2001 Annual Meeting
Mexico’s Finance Minister Gil Diaz Discusses Mexican Economic Performance in 2001 and Outlook for 2002
Mexico’s Finance Minister Francisco Gil Diaz delivered the keynote address at EMTA’s Annual Meeting on December 5,
2001. The event, which drew a crowd of approximately 350 Emerging Markets professionals, was held at the offices of Salomon Smith Barney in New York City.
Minister Gil Diaz began his presentation by discussing Mexican economic performance in 2001, noting that the Finance Ministry was projecting flat Mexican GDP growth in 2001 vs. 4.5% growth projections earlier this year. Minister Gil Diaz attributed weaker than expected performance in 2001 to a number of factors, including the slowdown in the global economy (especially the United States), volatile oil pricing, reduced capital flows to emerging countries, and the effects of the events of September 11th. Despite such weakness in the Mexican economy, the Minister reaffirmed his commitment to fiscal discipline, calling it "the cornerstone of Mexico’s economic program," and noting that the country has cut spending by MXP13.2 billion to offset lower than anticipated revenue. He strongly reaffirmed that Mexico would meet its fiscal deficit target for the year.
Minister Gil Diaz also stressed the maturing of the Mexican economy and its increasing integration with its NAFTA trading partners. "For the first time in a generation, Mexico is experiencing a traditional business cycle," he stated, noting that "in contrast to previous episodes, the slowdown has not been accompanied by a crisis but has occurred in a context of financial and price stability." He stressed that Mexico’s economic cycle is now increasingly linked to those of its two main trading partners, the United States and Canada.
Minister Gil Diaz then discussed his goals for the Mexican economy in 2002. He described his plan as having two main guidelines, a solid fiscal stance and the promotion of structural reforms. Assuming US GDP growth of 0.3% and a $17 average price for a basket of Mexican oil, Gil Diaz projected that the Mexican economy would grow 1.7% in 2002, with an annual inflation rate of 4.5%.
As for capital markets activity in 2002, the Minister announced that, "external debt policy will concentrate on liability management in terms of both cost and maturity." He noted that external debt would show no net increase in 2002. The Minister also noted that the government would continue to act to extend the average maturity of local debt.
Finally, Minister Gil Diaz also indicated, in response to audience questions regarding the outlook for oil pricing, that Mexico was likely to join other oil exporting countries in reducing oil production in order to bolster oil pricing. He also asserted that the country’s fiscal reform bill would be passed by year-end.
Investors Upbeat on Potential Return for EM Debt in 2002, Highlight Low Volatility
Speakers at EMTA’s Annual Meeting were largely upbeat on the asset class’s potential performance in 2002. Hari Hariharan (NWI Investment Management) pointed out that EM debt has performed remarkably well over the last six years, and stated that in 2002, "from a competing asset class perspective, I don’t see anything else very 
interesting." Amer Bisat (Morgan Stanley Investment Management) declared that he felt comfortable with forecasts of 10-15% returns for EM debt in 2002, and added that he also believed that EM equities would perform well, possibly even competing with EM debt for portfolio allocations. Mark Dow (MFS Investment Management) spoke positively not only of potential total return, but also noted that long-term volatility of EM debt compares favorably to other asset classes such as the S&P 500. Dave Rolley (Loomis Sayles) gave the most optimistic estimate for 2002 returns, possibly being higher than 15%, "unless Brazil hurts us very badly."
Bisat listed what he considered to be very important structural transformations that have occurred in the EM marketplace recently: the increase in information, and increased transparency from the IFIs; diversification of the investor base as a result of the growing roles of European, Japanese and local investors; the reduced role of leveraged financing; and the rise in crossover investing. Bisat said that as a result of these transformations, the marketplace has broadened to include investors with different risk appetites, who may not be index-constrained, and which may include new investors which have "adopted" countries that were previously "orphans." This has acted to reduce market volatility at the same time that correlations between EM debt prices are declining. Bisat argued that this was "not a one-off phenomenon but rather a fundamentally-driven trend that will continue over the medium-term," and called it an
"extremely healthy development in our asset class."
Panelists were largely positive and enthusiastic in their discussion of the market’s recent "de-coupling" from the Argentine economic crisis. However, Hariharan cautioned the audience about "too much hubris" on the relative lack of contagion from Argentina’s anticipated default, suggesting effects had been largely mitigated because the Argentine crisis had been "telegraphed" long in advance. "I believe that an unanticipated quick body blow…would still put this asset class into a huge spin."
On the resolution of financial crises, Dave Rolley (Loomis Sayles) stated that he missed the approach of former 
IMF Deputy Managing Director Stanley Fischer "because it mostly worked." He noted that many countries rescued under Fischer’s tenure are now investment grade (e.g., Mexico, South Korea, and Thailand) while highlighting the profit the public sector actually made on the Mexican rescue package. Rolley posited that, instead of the positive results of Fischer policy, the new financial architecture has resulted in a tiering effect on the market; he foresaw investment grade and near investment grade credits continuing to have access to capital and continuing to be part of the asset class, BB credits’ access not being certain and B credit countries having to determine new methods of financing, such as "creatively collateralized" securities. Rolley noted that support for the ending of the IMF’s role as a lender of last resort is widespread in the official sector, meaning "we are not going back…we’re going to have to learn to live with this." Hariharan echoed "we’ve got to live in a new world...the prospect of Stan Fischer announcing big
packages…ain’t gonna happen!"
