Mexico Parades Cheap, Unconditional Stand-By

Mexico’s proposed $47bn 1-year flexible credit line (FCL) from the IMF signifies cheap and unconditional backup funds for the sovereign, according to the government. “The cost to Mexico of having this credit line open is very low compared to other alternatives for increasing available international reserves,” the finance ministry and central bank say in a joint statement. “Once approved, access to funds is not subject to any condition,” it adds. The FCL’s repayment period is 3.25-5.00 years and the line can be renewed. The cost is 15bp for drawing up to 200% of quota, 30bp for 200%-1,000%, and 60bp beyond that. Banxico says the facility has an initial fee and that if it is drawn for less than 36 months, the cost would be approximately 2.84%. Mexico says it does not intend to draw from the line, as it is taking it only as a preventive measure. Barclays believes there is a good chance Mexico will not use the funds at all. It adds that by boosting investor confidence, the FCL may become redundant. “The line should dispel concerns about the country’s ability to face the mounting fiscal and external challenges of the current and next year,” says Barclays. “Given that the line is oriented toward countries with a solid macroeconomic framework, the “stigma” traditionally associated with tapping IMF funds has virtually been converted into a “seal of approval”,” it adds. The shop’s baseline scenario for the 2009 balance of payments entails a projected current account deficit of about $20bn and private sector external debt falling due in $35bn, to be financed with $10bn in oil hedge proceeds, $10bn in net public external borrowing, $12bn in net FDI flows. It also expects the private sector to roll over 100% of trade and bank obligations, and less than 60% of non-trade corporate debt falling due this year.