México

Mexico in recession: financial reform and structural change

Oscar Ugarteche, Ariel Noyola Rodríguez

07/08/2013

Opinión

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Mexico is the second largest economy in Latin America – after Brazil – and the one most interconnected to the United States, with an average annual growth rate that barely exceeds 1% per capita over thirty years according to the Economic Commission for Latin America and the Caribbean (ECLAC) (1). In 2009, with the U.S. crisis, the fall in economic activity was -7.1%, while in Latin America it averaged -3%. In the second trimester of 2013 the United States registered a growth of 1.7%, the fourth consecutive trimester below 2%.

ECLAC reduced their forecast for growth in the Latin American region from 3.5% to 3%, mainly because of the lower rates of Brazil and Mexico. In the case of the latter, the forecast went from 3.5% to 2.8% for 2013. (2) Meanwhile after posting a growth rate of 0.8% during the first trimester of 2013, the Secretary of Hacienda and Public Credit (SHCP) of Mexico reduced his own forecast "with optimism" from 3.5% to 3.1% while the Bank of Mexico has warned of an "important deceleration" due to the fall in non-automobile manufacturing exports and the reduced level of public spending during recent months. For their part, IIEC and UNAM have emitted an even lower figure, 2.8% of growth for 2013 (3). From January to May of this year, the Mexican economy grew by 1.7%, less than the 4.9% reported in the same period of 2012, the lowest in four years, according to the Instituto Nacional de Estadística y Geografía (INEGI) (4).

Because of this, Enrique Peña Nieto has called for "structural reforms" that the National Action Party (PAN) had failed to approve during the previous twelve years. With this they believe that "sustained growth" can be recovered. In the sphere of finance, a proposal of Financial Reform was presented (5) to increase the availability of credit to encourage growth. The principal factors are 1) provide a new mandate to the development bank to encourage growth in the financial sector; 2) promote competition in the banking system to reduce the costs of credit; 3) generate incentives to increase credit provided by the banking system; 4) strengthen the Mexican banking and financial system to encourage sustained growth in this sector. These reforms appear to indicate that the financial sector has been in trouble, which is not true either for their profit margins (from 2000 to 2012 their net assets amounted to 613 billion pesos, half of these in the hands of BBVA-Bankomer and Citygroup-Banamex; in 2012 alone these latter institutions made 87.13 billion pesos), nor from the viewpoint of concentration levels (in 2012 there were eight banks out of a total of 43, which accounted for 81.5% of financial assets, six foreign banks with 67.7%; BBVA-Bancomer 21.0, Citigroup-Banamex 18.6, Santander 12.5, HSBC 8.1, Deutche Bank 3.8 and Scotiabank 3.7%; and only two with a majority of Mexican capital: Banorte-Ixe 9.8 and Inbursa 4.0%).

What is certain is that there are worries concerning certain areas in the non-banking sector and that these would be the origin of the reform that deepens the reform already in effect since the 1990s. The proposal makes it clear that this is not a question of reducing interest rates "by decree" but rather to "create incentives" for the commercial banking sector to "make more loans" and under conditions of "greater flexibility". Hence what is involved is more interbank loans at minimum rates for commercial banks so that they can continue with their operations with consumer credits at higher rates.

The argument made is that the paradox of the Mexican banking system lies in that, while it has high levels of capitalization (they have even adopted the criteria of Basel III), and low indices of arrears, the system does not lend productive money and it securitizes mortgage loans, so that their "solidity" does not translate into a significant improvement in the economic situation of the country. In our view, the cited affirmation derives from a bad diagnosis: the level of credit extension does not depend solely on the "rigidity" of the financial institution, but fundamentally on those conditions that allow for effective repayment. That is to say, in order for a bank to lend money, what is needed is not so much deposits as the "faith" (credit) in the solvency of an economic agent (families, companies, government). In a word, credit is directly related to the economic cycle, it depends on the expectation of earnings and not the inverse, as Keynes proposed in his General Theory of Employment, Interest and Money. In a country that suffers from economic stagnation such as Mexico, credit, far from favouring growth, increases the risk in the financial sector as was evident in the banking crisis of 1994. Because of this, the bank does not lend to productive sectors.

