Corporate Dollar Debt Explodes in Mexico as Peso Dives…”Recipe for a debt crisis.”
By Don Quijones
WolfStreet.com
August 8, 2015
In the emerging markets, private-sector debt has become a doozie: In 2014, EM non-financial corporate debt reached a record high of 83% of GDP, up from 67% in 2009. The problem is that part of this debt is denominated in a foreign currency.
Between 2015 and 2017, some $645 billion of non-financial corporate debt will mature in emerging markets, with USD-denominated bonds accounting for around $108 billion, warns the Institute of International Finance. And with non-performing loans already rising while the dollar strengthens, some EM banks, particularly those that have increased their foreign-currency lending, could face serious challenges.
The countries that have seen the largest increases in non-financial corporate indebtedness are China, Brazil, and Turkey. But Mexico is not far behind. According to a new report in El Financiero, in the first half of 2015 the total debt of a sample of 50 publicly listed companies had risen 22% year-over-year.
The main reason? The peso’s decline against the dollar. In the last year alone, the Mexican peso has lost 21% of its value against the dollar. Corporations can borrow more cheaply in dollars. But as the peso falls against the dollar, the dollar-denominated debt held by Mexican corporations with peso-denominated operating income becomes increasingly difficult to service. A recipe for a debt crisis.
A Debt Binge
The Mexican companies most affected include América Móvil (AMóvil), Axtel, Alfa, TV Azteca and ICA, all of which have a large portion of their debt denominated in dollars. According to financial analyst Carlos Ponce, this debt can be expected to continue growing – and not just as a result of the strengthening dollar:
We are still in a context of exceptionally low interest rates and it’s likely that many companies have decided to take advantage of this by applying for more debt with favorable conditions.
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