amortization schedules, covenants and legal restrictions and better enforceability (see figure 22)<sup>27</sup> . The reforms have led to the near-doubling (in terms of GDP) of domestic bonds issued by the non-financial private sector and to significant innovation in structured issuance<sup>28</sup> . However, the size of the non-financial private debt market is still small compared to other countries<sup>29</sup> , which is partly a function of the limited number of large, highly-rated corporate issuers (see next section)<sup>30</sup> . Further growth of this sector will likely require issuance by smaller firms (perhaps combined with a slight relaxation of investment limits for institutional investors) and additional innovations in securitization structures (tranching and financial guarantees).

Figure 21: Evolution of Mexico’s Sovereign Yield Curve (2000-2005) <!-- Start of picture text --> 20<br>18 2000 2003 2001<br>16<br>2004 2002 2005<br>14<br>12<br>10<br>8<br>6<br>2 4 6 8 10 12 14 16 18 20<br>Maturity (Years)<br>Yield (%)<br><!-- End of picture text --> Figure 22: Domestic Corporate Debt Issuance (May 2002 – January 2006) <!-- Start of picture text --> 160<br>140<br>120<br>100<br>80<br>60<br>40<br>20<br>0<br>Traditional Bonds Certificados Bursatiles<br>MXP Billion<br>May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06<br><!-- End of picture text --> Source: BOM and SHCP.

Note: Domestic corporate debt issuance only includes bonds denominated in MXP and UDIs that are issued by non-financial private sector companies. Traditional bonds refers to commercial paper, _pagarés_ , _obligaciones_ and _certificados de participación_ .

27 Other examples include the creation of a central counterparty for securities markets transactions and of an organized derivatives market (MexDer), improvements in the functioning of the repo and securities lending markets, and the development of the legal framework for payment finality and the netting of financial instruments and for default insurance and financial guarantees for mortgage-backed securities. 28 Examples include the securitization of take-out construction loans, residential and commercial mortgages, current receivables and future flows, although most of the issues have actually been made by financial institutions; credit enhancements have also been used to raise the rating of the issue. According to the Moody’s Investor Services (January 2006) and Fitch Ratings (March 2006) reports, Mexico continued to be the largest local securitization market by volume in Latin America in 2005.

29 According to the Bank for International Settlements, the amount outstanding of domestic private bonds in Mexico (a broader definition than the one used in this paper, since it includes financial institutions) was around 3.4 percent of GDP as of end-2004, compared to 23.3 percent in Chile and 12.6 percent in Brazil. 30 While institutional investors such as Afores are allowed to invest in bonds rated A-AAA (local scale), in practice, they conservatively restrict their purchases primarily to securities with a AA and AAA rating. As a result, these types of bonds currently comprise the large majority of all outstanding issues, which limits the investable universe to only 20-30 firms with strong credit fundamentals.

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