Mexico
| Pages | 127-142 |
Page 127
Public debt management aims to ensure that the government's financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.1
The importance of the government's debt management strategy lies in helping generate macroeconomic stability and stronger public finances. The debt policy for 2002 had the objective of adequately managing the government's debt and helping to generate a stable macroeconomic environment as well as stronger public finances. This was even more important during a year in which most economies were encountering difficulties, characterized by low growth rates and uncertainty in the international capital market. In this regard, the government adopted the following debt management policy for 2002:
- As in past years, the fiscal deficit was financed in the domestic market. The uncertainty in the international market also underlined the need for this strategy during 2002.
- The strategy in the domestic debt was focused on three areas:
- improving the maturity profile,
- extending the average life of domestic debt, and
- developing the long-term yield curve. It is important to note that issuance of the 10-year nominal fixed rate bond dates only to July 2001.
- The external debt strategy is expected to continue to extend the maturity profile and at the same time lower costs by implementing active debt management strategies aiming at reducing market imperfections in the sovereign yield curve. The strategy also intends to avoid refinancing risk due to large concentrations of maturities in any given year.
The legal framework for the debt management is covered by the following articles: Page 128
- Article 73, Section VIII of the Political Constitution of the United Mexican States (UMS) empowers the congress to establish the basis upon which the executive may borrow upon the credit of the nation, approve such borrowings, and order the repayment of the national debt.
- Article 89, Section I of the Political Constitution of the UMS empowers and establishes the duty of the president to promulgate and execute the laws enacted by the congress to provide for exact observance of the laws by the government.
- Article 31, Sections V and VI of the Organic Law of the Federal Public Administration provides that the ministry of finance and public credit shall manage the public debt of the federation and perform and authorize all transactions involving the public credit.
- Article 1 of the General Law of Public Debt provides that the following entities are authorized to borrow: (a) The federal executive and its branches, acting through the ministry of finance and public credit; (b) decentralized public agencies as well as public corporations (i.e., corporations with majority government ownership); (c) government credit institutions and auxiliary credit organizations, government insurance and surety companies; and (d) trusts for which the grantor is the federal government or any of the agencies mentioned above.
- Article 4, Section V of the General Law of Public Debt establishes that the federal executive, acting through the ministry of finance and public credit, shall be vested with the power to contract for, and manage, the federal government public debt and provide the guarantee of the federal government in credit transactions.
Debt management policy is determined by fiscal policy. If fiscal policy is coordinated with monetary policy, debt management policy will be indirectly related to monetary policy. In this regard, borrowing programs are based on the economic and fiscal projections contained in the government budget. The financial projections used in the government budget, such as the inflation rates and interest rates, are consistent with the monetary program of the Bank of Mexico (BOM), the central bank. In addition, as will be described, the BOM acts as financial agent of the federal government for many transactions. This requires a continuous working relationship between the fiscal and monetary authorities regarding debt management policy.
When the budget is authorized at the end of each year, the congress approves the annual limit for net external and internal borrowing submitted by the government through the ministry of finance and public credit. This limit reflects the debt policy for the coming year, which is also submitted to the congress, which analyzes this information carefully. This institutional framework supports implementation of a prudent government debt management strategy.
In addition, every new administration sets forth a general program for borrowing and debt management, directly related to the fiscal objectives established for the period.
The principal agency of debt management is the ministry of finance and public credit, acting through the unit general direction of public credit unit. The main powers delegated to the unit are to negotiate and execute all documents related to
- the public credit;
- the authorization and registration of borrowings by public entities, including the development banks; and
- financial transactions and derivatives to which the government is a party.
The President of the UMS appoints the general director of public credit. The senate must ratify the appointment.
The general director of public credit reports to the undersecretary of finance and public credit. Page 129 Every quarter, the issuance program for domestic debt is discussed with the undersecretary before its publication. The reporting covers the negotiations related to the authorization of borrowings by public entities and the financial transactions to which the government is a party. This covers, for example, every new operation of the government in the international capital market. The frequency of the reporting depends on when these negotiations take place.
As mentioned, the central bank acts as financial agent of the government in the issuance and service of domestic bonds as well as other liability management operations. The BOM is also in charge of paying the government debt derived from most of the external debt with the funds of the federal government and under the instruction of the general public credit direction. This entails a constant working relationship between the two entities.
The debt management office is organized as follows:
- The deputy general direction of external credit manages the issuance of securities in the international capital markets and carries out liability and risk management concerning the debt portfolio.
- The deputy general direction of internal credit formulates the policies and manages the programs concerning the financing in the domestic market.
- The deputy general direction of international financial organisms negotiates the conditions of the loans with the World Bank, the Inter- American Development Bank, and other financial organisms.
- The deputy general direction of project financing negotiates and implements the policy regarding the financial operations, special schemes, and infrastructure projects.
- The deputy general direction of legal procedures is in charge of solving issues related to the legal framework applicable to public debt management and provides legal advice to the general direction of public credit and to the other deputy general directions.
- The deputy general direction of public debt negotiates, authorizes...
To continue reading
Request your trial