Lopez Obrador
The annual conference of the Mexican Bankers Association (ABM) in Acapulco on March 22 and 23 will be anything but a routine affair. New left-wing president Andrés Manuel López Obrador, known as Amlo, is potentially the most powerful Mexican president in decades, given that he won 53% of the vote, has a majority in both houses of congress and control over several state legislatures. He has said he will attend. At the same time, Banco de México (Banxico), the country's central bank, will be launching a groundbreaking digital payments platform alongside the Mexican finance ministry, according to the conference organisers.
“Right now, the main thing that slows us down in the level of growth that we could achieve as a bank is the very low level of bankarisation,” says Carlos Hank González, chairman of Banorte, Mexico’s largest local bank. Indeed, including wider parts of the population in the financial services sector is something that could help Mr López Obrador’s in his plans to tackle poverty and inequality in the country.
A digital first
It is claimed that the new payment system is a first in Latin America: an interbank platform using state-of-the-art QR technology that can be accessed by mobile phones or via the internet, and where all transactions by individuals or business sellers and buyers will be executed through a single Mexican central bank platform, called the Interbank Electronic Payment System, or SPEI.
The security of the new platform is also going to be centrally administered, with Banxico taking responsibility for both the mobile phone devices using the system and the transactions on it.
If all goes to plan, 20 of Mexico’s largest banks will be connected to the platform on a voluntary basis at the time of its launch, and at some point in 2020 the participation of all of the country’s 50 banks will be mandatory, according to Arturo Herrera, Mexico’s deputy finance minister.
An inclusive initiative
The SPEI system promises to be the most significant initiative ever taken in Mexico when it comes to resolving the issue of financial inclusion.
Currently, the percentage of Mexicans using any financial product is only 37%, “a number closer to Nicaragua than Colombia and Argentina”, says Mr Herrera. The plan is to push it to a more regionally comparable 50% by 2024, or by 30 million more people, according to Marcos Martinez, the chairman of the ABM, who is also managing director of Santander Mexico.
Getting to the point of launch for the new platform in the short period of time since Mr López Obrador took office has been no mean feat – and not only because of the widespread debate over what the characteristics of the platform should be.
For instance, the government wanted to ensure that anyone using the platform, for all payment and settlement transactions, would be able to do so free of charge. The motivation behind this is to attract low-income families, and micro and small business owners, particularly those in remote, unbanked areas and in Mexico’s poorer southern states.
But BBVA Bancomer, the country’s largest commercial bank with a 21% share of the sector’s assets, according to national financial regulator Comisión Nacional Bancaria y de Valores, argued in an economic brief that offering the service free of charge could potentially discourage banks from investing in the technology surrounding the initiative.
A compromise was eventually reached that will mean only small transactions of up to 8000 pesos (about $400) executed on the platform by individuals or micro and small businesses will be free of charge.
Trickle-down effect
The ABM says that the platform will also provide the new government with the certainty that public funds, such as disbursements for welfare programmes, will reach the people they are meant to reach in a transparent and secure way.
This is of particular interest to the Amlo administration, given its promise to allocate 100bn pesos in order to double the number of elderly Mexicans who will receive a public pension (see interview with deputy finance minister Arturo Herrera on page 48). It has also promised to allocate 44.3bn pesos to provide bursaries and apprenticeships to 2.6 million young people who can neither afford to attend school nor get a job to provide them with a specific, marketable skill.
Both programmes are also expected to boost financial inclusion in Mexico as, in order to receive the public funds, recipients will have to open a bank account. They will also be automatically registered in the social security system. (The latter, as well as improving the living standards of many Mexicans by providing them with various health benefits, will also help the government to achieve its goal of reducing the influence of the informal economy, note analysts.)
A mixed start
Launching the interbank digital payment platform to boost financial inclusion is one of eight actions being taken to strengthen Mexico's financial system – and reduce obstacles to its growth – that were announced by Mr López Obrador and his finance minister Carlos Urzúa, along with, Alejandro Díaz de León, the country's central bank governor, and Mr Martinez of the ABM, on January 8 in Mexico City. But the relationship between the Amlo administration and the financial and business sectors remains mixed.
Before he had even been sworn in at the end of October 2018, Mr López Obrador scrapped the $13bn project to build a new airport in Mexico City which was already under construction. This move rattled the markets along with international and local investors, causing stocks, bonds and the peso to plummet.
Then, in November, Mexico’s banking stocks fell steeply on the local exchange after a senator in the ruling party proposed a law to either eliminate or reduce certain bank commissions, such as cash withdrawals from ATMs, balance requests and account closures, deepening uncertainty about the economic policy of the incoming administration. “The law came completely out of the blue, surprising everyone,” says Jorge Mariscal, chief investment officer for emerging markets at UBS Global Wealth Management.
After the dive in Mexican bank stocks, the senator adopted a more conciliatory tone, saying legislators would take the financial institutions’ concerns into account and would not pass such legislation in an “abrupt, fast, hasty way”.
