Q: Due to dependence on the US for trade, remittances, foreign direct investment and tourists, the US recession hit Mexico harder than practically all other emerging markets. Are changes in Mexican economic policies needed?
A: This crisis has shown many emerging markets that we should try to complement our drive towards exploiting globalisation with a more inward-looking type of growth. This crisis, with a few exceptions, was not generated by poor macroeconomic management in emerging markets. And that's why, other than growth, Mexico has maintained its strength. Inflation is under control. The fiscal accounts are under control. The banking system is in good shape. But we sort of bet on growth being generated by our integration with the US, and the US surprisingly fell into this huge crisis. Now for Mexico, one of the important lessons is that we need to strengthen our internal market and we should try to develop policies towards diversifying our trade.
Q: Mexico's banking industry is in a strong position, bankers say, to help reactivate the economy by providing loans for infrastructure development and in areas such as the car industry, manufacturing and part assembly for the re-export maquiladora sector and tourism. In order to play a bigger role in the economy, does the banking sector itself need to grow?
A: If you consider credit granted [by the banking industry] to the private sector in Mexico, it is extremely small. This relationship, as a percentage of gross domestic product, went from 30% to 34% in 1994 to less than 13% a few years ago and recently it has been increasing, but it is no more than 15% of GDP. If you compare this with other countries [in Latin America] of a similar level of development, such as Brazil and Chile, and consider some Asian countries such as South Korea, this ratio is closer to 50% of GDP, if not higher.
The Tequila crisis of 1994 had a devastating effect on Mexico's banking system. From 1995 to 2005, we were basically rebuilding it. But the truth is, there is this challenge of how to increase the financing of productive activity in Mexico. There is a still a lot to be done. There has been a slowdown in a trend towards increasing the penetration of the financial system. The banking system is highly capitalised, but just because of the overall economic environment, this trend has slowed down. I expect that once we return to a more normal situation, the strong capitalisation base of the banking system will increase economic activity. We estimate that if financing increases, total productivity will increase and we will add at least 1% growth to annual GDP.
Q: It is forecast that Mexico will face a budget deficit equivalent to 4% of GDP in 2010. The government's tax take is currently just 8.8% of GDP. So what can be accomplished, especially when the chances of president Felipe Calderón's administration passing significant fiscal and energy reforms in Congress may be worse since the opposition Institutional Revolutionary Party (PRI) gained a majority in the Lower House in July?
A: I am optimistic that we will be able to put something together and reach some agreements. The PRI, in a way, managed to work with the government party in achieving several reforms during the two-and-a-half years of President Calderón's previous government. With them, we managed to have a record three straight budgets approved with unanimity. We managed to pass a fiscal reform, several financial sector reforms, a reform of the pension system, a reform of the electoral law and of the judicial law. So the PRI has had a very responsible attitude towards an agenda that will help Mexico in the medium and long-term. In that sense, the interest of the government, the government's party and the PRI have come together. That makes me optimistic that we will be able to reach an agreement. But that does not mean the PRI will accept everything we propose.
Q: Mexico has had little freedom to borrow and spend its way out of this recession, but the administration of President Calderón has introduced some stimulus measures, including increased spending on anti-poverty and job creation programmes. How have these fared?
A: It has been impossible to fully compensate for the downward track. Even though we have introduced many measures on the fiscal front and on the development bank front, the force of the recession has been too strong. But there are some silver linings. The decrease in employment in Mexico has been quite small. There is also evidence that the slowdown has been big in specific sectors - those that are more linked to the US business cycle. But as the situation gets sorted out in the US, Mexico has the opportunity to bounce back with energy. Another factor that will help is that we have had an orderly exchange rate. That makes Mexico's exports more competitive.
