PRUDENT AND PROGRESSIVE

Mexico 2015 | FINANCE | FOCUS: FINANCIAL REFORM

Broad based financial sector reform, in step with that in other key economic sectors, seeks to improve the credit climate and streamline the financial system to better serve the Mexican public and SMEs through a more available, yet secure credit mechanism, while reassuring banks and financial institutions against risk.

In January 2014, President Enrique Peña Nieto signed into law comprehensive financial and banking laws—laws that complemented landmark reforms in other key areas of the economy, principally energy and telecoms, deregulating the former and promoting wider competition in the latter. In the telecommunication sector, essentially an 80% oligopoly, giant players have been incentivized to scale down, fostering competition that will in turn reduce costs across the service spectrum. This in time will get more Mexicans online for such services as ebanking and ecredit, theoretically boosting the registered economy and increasing growth.

Nieto's goal has been ambitious, and overshadows the failure of previous administrations' reforms to tackle social inequality, raise financial inclusion and set the groundwork for stable economic development. “Starting in 2014… Peña Nieto proclaimed, “…Mexico's financial system will be more solid, and 'a true engine of growth' for the economy."

CREDIT, NOT CRUNCH

Many in Mexico remain unbanked, relying instead on microcredit and other lending facilities. The authorities have importantly, then, shored up the banking framework, and stipulated fuller information requirements for non-banking financial intermediaries. The same applies to credit bureaux, where systematic data on credit lines will create a better picture of the nation's financial landscape, while raised standards can only foster competition based on service quality. This, in turn will boost consumer confidence; confidence that will percolate throughout the wider economy.

In the wake of the global crisis commercial bank lending to the private sector decelerated as prudence turned to reluctance. This hit small businesses, the vast majority of Mexican enterprises, the hardest. The intention was for banks to lend more from deposits received from the public, instead of investing it in safer havens of less productive consequence to the broader economy. The envisioned objective of sustainable credit expansion rests on three pillars, namely the safeguarding of creditors, stricter formal regulation and the encouragement of competition among financial intermediaries. To motivate the banks, the reforms, therefore, curbed the risk faced by banks by facilitating collection on on loan guarantees should nonpayment occur. The President hoped in 2014 that the new environment would lead to a 15% rise in lending.

The Bank of Mexico observed in 2014 that credit as a percentage of GDP, if rising from the then figure of 26% to 52%, could permanently add a half percentage point to economic growth within eight years. Meanwhile, Finance Minister Luis Videgaray believes that Mexico is now placed to see sustainable growth rates in excess of 5% in the second half of the current administration, running to 2018.

CAPITAL REQUIRED

Key among financial reforms was the adoption of BASEL III guidelines on capital requirements to bolster the system, again, in pursuit of sustainable liquidity. In a TBY interview, Gary Bennett, General Director of Seguros Monterrey New York Life states (within the context of insurance) that “Ours is quite a sophisticated marketplace. This has been attested to by the introduction of Solvency II into the Mexican marketplace […] It means that lawmakers understand the significant role that financial services play not just in individual families' lives, but also that life insurance and financial services help build economies."

Perhaps Manuel Sánchez, Deputy Governor of the Bank of Mexico most cogently summed up the objectives of Mexico's financial spring-cleaning, and the economic expansion it hopes to foster. In March 2014 he noted that; “Prudence is a sine qua non for such expansion, meaning that it would likely take some years for financing ratios in Mexico to reach international levels." And as for credit growth, that, along with the perceived advantages of structural reforms in other key sectors, “…would allow Mexico to enjoy a higher rate of economic momentum, and eventually, a long-sought, much-desired higher standard of living."