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Mexico on Thursday planned to issue $7bn in domestic debt to pay off multilateral loans in an operation that is expected to roughly halve the amount of money the country owes to the Inter-American Development Bank and the World Bank.
The move, which follows the announcement late last year by Brazil and Argentina that they would pay off all outstanding debts with the International Monetary Fund, forms part of the government’s long-term strategy of improving its debt profile by extending its repayments schedule and lowering overall costs of debt servicing.
Economists say that strategy has been made possible thanks to improving macroeconomic fundamentals, a deepening of the domestic debt market and, more recently, to high international oil prices.
The additional revenues from oil sales have helped swell central bank reserves to record highs, and total international reserves now stand at about $80bn, or about 9.5 per cent, of gross domestic product. This compares with about $32bn, or 6.5 per cent, of GDP in 2000.
At the same time, interest rates have fallen sharply since the middle of last year and inflation ended 2005 lower than that of the US.
“This kind of operation is only possible because Mexico’s macroeconomic stability is consolidated,” said Jonathan Heath, director of economic studies at HSBC in Mexico City.
Economists on Thursday said the ability of President Vicente Fox’s administration to carry out such a deal is particularly impressive given the current uncertainties surrounding Mexico’s political future.
Andrés Manuel López Obrador, the leftwing candidate, has disputed the results of last month’s election in which he narrowly lost to the centre-right Felipe Calderón, who is a member of Mr Fox’s National Action Party.
According to Mexico’s Finance Ministry, the money market operation will consist of the government acquiring central bank reserves by issuing about $7bn of locally denominated debt in the local market. The reserves will then be used to pay off the multilateral loans.
The ministry claims that the operation will lead to federal government savings of about 600m pesos ($55.3m) thanks to reduced debt-servicing costs over the coming years. The ministry says the operation will reduce the overall proportion of external public debt to 28.5 per cent of the total compared with 32.5 per cent now.