1 y 3 meses Bono 3 años Bondes26 de junio Cetes 1, 3 y 6 meses Bondes12


In October 2000 a group of Market Makers (PrimaryDealers) was selected for the fist time• The objective is to increase liquidity in the secondarymarket of government securities• Market Makers are selected for periods of 6 months,according to an index that measures activity in theprimary and secondary markets• The 5 institutions designated as Market Makers for thecurrent period are:•Banco Santander-SerfínSerfín•ING Bank México•Deutsche Bank México•JP Morgan Chase•BBVABancomer13


14Market Makers have the following obligations:• Place bids of at least 20% of the auctioned value for eachof the CETES and BONOS• Maintain bid-offer quotes for CETES and BONOS withauthorized brokers for a minimum amount of 20 millionpesos• Provide authorities with all necessary information toquantify their activity in the markets


15... in exchange for the following rights:• An option to buy additional securities after the auction(Green Shoe)• Borrow securities from the Central Bank• Periodic meetings with Government Officials


16AgendaI. IntroductionII.Key Developments● Fiscal Discipline● Monetary Discipline● Domestic Debt Market DevelopmentIII.IV.Main ResultsConclusions


As a result of fiscal discipline, the debt burden hasdecreased during the decade1745Public Debt Evolution 1994 - 2001(% of GDP)3015019.524.910.826.86.132.46.224.37.310.18.218.1 19.38.69.015.84.1 4.110.6 10.312.8 13.71990 1994 1995 1996 1997 1998 1999 2000 MZO-01External Domestic IPAB** Only liabilities guaranteed by the Federal Government.


Net external debt has been reduced throughoutthe decade...18Net Public External Debt(2000 US$ Billion)100908070601990 1995 1996 1997 1998 1999 2000


..reaching its lowest level relatively to GDP inrecent history1980%Net Public External Debt(% of GDP)60%40%20%0%20001999199819971996199519941993199219911990198919881987198619851984198319821981


16 | California Community Colleges Chancellor’s Office


The Government has started a regular inssuance ofthree and five-year fixed rate bonds100%Net Domestic Borrowing by type of Security2175%50%25%0%1999 2000 1T 2001Floating Rate NotesCetes 6 and 12 monthsFixed Rate Bonds 3 and 5 year


The average life of domestic debt has beenincreased significantly22600DaysAverage life of Domestic Debt and% of Maturities Over the Next 12 Months80%50070%40060%50%30040%2001993 1994 1995 1996 1997 1998 1999 2000 Mar-01Average lifeMaturities30%


The amortization profile has improved significantly,reducing refinancing risk250Amortization Profile of Domestic Debt as of May 31, 2001( Billion Pesos May 2001)232001501005001998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*Does not include 28, 91 and 182 day Cetes.


The proportion of 28 and 91 day floating rateinstruments has been reduced24Internal Debt Composition by Type of Instrument100%80%60%40%20%0%1996 1997 1998 1999 2000 Mar-01Cetes Floating 28 Floating 91Floating 182 Bonos Inflation-Indexed Bonds


Institutional Investors are becoming increasinglyimportant for the development of local markets25Government Securities Holders(% of total)100%80%60%40%20%0%Dic 97 Dic 98 Dic 99 Dec-00Banks Siefores Pension and Insurance Funds Mutual Funds Other


The Government has been reopening bond issuesto make them larger an more liquid.2618.0Outstanding Amount of Current Issues(Billion pesos)17.016.015.014.013.012.011.010.0Cetes * 3y Bonos 5y Bonos 5y Udibonos 10y Udibonos* Considering the fungibility


2-May-002-Jun-002-Jul-002-Aug-002-Sep-002-Oct-002-Nov-002-Dec-002-Jan-012-Feb-012-Mar-01Long term interest rates have decreasedsubstantially19.018.0Daily Secondary Market Rates 2000-2001(%)17.016.015.014.013.012.01yr Cetes 3yr Bono 5yr Bono2-Apr-012-May-012-Jun-0127


With the introduction of Market Makers, secondarymarket trading activity has increased substantially2840,010Secondary Market Trading of Bonos(Million Pesos)35,010BEGINNINGCHANGE OF RULESCHANGE OF RULESDaily volume operated30,01025,01020,01015,01010,010ANNOUCEMENT5,01010Jan-00Feb-00Mar-00Apr-00May-00Jun-00Jul-00Aug-00Sep-00Oct-00Nov-00Dec-00Jan-01Feb-01Mar-01Apr-01May-01OCTOBER 2, 2000JANUARY 8, 2001MAY 7, 2001


A market for medium and long term derivatives isdeveloping29•FX Derivates-Options-Forwards-Swaps--- Up to 5 years•Interest Rate Derivates-Swaps--- Up to 5 years-Nominal Rate Caps & Floors --- Up to 5 years-Real Rate Caps & Floors --- Up to 10 years


Long term derivatives can help to construct theyield curve30• They can be used as a reference to price new instruments• They increase liquidity and play an important role in theprice discovery process• They facilitate the development of “tailor made” productsthat increase the demand for long term instruments


A developed government bond market providesmany benefits31Simultaneous developmentof corporate debt marketLong term assetsto fund long termliabilitiesLong-termdebt contractsBetter marketrisk distributionBetter term structurereduces costs


32AgendaI. IntroductionII.Key Developments● Fiscal Discipline● Monetary Discipline● Domestic Debt Market DevelopmentIII.IV.Main ResultsConclusions


Conclusions33• Federal Government has to participate actively in thedevelopment of the domestic debt market• Macroeconomic stability is a necessary condition• Institutional investor demand is an importantcomponent• A key first step is to increase average life in order toreduce refinancing risk• Maturity instruments provide an opportunity torefinance with longer duration instruments


Conclusions34• Importance of programs to increase liquidity in thesecondary market• There have been important improvements in thedevelopment of the medium and long term debt markets• We foresee an important transformation of the Mexicanmarket in the short and medium term-The issuance of private sector securities, at present almostinexistent, is expected to become an important financingalternative-A A virtuous cycle is being created in which the volatility of interestrates and other financial variables will be reduced


35M E X I C Owww.shcpshcp.gob. .gob.mx

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