WHY is NO ONE talking about Mexico??

Mexico's effervescent financial markets, which are growing three times faster than the rest of the economy, have been among the strongest performing in the world. The benchmark IPC stock exchange index is on course for growth of more than 40 per cent for the third year running, while bond markets are booming as foreign investors comb the globe for higher yields. Also, a decade after the banking system collapsed in the wake of the Tequila crisis, lending is rapidly gathering pace.

This deepening of Mexico's capital markets has been taken advantage of by the government to rid itself of the "original sin" of being overburdened with foreign debt, warned against by economists in the 1990s. "There is redemption!" jokes Guillermo Ortiz, governor of the Bank of Mexico.

With domestic debt now far outweighing external debt, and no danger of a crisis sparked by the elections, the narrowing differential between domestic and US interest rates is more likely to impact Mexico's markets. As interest rates continue their downward path begun in September and US rates keep rising, the almost 7 percentage point differential reached in May this year is expected to fall to 3 points by May 2006.

Nevertheless, corporate bond issuance has continued to flourish after little activity following the financial crisis of 1994-95. The $683m issued in 1999 compared with $11.4bn in 2004. Mortgage companies, retailers, and micro-financiers have been tapping into the markets like never before, and banks are introducing new instruments. The growth of asset- and mortgage-backed securities, which account for about a quarter of total issuance this year, is opening access to those who did not have it before.

Regulatory problems have restricted the broadening of the equities market, although a new capital markets law could help solve some of these issues such as the strengthening of minority shareholder rights. The law could also stimulate increased involvement of the vast number of medium-sized family-owned businesses in Mexico, which have traditionally preferred to finance themselves through uncomplicated bank loans because of the costly, time-consuming and complicated rules that capital market issues involve. A market for high-yield Mexican bonds also needs to be developed, as most low-grade issuers are forced to seek financing abroad.

"It's a very large market that hasn't been exploited yet - the potential for growth there is huge," says Jaime Guardiola, who heads BBVA Bancomer. After many banks went bust in 1995, bank participation in the mortgage market has suddenly taken off, and it is expected to be one of their key areas of growth in coming years.

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