The proposed Financial Reform does not touch on such important themes as the 4% differential between active rates (those charged by the bank) and the passive rates (those paid by the bank). The differential in consumer credits of 34% leaves the Mexican middle classes strangled, and gives the banks more new legal instruments to execute guarantees in case of default.

On the other hand, the referential interest rate of 4% increases the cost of credit for small and medium national business and is quite irrelevant for the transnational enterprises, both Mexican and foreign, which obtain finance in the United States where the rate is 0.25%. The consequence is to stimulate a growing flow of importations and short term capital that has a negative impact on national production and ends up with a massive transfer of surplus towards the exterior. Evidence shows that short term bonds grew from 81.4 billion dollars to 493.23 billion between 2001 and 2011, of which something like half is in the hands of foreigners (6), leaving the Mexican economy in a highly vulnerable situation.

A real structural change in the financial sector would reposition economic growth and employment as the principle mandates of the central bank (as is stipulated for the Federal Reserve); not just controlling inflation and the stability of exchange rates, as is prescribed by neoliberal theory. Finally, a redistributive policy is needed, given that poverty has grown from 52.8 to 53.3 million persons between 2010 and 2012 (7); as well as a policy of internal reactivation through wage increases and democratic control of the Mexican banking system.

(Translation for Alai by Jordan Bishop)

- Oscar Ugarteche is a Peruvian economist who works in the Institute of Economic Research of UNAM, Mexico. He is a member of SNI/Conacyt. Coordinator of the Economic Observatory of America Latina (OBELA). www.obela.org and president of ALAI www.alainet.org

Ariel Noyola Rodríguez is a member of the OBELA, IIEC-UNAM project. Contact: anoyola@iiec.unam.mx>

Notes:

(1) CEPAL. Estudio Económica de América Latina y el Caribe. Tres décadas de crecimiento desigual e inestable, in <http://www.cepal.org/publicaciones/xml/4/50484/EstudioEconomico2013.pdf>. Publication date: July (2013), page 74.

(2) Harding, Robin. “US GDP growth lifts chances of taper” in Financial Times, in <http://www.ft.com/intl/cms/s/0/56cf4532-f9de-11e2-b8ef-00144feabdc0.html#axzz2adxcohsf>. Publication date: 31-07-2013.

(3) Coordinación de Análisis Macroeconométrico Prospectivo (CAMP). Situación y Perspectivas de la Economía Mexicana, in <http://www.iiec.unam.mx/files/Situacion-abril-junio-2013-2905213.pdf>. Nueva Época, year 3, No. 11, April-June (2013).

(4) See “Economía crece 1.7% anual en 5 meses” in El Financiero, in <http://www.elfinanciero.com.mx/component/content/article/44-economia/25076-economia-crece-17-anual-en-5-meses.html>. Publication date: 26-07-2013.

(5) See the complete speech of Luis Videgaray Caso, head of the Secretaría de Hacienda y Crédito Público in the presentation of the Financial Reform, May 8 2013, in <http://www.shcp.gob.mx/SALAPRENSA/doc_discurso_funcionarios/secretarioSHCP/2013/lvc_reforma_financiera_08052013.pdf]>.

(6) Ugarteche, Oscar and Leonel Carranco. “Flujos de Corto Plazo: una aproximación” in ALAINET, in <http://alainet.org/active/61945&lang=es>. Publication date: 27-02-2013.

(7) See “La pobreza aumenta a 53.3 millones de personas en México” in CNN Expansión, in <http://mexico.cnn.com/nacional/2013/07/29/la-pobreza-en-mexico-aumenta-a-533-millones-de-personas>. Publication date: 29-07-2013.

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