A rising dollar exchange rate, too much dollar-denominated debt, and increasing fiscal stress among the indebted are all manifestations of the debt deflation and depression crisis slowly strangling the world. Mexico’s has problems. From Don Quijones at wolfstreet.com:
Recipe for a debt crisis.
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.
In the second quarter of 2015, the debt in dollar terms of América Móvil and Axtel exploded by 37% and 48% respectively. In the case of Alfa, TV Azteca and ICA it grew by 29%, 32%, and 20% respectively. Other companies also increased their debt.
Over the last five years, the external debt held by Mexico’s private businesses (in pesos) has increased by 86%. In nominal terms, the total amount has reached 1.69 trillion pesos (roughly $105 billion), 117% more than at the beginning of 2010. And if anything, the pace is quickening as fears rise that the Federal Reserve may raise rates in September.
It’s an ironic twist: out of fear that the Fed may be about to take away the ZIRP punch bowl, some of Mexico’s biggest corporations are embarking on one last dollar borrowing binge.
To continue reading: Corporate Dollar Debt Explodes in Mexico as Peso Divess