Joydeep Mukherji, credit analyst for the Americas at S&P Global, says that investors are to blame to some extent for working under the assumption that there would be no change under the new government. “The arrival of Mr López Obrador always implied change. That’s what [he] campaigned on; that’s why Mexicans voted for him,” says Mr Mukherji. And he adds ”[Mr López Obrador] is increasing the role of the government in promoting economic development, in promoting social development, [but] he’s not nationalising the land. He’s not nationalising the banks, or creating government-owned banks, but managing and regulating them in a way to serve other public policy purposes, which all countries do in some way or another.”
Government assurances
Banorte’s Mr Gonzalez describes the Mexican president as “very, very pragmatic". He notes how decisions over bank fees are the responsibility of the central bank, so if “this senator has a proposal, he has the right to propose it. But it has to go through the central bank.” The government has sought to reassure investors, saying it will respect the independence of the central bank and provide security for investment.
Specifically, the government has pledged to respect the 100-plus production and exploration contracts issued to foreign and national oil companies in the past six years. These investments came after a ground-breaking reform, enacted by the previous administration, which ended the monopoly of state-owned Petróleos Mexicanos (better known as Pemex) and opened up the country’s oil and gas markets to the private sector for the first time.
Taking a new tack, however, the government has reversed the steep decline in public investment in Pemex. In 2019 it is allocating $3.7bn to the company in a bid to boost its crude and refined products’ output, while there is a specific proposal to build a new 600,000 barrels-per-day refinery in Tabasco and upgrade Pemex’s six existing refineries, which are operating well below capacity, according to Lisa Viscidi, energy programme director at US-based thinktank Inter-American Dialogue. A second prong of the new government’s energy policy, Ms Viscidi says, is energy “independence”. “Particularly, [the government is] referring to the huge imports of refined products and natural gas coming from the US," she says.
A crackdown on criminal gangs stealing petrol, diesel and other refined products by making illegal taps into Pemex’s pipelines is also expected to result in about $1.5bn in extra revenue a year for the state oil company, according to Mr Herrera.
Calmer markets
Meanwhile, in an attempt to restore calm to the markets, the first budget of Mr López Obrador was widely considered to have shown fiscal discipline. Finance minister Mr Urzúa pledged a 2019 primary budget surplus – excluding debt payments – of 1% of gross domestic product (GDP), with the government applying tough austerity measures that include significant cuts in discretionary spending on state governments and reorienting spending towards welfare and infrastructure. The budget forecasts a 2% GDP growth in 2019, the same as in 2018, and an annual inflation rate of 3.4%.
In another action that the central bank, the finance ministry and the country's bankers agreed to, Mexican workers will be allowed to transfer any consumer credit they obtain from a bank (which is now tied to their payroll bank accounts) to any financial institution – a right that officials say will give a large proportion of the labour force greater choice in an open market, increasing their bargaining power and thus contributing to lowering the cost of this type of credit. Banorte’s Mr Gonzalez says the interest rates on payroll credits are now between 25% and 30%.
The government has said it will also lower the tax rate on the returns from initial public offerings from 30% to 10%, to encourage more companies to list on the stock market and use the market as an alternative source of credit.
There is also a plan to change the rules for private pension funds, known as 'afores', to give them more freedom to diversify their investments – which currently tend to be concentrated in government securities – and at the same time encourage them to invest in long-term projects such as in infrastructure.
Infrastructure hopes
According to officials, the government is eager for local and foreign investors, banks and businesses to participate in its ambitious infrastructure projects, particularly in the south of the country. The country’s infrastructure deficit serves as a severe impediment to economic growth, according to the government.
A much-touted project is the Maya Train, a 1500 kilometre-long loop between Cancun and Merida connecting five south-eastern states.
José Manuel López Campos, president of Concanaco, which represents Mexico’s trade, services and tourist companies and claims to be the biggest business confederation in the country, says he is planning to work with the government on the Maya Train, which will have 15 stops, each of which it is hoped will revitalise the surrounding areas and boost employment.
“It is not only a project to benefit tourists; it’s about communications, transport, territorial reorganisation,” says Mr Campos. “The goal is to bring about a better balance between the states of the south and south-east – which now have the lowest productivity, the most poverty, the most unemployment – and the more developed centre and north of the country, by creating the conditions for economic growth in the south and opportunities that are more sound and healthier.” As opposed, some note, to young people falling in the hands of drug cartels or violent gangs due to a lack of any alternative income.
Mr Herrera says: "The idea is to involve the private sector as much as possible in the project. The financing will be done in seven tranches. Some of these tranches are expected to be more attractive to the private sector. In others we expect the government to take some of the risk. We’re open to both the domestic and the foreign private sector.”
He emphasises that the government also has no intention of changing the established public-private partnership rules for infrastructure.
Whether in infrastructure or bank payments, there are widespread hopes that Mexico will benefit from solid co-operation between the government and the private sector.
