VIII. Conclusions

Claudia Álvarez-Toca and Jaime Cortina-Morfín[1]

8.1 Conclusions

The successful development of the Mexican government securities markets observed in the last fifteen years certainly does not end here. As mentioned in the introductory chapter, the development of the government securities market is a dynamic process, where continuity and perseverance in macroeconomic and financial stability are essential for building and keeping the government’s credibility as a debt issuer. It is imperative that responsible fiscal and monetary policies persist and that legal, fiscal, and regulatory frameworks are suitable. Domestic and foreign investors will certainly be more reluctant to purchase government debt instruments in those scenarios where the government credit risk is considerable, the regulatory framework is more restrictive, the fiscal regime becomes more complex and not much transparent, and inflation expectations are high. In a few words, all these factors work as an auto-corrective element in the framing of macroeconomic policy.

The benefits of developing a liquid and deep primary and secondary market of government securities have been discussed in detail in the different chapters comprising this book. The benefits for both, the government and the private sector are evident, since both will enjoy more financing alternatives at a lower cost as they have more access to a mature debt market. At the same time, a more developed securities market also benefits investors by providing them access to a broader range of investment possibilities according to their own investment profiles.

The development process of the government securities market in Mexico made clear that opportunities for the placement of any kind of debt instruments are created by issuing and developing a market for bonds issued by the Federal Government. For this reason, government securities are considered as the backbone or base for other debt markets.

Indeed, it is from the yield curve of government bonds that the yield curve of other issuer’s reference interest rates originates. Besides, government securities work as underlying assets for various derivatives, and also serve as collateral for different types of loans and financial operations.

Efforts have been made in Mexico so that the financial system in general may evolve from a system centered in bank financing to a multi-level system in which debt and capital markets complement financial intermediation. From the central bank’s perspective, the development of local debt markets is particularly relevant as it “enables the use of short-term interest rates to convey monetary policy signals across the whole maturity spectrum.”[2] In other words, the debt market is part of one of the most immediate and relevant monetary policy transmission channels for a central bank, which may carry out its open-market operations through the purchase and sale of these bonds.

The strategy adopted in Mexico regarding the development of the government securities market has consisted in decidedly attacking a series of factors which had limited its growth, focusing on both improving supply and demand conditions and on reforming the rules with which the most important institutional investors must comply. Hence, the different authorities have striven to coordinate among themselves to consolidate the macroeconomic stabilization process, adopt a free-floating exchange rate regime, design and implement a strategy for managing public debt, carry out structural reforms –such as the pensions reform- eliminate restrictions to capital mobility, conduct financial system reforms, and simplify the fiscal regime, among many others.

The results achieved to date have helped break with some financial theory paradigms, such as that of the “original sin”, which considered that some countries were unable to issue debt in their own currency.[3] This new approach has set not only the basis for different economic agents to improve their access to financing in better conditions, but also for having a deep and liquid interest rate yield curve, with maturities of up to 30 years.[4] The existence of a risk-free curve has served as benchmark for the issuance and development of other Mexican issuer’s debt markets.

There is no doubt that all these achievements are the result of a joint and coordinated effort of many agents. The purpose of compiling this work is to provide a useful reference for other countries seeking to develop their government debt markets and, at the same time, to offer a guide for students, academics, and domestic and foreign investors to determine the level of development and major features of our market.

8.2 References

  • BIS Quarterly Review. Reducing financial vulnerability: the development of the domestic government bond market in Mexico. Jeanneau, Serge and Pérez-Verdía, Carlos. 2005.
  • BIS. The impact of international financial integration on Mexican financial markets. Sidaoui, José Julián. January 2009.
  • BIS. The role of the central bank in developing debt markets in Mexico. Sidaoui, José Julián . June 2002.
  • IBRD/World Bank, IMF. Developing government bond markets a handbook. 2001.
  • NBER Working Papers no. 10036. Currency mismatches, debt intolerance and original sin: why they are not the same and why it matters. Eichengreen, Hausmann and Panizza. October 2003.

8.3 Notes

[1] Claudia Álvarez-Toca has a Bachelor degree in economics (summa cum laude) from Universidad Iberoamericana (UIA) and a Master degree in business administration (summa cum laude), with a major in finance from Instituto Panamericano de Alta Dirección de Empresas (IPADE). Since 2007 she has been research specialist manager at Banco de México, now reporting directly to the Directorate General of Central Bank Operations. Since she first started working at the central bank in 1993, she has held different positions, always in the Operations Department, among which stands out her position as head of the desk in charge of the implementation of currency exchange policies and later, as head of foreign reserves management. During a period where she worked outside Banco de México (2002-2007), she did so as an academic in Finance at IPADE, where she also held managerial positions and offered consulting services to corporations and individual investors.

Jaime Cortina-Morfín received his Bachelor degree in economics from Instituto Tecnológico Autónomo de México (ITAM). He also has a Master degree in business administration from the University of Rochester. He currently is general director of Central Bank Operations at Banco de México. Among his main responsibilities are managing the international reserves, leading the monetary operations, implementing the currency exchange policy, and monitoring the local financial markets. Although his professional experience has mainly evolved around the central bank, he worked for three years (2004-2007) as deputy chief financial officer (CFO) at the Federal Mortgage Society (Sociedad Hipotecaria Federal, SHF), developing the mortgage-backed securities market in Mexico, and later, from 2007 to 2010, in the Treasury Department at Banco Nacional de México S.A. de C.V. (Banamex).

Most of the arguments stated herein are explained in more detail in the introductory chapter “Risk-free issuers”.

[2] BIS papers no. 11. The role of the central bank in developing debt Markets in Mexico. José Julián Sidaoui, June 2002, p. 151.

[3] Advocates of this theory argue that this condition increases a country’s vulnerability as it is forced to finance itself in foreign currencies, facing along strong depreciations of its own currency (Eichengreen et al. 2003).

[4] The chapter “Risk-free issuers” includes charts and data supporting these statements.