Mexico: Capital buffers
While Mexico’s financial sector has largely remained resilient throughout the global financial crisis and the resulting aftershocks in the US and EU economies, both the sector and the wider economy still face threats. Banks are well-capitalised and show healthy balance sheets. However, the devaluation of the peso, as well as high levels of loan and asset concentration, represent potential dangers to the stability of the financial markets.
As the country has become increasingly open to both the positive and negative aspects of globalisation, the central bank (Banco de Mexico, CBM) has thus far handled the country’s precarious position in the global arena quite well, though financial and trade ties to potentially dangerous economies threaten the livelihood of Latin America’s second-largest economy.
The CBM has maintained its chief inter-bank lending rate at 4.5% since 2009, partly due to weak currency exchange. Agustin Carstens, the bank’s governor, told local press that, “Without a doubt, external conditions have been one of the reasons which, on different occasions, prevented the lowering of borrowing costs, but I would not say that this was the only trigger for such a decision.”
Carstens also indicated what might trigger a reversal of fortune for the peso, stating, “The potential of a catastrophic event in Europe has done a great deal to increase risk aversion,” later adding, “When the volatility drops, it will likely mean a turnaround for the peso.”
Though currently benefitting Mexico’s numerous export-oriented industries, the continued weakening of the peso could potentially cause increased inflationary pressure as a result of higher prices on imports. In fact, in May the CBM sold $258m to support the peso by providing additional liquidity in the market for the first time since 2009 as the currency fell to a three-year low. It has since recovered moderately. Even with a weakened peso, the CBM forecasts inflation to remain close to its targeted 3% and to stay between 3-4% through the remainder of 2012 and into 2013. The bank also recently raised its economic forecast a quarter percentage point at the quarterly inflation briefing, predicting 3.25-4.25% GDP growth in 2012.
After conducting its third Financial Sector Assessment Programme (FSAP) in Mexico over the past decade, the International Monetary Fund (IMF), in cooperation with the World Bank, also found reasons for cautious optimism in the country’s financial markets amid a weak exogenous environment. The FSAP reported its findings in March 2012, indicating several challenges to the sector, including the concentration of assets and loans among large financial groups.
It noted that at the end of June 2011 the nation’s seven largest financial groups held over 75% of the financial sector’s $600bn in total assets. The FSAP went further to warn about the dangers of increased credit risk due to the concentration of loan portfolios, which if not properly monitored, could wreak havoc on the sector in the future.
Fernando Montes-Negret, a senior financial sector expert in the monetary and capital markets department and the head of the IMF team that conducted the FSAP, said in an IMF statement, “Overall, our assessment of Mexico’s financial system is very positive. The country now has better tools for systemic crisis management and competent supervision. However, there have been episodes of international distress in recent years and, given Mexico’s significant linkages to the global economy and to Spanish banks, the authorities need to monitor closely and respond quickly to emerging international and domestic risks.”
Although the IMF’s FSAP found the Mexican banking system well-capitalised and capable of withstanding several severe shocks after conducting stress tests in 2010, the country could be one of the first to adopt the Basel III accords on bank capital requirements later this year. Guillermo Babatz, president of the National Securities and Banking Commission, told international press that Mexico plans on being the first country to adhere to the accords in mid-2012, which will also encourage banks to publicly list shares in order for subordinated debt to count towards the country’s already high capital requirements.
Mexico’s economy is indeed significantly tied to the fate of its northern neighbour, the US, and Europe. During the global financial crisis in 2009, the economy shrank 6.5%, according to World Bank data. Even with its well-capitalised financial system and expanding economy, it must remain alert to the dangers of a financial crisis in Spain or a relapse into recession in the US.