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AmericasMay 27 2010

Mexico is well positioned for any global recovery

Aiming high: Well-capitalised banks such as Banamex are giving cause for optimism over Mexico's futureMexico's ties to the US economy, its well-capitalised banks and the business-friendly reforms it has in the pipeline mean the country is perfectly positioned to ride the wave of any global economic recovery. Optimism is such, that there is even talk of the country being classified alongside the BRIC economies. Writer Silvia Pavoni
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Mexico is well positioned for any global recovery

Events have conspired against Mexico in the past few years. The country's economic cycle was on a downward trend even before the global financial crisis erupted, with consumption and credit levels slowing months before the collapse of Lehman Brothers. Its dependency on exports to the US and to the manufacturing and automobile sectors aggravated the situation further. And so did the devastating effects of the H1N1 ('swine') flu, which put the whole country on a standstill for weeks and kept tourists away. With a low tax take limiting any space for countercyclical manoeuvres, the arrival of the global recession hit the country very hard.

Of late, though, Mexico's symbiotic relationship with the US economy is working in the country's favour again. With the US showing signs of a recovery, there are higher expectations for Mexico's future - despite slow levels of domestic demand.

Economists attribute such slow domestic recovery to the perennially high unemployment rate and slow growth in lending to the private sector.

Any Mexican recovery will require help from the banking sector, and while many of the country's economic sectors were on their knees, Mexico's banks weathered the storm well. Having learned from the Mexican peso crisis of the mid-1990s, banks' capital had been strengthened and risk management improved. Risk-adjusted capital levels have been kept way above the international requirement of 8% and are now, on average, almost 16%. Better risk assessments also meant that non-performing loans (NPLs) did not come back to haunt Mexico's banks as they have elsewhere. On average, the top five Mexican banks have NPLs of less then 3%, which is particularly impressive when compared with US lenders, which scored on average 5%, and had individual peaks as high as 8%.

Growth through banking

"The banking sector in Mexico can be an engine of growth," says Alejandro Valenzuela, chief executive of Mexican bank Banorte. "The level of bancarisation that Mexico has today is well below what it had 15 years ago, before the peso crisis, and it is well below countries with similar levels of development."

Mr Valenzuela points out that Brazil's private sector loans have a value of almost 60% of GDP; Chile's is already at 85%; while Mexico's, including all financial intermediaries, is only 20% of gross domestic product (GDP). "This means that there is huge potential to increase financial penetration," he says.

In the coming months, Mexico's banks will be busily assessing their ability to increase lending. Something that should encourage the whole industry is data published by the Association of Mexican Banks, which expects the sector's performing loans to grow by at least 10% this year. Ignacio Deschamps, president of the association and CEO of BBVA Bancomer, says that mortgages and small business loans could grow by more than 15% and 20%, respectively, in 2010. Defaults in 2009 caused banks to cut lending and consumer loans shrank by 14.9% year on year at the end of February to 380.87bn pesos ($30bn). These values are expected to grow in 2010.

Loan balances at the end of February were 1968bn pesos, up 4.1% from a year earlier, but nearly unchanged from December 2009, according to preliminary data published by banking and securities regulator Comisión Nacional Bancaria y de Valores. Bank lending is expected to continue to recover slowly, along with the rest of the economy.

"We expect 30 million Mexicans to become new customers over the next 20 years," says Mr Deschamps. "This is thanks to higher penetration capacity, offering credit to low-income population and admission of new people in the workforce."

The level of bancarisation of Mexico is still low and banks are sharpening up their tools to get higher degrees of penetration. And new players might emerge too.

At present, 41 million Mexicans are part of the banking network, a number close to the economically active population of 46 million. Only six years ago, there were only 22 million banking customers, says Mr Deschamps. Products such as debit cards and pre-paid cards have helped to push these numbers up. A higher use of electronic payments doing away with the need for a bank teller has also brought more Mexicans into the banking system.

Mr Deschamps explains that as Mexican banks focus on lowering or waiving fees on the remittances Mexicans receive from the US, this too is likely to pull more Mexicans into the banking network.

Finally, a new banking regulation will soon allow retailers, convenience stores and merchants with large networks in the country to connect to the banking network and act as a correspondent bank would do, creating a similar set-up to that used in Brazil.

Lending gap

In a country so heavily reliant on exports, trade finance is well developed to support business growth.

However, in Mexico, it seems that while large corporations find access to financing easy, smaller businesses miss out on the same opportunities. Small firms may find there is a low appetite for their segment or they may be hampered by slow decision-making processes, by foreign-owned lenders which may have to wait for head office approval. Eduardo Lecuona, CEO of financial services provider Intercam, says that this lending gap will create opportunities for new players.

