Q24N (BBC Mundo) Mexico has once again turned to the Japanese market. On August 22, the country placed some 152.2 billion yen (about US$1.04 billion) there through the financial instrument known as samurai bonds, according to its Ministry of Finance and Loans.
It is not the first time that Mexico has sought financing in Japan, although this time there was greater expectation, since the Mexican fiscal deficit, now at levels not reached in more than 30 years, has begun to generate concern among analysts and investors.
The Mexican government periodically resorts to this means. Approximately every two years, Mexican samurai bonds are released in the Japanese market.
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But what are these bonds, also used by other Latin American countries, and what advantages do they offer?
Samurai bonds are bonds issued by foreign entities in the Japanese market, under local regulation and denominated in yen, the country’s currency.
Many foreign companies and governments turn to them because they allow them to raise capital from investors attracted to bonds within Japan.
The samurai bond arose from the need to open up the Japanese market after large foreign exchange reserves had accumulated in that country in the 1960s and its authorities were increasingly under pressure to raise the value of the yen, then tied to a fixed exchange rate.
In 1970, the Asian Development Bank, an international financial institution created a few years earlier to promote growth and reduce poverty in Asia, issued the first samurai bond, which was then followed by other liberalizing measures.
One of the attractions of these bonds is that they allow foreign entities to access the Japanese market, which historically has lower interest rates than in other major global markets, which lowers financing costs.
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In other words, whoever borrows in samurai bonds in Japan will pay less interest than they would pay in the United States, Europe or China.
The many Western entities that, like the Mexican government, turn to them also benefit from the lower volatility of the Japanese market, where prices tend to fluctuate less than in other markets.
In addition, the low value of the yen compared to the dollar or the euro also lightens the burden of debt issued in that currency.
However, it is not all advantages.
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The samurai bond market is subject to high taxes and the rules, terms and conditions for operating with them are comparatively rigid.
Another problem is the high administrative costs associated with these investments.
Why Mexico and other countries are turning to samurai bonds
Samurai bonds are a common instrument of fiscal policy for Mexican authorities.
Like other countries, Mexico has long used them as a way of diversifying its external debt.
Elijah Oliveros, an economist specializing in Latin America at the rating agency S&P Global, told BBC Mundo that “the decision to turn to samurai bonds is a matter of risk management, as they allow the investor base to expand.”
“It also makes it easier to create a yield curve that will serve as a reference for corporate issuers who also want to obtain financing in Japan.”
That is to say, the presence of federal debt bonds in the Japanese market opens the way for private entities that also want to obtain financing in Japan and the profitability offered by public debt securities will serve as a reference for those who want to place them.
And a report by the Fitch agency found that in 2022, 7% of sustainable bonds, those declared to be linked to social and environmental projects, that were issued in Japan were issued by foreign entities, including numerous companies.
The report highlighted Bolivia, Chile, and Honduras, in addition to Mexico, as the countries of origin of the entities issuing these bonds.
The Mexican State has been issuing samurai bonds in the Japanese market for years, which has made it “the largest international issuer of sovereign sustainable bonds there, only behind the Japanese government,” according to the Mexican Ministry of Finance and Credit.
And, according to the rating agency Moody’s, Mexico became the first country in Latin America to issue a samurai bond with a 20-year maturity in 2014.
Uruguay followed suit years later and in December 2021 became the second country in the region to do so by issuing samurai bonds worth 50 billion yen, about US$442 million at the exchange rate at the time.
Outside Latin America, many other countries, especially among the so-called emerging countries, seek financing in the Japanese market and place their debt securities there. This is a common practice that countries such as Hungary, Indonesia or the Philippines have resorted to in recent years.
And although the more than US$1.04 billion in this latest placement may seem like a very high amount, in reality it represents a very small percentage of the total US$219 billion that Mexico’s total external debt is estimated to be.
75% of this total debt is in Mexican pesos. Of the remaining 25% denominated in foreign currency, only 3% is in yen. Very little compared to the 75% that Mexico is estimated to owe in dollars.
Oliveros sums up: “If we analyse the total Mexican external debt, we come to the conclusion that the weight of the samurai bonds is very small.”
What results have been achieved?
The Mexican Treasury issued the bonds in five placements with terms of three, five, seven, ten and 20 years, and will pay rates of 1.43%, 1.72%, 1.88%, 2.27% and 2.93%, respectively.
The funds obtained from this new debt issue will be invested in projects aimed at achieving the United Nations Sustainable Development Goals, as announced by the Ministry of Finance and Credit.
For Oliveros, the result “has not been surprising” and the Mexican authorities were able to carry out their financing plan without major setbacks.
Although the recent and unusual decision of the Bank of Japan to raise the reference interest rates from 0% to 0.25% made the operation more expensive.
Most analysts interpreted the placement of Mexican samurai bonds in the Japanese market as a sign of the appetite of investors operating in it for higher-risk assets, such as debt securities from emerging countries like Mexico.
What is Mexico’s financial situation?
Although the issuance of samurai bonds has a marginal weight in Mexico’s total external debt, its fiscal sustainability in the medium term is beginning to be questioned.
According to official data, the federal fiscal deficit will exceed 5% in 2024, its highest level in more than thirty years, which has caused concern among analysts and observers of Mexican reality.
The generous subsidies approved by President Andrés Manuel López Obrador, together with two expensive projects that he has championed, the so-called Mayan Train and the Dos Bocas refinery that the state oil company is building in the state of Tabasco, have significantly increased public spending in recent years.
The recent increase in the deficit breaks the trend of decades of budgetary rigor.
Following the severe financial crises of 1976, 1982 and 1994, successive Mexican governments began to show greater commitment to fiscal balance and the country became one of the most stable in Latin America in macroeconomic terms.
As a result, Mexico’s debt has now risen to 45% of its annual Gross Domestic Product, when the average for countries in the region is around 70%, according to data from the consulting firm Deloitte.
A financial crash is not foreseen in the short term in Mexico. If it were, the country would probably have had much more difficulties in its last issue of samurai bonds.
But there is work to be done to prevent an excessive deficit from consolidating as a formula to finance indebtedness and that leads to greater difficulties.
President-elect Claudia Sheinbaum, who will take office on October 1, has committed to reducing the deficit, but has not given details and it is unknown how she will do so.
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