Dow suggested that official policy makers will be closely watching the resolution of the Argentine default, and the conclusions they draw will have important implications for the new financial architecture, thereby affecting capital flows to emerging countries. The official sector believes that organized buy-side involvement in restructurings will be difficult to achieve, will not necessarily improve the quality of talks and will retard final resolution, according to Dow, but the question is "how much less efficient is [bondholder organization?]…how much more atavistic are we?" Dow emphasized the paramount importance of bondholders working well together in talks with Argentina, and the orderly advancing of discussions. Bisat added that a paradigm shift is occurring in Washington, with the concept of creditor rights being explicitly recognized, and a subtle recognition that "the cram-down approach to private sector involvement just does not work."
Sell-Side Speakers Debate Economic Outlook for Brazil, Mexico and Russia
Panelists on EMTA’s "Economic Outlook for 2002" panel all predicted that the effects of an Argentine default on market giant Brazil would be limited, but often differed on how contagion would be transmitted. Joyce Chang (J.P. Morgan) noted that the effects of contagion could be more politically focused, possibly surfacing when the Brazilian electoral cycle gets underway later this year, "and everybody begins to look at the process of a vicious political cycle." Tulio Vera (Merrill Lynch) opined that "legal-driven" contagion, i.e., the implications of how a restructuring is handled, would prove more significant, and stated that such contagion would affect the whole asset class and not be Brazil-specific. Paulo Leme (Goldman Sachs) stated that the effects of an Argentine default would eventually filter through Brazil’s capital account, while a more optimistic Arturo Porzecanski (ABN Amro) posited that the "worst of contagion is over." Underscoring their limited concerns of contagion, the panel was unanimous in including Brazil as one of their major investment recommendations for 2002.
Jose Luis Daza (Deutsche Bank), moderating the discussion for the fifth year, noted that the panel had discussed the prospect of an investment grade rating for Mexico
for several consecutive years, and that such a rating had only thus far been awarded by one of the major ratings agencies. Porzecanski responded that in fact Mexico had proven disappointing. "Mexico has benefited from a lot of one-time inflows of money. There was the Mexican money parked abroad in case the transition to a non-PRI government went wrong… there was regional flight to quality money that came in…there is the privatization money, certainly from Banamex…but if you scratch the surface, you wouldn’t really like everything you see." Leme concurred "the story is probably not as glowing as it could have been," praising the short-term microeconomic management of the Finance Ministry, while noting less impressive performance on longer-term issues by the administration.
As for predictions for Russian debt performance in 2002, Chang expects Russia "will be a solid performer, but not necessarily the homerun that it has been the last couple of years." Vera and Leme concurred that Russia’s 50%+ performance in 2001 would be difficult to repeat, though noting good governance, structural reform and an oil windfall all continue to make Russia a "strong story." Leme added that one should not forget the positive effects of Russia’s 1998 debt default and currency depreciation on its restructured debt instruments.
The panel differed on Ecuador, with Porzecanski recommending an underweight while Vera said that IMF support should continue, and Ecuadorian debt will likely be one of the year’s "high spread, stable fundamentals stories." Chang noted that her firm has recently recommended taking profits on Ecuador; while she has fundamental concerns, there is nothing that is an 
immediate cause of concern for her. Panelist comments on Venezuela were mostly negative, with panelists highlighting the recent political deterioration.
In addition to the prospects for sovereign debt, the panel also discussed the outlook for Emerging Markets corporate issues in 2002. Vera noted that corporate issuers could benefit from increased demand in the future, as the rally in the EMBI during 2001, excluding Argentina, would increasingly force investors to seek out paper with wider spreads. However, a re-opening of the corporate market in 2002 is not a foregone conclusion, Vera added, saying it was a
question of "whether risk appetite continues to increase, and it ties into the overall strategy of a recovery in the global economy."
Responding to Daza’s question of whether the IMF was ending support for fixed exchange regimes, Vera and Leme agreed that Fund policy has definitely shifted towards floating rate regimes. Chang stated that, although the Fund may be issuing more statements praising floating currencies, it is moving away from specific prescriptions for countries in favor of countries developing their own programs hoping to promote local ‘ownership’ of Fund programs with the goal of increased sustainability.
Finally, the panel discussed the IMF First Deputy Director Krueger’s recent proposal for an international bankruptcy court. Chang said that, although it was too early to tell, the complexities of setting up such a process would probably result in a bankruptcy court which would have a less activist role than originally conceived. Leme admitted to being troubled by the unilateral nature of the proposal, noting that IMF officials "should open the dialogue with those that deal with these markets, both the investors and the issuers themselves, to better formulate policies that would avoid the segmentation that is likely to happen, and to avoid increasing the cost of capital."
EMTA Executive Director Calls for More Constructive Dialogue with Official Sector
In his Annual Meeting remarks, EMTA’s Executive Director Michael Chamberlin called for a more constructive dialogue between the private and official sectors. Chamberlin noted that the past several years’ debate on ‘burden-sharing’ had, "sadly, distracted us all from the larger picture of how best to meet the financing needs of developing economies." Instead, Chamberlin noted, "it would be better policy for the official sector to promote ‘carrot’ approaches that would help to catalyze stable private sector flows rather than the ‘stick’ approaches that only discourage them."
Chamberlin expressed concerns that the issue of moral hazard may have become "exaggerated to the point where eliminating it becomes the paramount official sector objective." As a result, the official sector has forgotten about "the virtue of increasing the investor pool, not merely locking it in at its current level." Another unfortunate result of the pre-occupation on ‘burden-sharing’ is that it has tended to divide buy-side and sell-side firms, "weakening their common voice."
Chamberlin also discussed the call by many in both the private and official sectors for a more "rules-based" approach to sovereign debt crisis resolution, and said that a better framework or basic principles could be developed for some cases. However, recent attempts at doing so have "missed the mark," and he expressed his "serious doubts" about the current initiative by the IMF to organize an international bankruptcy court.
Presentation by Mexico’s Finance Minister Gil Diaz
Transcript of Remarks by EMTA Executive Director Michael Chamberlin