"There is a need for more intermediaries," says Mr Valenzuela. "One of the views we have at Banorte is that we need to share risk more in the future. Before, the culture was 'I can take everything', now that is over. We need to diversify, to find partners. It would make sense for everybody."

Others agree that the small enterprise market has been lagging behind, but are also optimistic about ways to cultivate small businesses as customers.

"There is huge potential in the small business market," says Mr Deschamps. "It's relatively recently that we've learnt how to manage risk for smaller companies, many of which have less than 10 employees. The use of statistical models to predict risk, along with government and development bank guarantees, has created opportunities to grow small business lending."

Significantly, the highest expansion in bank lending in the past five years has come in the lending to small businesses sector, with a 25% annual growth rate. "For Bancomer, this is an important strategy," says Mr Deschamps. "We've created a specific network to provide services to smaller companies."

More sophisticated lending facilities will also help to support foreign companies that are expected to open business in Mexico to take advantage of the North American Free Trade Agreement (NAFTA). Chinese firms are already establishing a presence in the country and more are expected to come, which will have a long-term positive effect on the economy and on the banking system too.

Putting the 'M' in BRIC?

Because of the high levels of expectation surrounding Mexico, momentum is growing around the argument that it should be classified as part of the group of fast-developing countries labelled the BRICs - Brazil, Russia, India and China.

When talking about Mexico's international standing, banking analysts' attention is caught by its financial stability, the good management of its exchange rate, its large economy with internal market opportunities for various products and services, and the opportunities it presents for trade with North America. This is increasingly drawing investors' attention towards the country.

Xavier Denis, senior strategist at Société Générale Private Banking, says that he feels optimistic about Mexico's future and is recommending a group of its companies to his clients. What's more, tourism and growing investments in infrastructures such as highways and ports have created a good climate for private investors.

But the international status of a country is also linked to its population size and if Mexico's 110 million people are only half of Brazil's, they are less than a tenth of China's or India's population.

Examples of a relatively small population affecting international business can be seen in other developing countries in Latin America, according to Alberto Gomez, chief economist for Banamex. "If you really look at this, it's demographics," he says. "For example, Peru has been doing great in recent years, even better than Chile. But it's such a tiny place. [Countries'] weight is very important."

If not much can be done about a country's population size, implementing much-needed regulatory reforms is something that governments can control.

Beside the fiscal reforms being discussed, Mexico also needs to encourage smaller businesses to use a more transparent accounting discipline and appropriate internal reporting practices. If this can be done, it will also make the local stock market bigger and livelier.

As Mr Valenzuela points out, it will first be necessary to change the country's business mentality to allow for the adoption of stricter accounting practises.

Key figures: Mexico\'s big five banks

Key figures: Mexico's big five banks

Business transparency

In Mexico, local business folk joke that a million-dollar sized company would use four accounting standards. The first being the one that CEOs use when they show the company accounts to their spouses, the second is the one that they show to the banker, the third is one they show to the tax authorities, and the fourth is the one they use to control their business. More transparency would help the Mexican stock market.

"The key thing is how to incentivise smaller firms to come to the [stock] market," says Mr Valenzuela. "Listing is a discipline that implies transparency, checks and balances. Moving to a single accounting standard requires discipline but also opens up doors. If those companies are willing to pay the cost in becoming more transparent and adopt those checks and balances, in terms of future investment opportunities, the sky is the limit."

With presidential elections coming up in 2012, it is very likely that fiscal reform will be brought forward because such reforms tend to follow the election cycle. It remains to be seen how strong such measures will be. The 12 governorships, 15 state legislatures via 309 seats, and 1533 mayorships to be renewed between May and July this year will provide a test for the Calderon administration and its right-of-centre PRI party. Should the opposition PAN party win, either independently or through a coalition with PRD, the way in which the country's issues would be tackled will change dramatically, and it certainly would not help the proposals about privatising Mexico's energy sector.

"The priority in Mexico is to have energy reform," says Mr Gomez. "If you successfully privatise the energy sector you'll automatically have a boom in the stock market. [But] it is not going to happen soon, despite some moves in the right direction."

The country is only too aware of its problems but it still has not managed to tackle all of them.

"Mexico badly requires those structural reforms," says Mr Valenzuela. "It is over- diagnosed. It is like a patient that has gone to the doctor's surgery 100 times [each time for the same problem]. But we're not moving forward. We need to change or we won't be able to grow faster and compete. [Only then can] Mexico truly start to place itself within the BRIC countries."

If circumstances served to act against Mexico a couple of years ago, it is now in good condition to raise its economic game, if only it can muster the required political determination and find the courage to take a few risks.

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Read more about:  Americas , Mexico
Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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