Could you define the situation of Mexico's banking system in the aftermath of the bail out program?
As a result of the 1995 financial crisis, the banking system in Mexico suffered from a high past due loan portfolio and from the pressure that it created on capital; in this regard the capitalization index fall below international accepted levels. During the last five years, authorities and credit institutions have been working on new regulations and better banking practices, as well as on the capitalization of banks in order to achieve the strength and stability of the banking system and of the economy as a whole.
During this period many banks went bankrupt, in fact, only 4, out of the 18 that were privatized, remain with their original shareholders. It has been until this year that the Mexican banking system has reached the capitalization indexes required having a strong banking and financial system.
Nevertheless, there are still some operations pending in order to complete this task. It is necessary to sell back to the private sector those institutions intervened by the government. For instance, recently Serfin was sold to Banco Santander and it is likely that in September Bancrecer will be sold.
Another example of the consolidation of the banking system is the proposal made by BBV and Banamex to Bancomer to create a single bank; it would mean a re-capitalization and strengthening of Bancomer, considering all Fobaproa contingencies.
Therefore I foresee that by the end of the year we will have a reasonably healthy and strong banking system. However it does not mean that we have finished, that we do not have challenges ahead. In spite of the reduction of the past due loan portfolio, we still have a very large proportion of it, in the order of 9.4% of total portfolio, it is around 10 billion dollars of non-productive assets, a heavy load that we have solve and get rid of. Along with the process of capitalization, credit institutions have created enough reserves as a mean to assimilate potential losses.
Another issue is to achieve the normal operation and ownership of Inverlat. Once that these aspects are addressed we will have a stronger and healthier banking system, credit institutions in better shape with enough capital and reserves.
In the case of Bancomer, which are the pros and the cons of a possible merger with BBVA or Banamex?
The decision is going to be taken next Monday (12th of June) and due to the fact that I am a member of the Board of Bancomer I cannot talk about the details of the transaction. However in general terms I can tell you that this transaction will be positive for the consolidation of the banking system. It means a better capitalization for Bancomer.
Obviously both options (BBVA and Banamex) will be considered and analyzed, taking in to consideration the differences between them.
Money matters will not be the most important issues to be discussed, although they are relevant; each alternative implies completely different future outcomes, risks, strategies and consequences in terms of the shareholders, employees and clients.
This operation means a very important injection of capital that will allow Bancomer to increase its capitalization index. It will also provide enough resources to complete the process of provisioning the contingencies of past due loan portfolio and to speed up the compliance of the conditions established by the authorities in terms of capitalization.
When do you expect Mexican banks to be able to provide their customers, particularly the industry, with more accessible loans?
I think the past due loan portfolio is still a very heavy load. However several actions have been taken to reduce it and to have an efficient process of credit allocation. Also the capitalization of Bancomer and Bital, and obviously the stabilization of Serfin and Inverlat, are important and necessary steps towards restoring the lending activity.
Prudential regulation has been established or reinforced in order to guarantee that financial resources are allocated to economic viable projects and to those borrowers that have not defaulted on their payments, otherwise, banks will have to create provisions of 100% of the credit. Also, there are new methodologies and regulation for credit rating and risk administration.
However, there are another two important elements in the equation. On one hand, there is the legal framework that regulates the lending activity. In this regard, Congress approved in April several law initiatives: a new Bankruptcy Law, several reforms related to the execution of credit guarantees and to electronic commerce. These new laws provide a better framework for the credit activities in Mexico and create confidence among all participants.
On the other, the demand and supply of credit also depends on interest rates which are affected by several factors such as the next election process and the political unrest that it could create; if there is uncertainty about the behavior of interest rates people will not borrow.
Regarding the supply side of the equation, credit activity also is related to the economic stability as well as to the perception of risk of a country. Since Mexico has proved to have a serious and credible economic plan, it is likely that investors and entrepreneurs will start borrowing by the end of the second semester of this year.
Some reasons to be optimistic about it are: 1) inflation will continue its trend towards one digit, 2) banks have enough capital and provisions, 3) there is a more appropriate legal framework for the credit activity, and 4) we foresee peaceful elections and in consequence confidence in the financial markets. However there will be certain volatility in the next few weeks, both in the interest rates and in the exchange rate.
Do you think today's banking system has the right mechanisms of control and supervision?
In coordination with the financial authorities the banking sector has worked very hard to create internal controls, to change banking practices and to improve supervision through more timely and accurate information. In general terms we have better internal controls and supervision. Nevertheless, there are aspects that have to be addressed inmediateley such as the rule of law. In this matter there is a huge challenge in Mexico in terms of achieving an efficient system of justice administration.
One of the most important conditions for economic activity is certainty, not just in macro economic issues but in the enforcement of laws. The judiciary system in our country, specially at the local level, needs to be up dated and modernized; more resources, computers, specialization courses, among other actions have to be taken as soon as possible. I think we all have to demand a better judiciary system, not only the bankers, but also the whole society. Although we know that it will take some time, it is important to address this important issue.
How committed are the Mexican authorities to endorse those measures?
They are very committed and so are we. I think that in general, all the actions taken and the policies implemented will result in a more selective and succesful lending activity than before. Its recovery will be gradual given the new regulations and bad experiences on both, the borrower and lender side. Mexican society lost leverage very rapidly during the last five years, being high interest rates, volatility and risks involved the main reasons. In this context, nowadays individuals and firms today are less leverage than they were in 1994, before the crisis. We all have learned the lesson; if you borrow (lend) intensively and there is volatility in the interest rates, there are high probabilities of facing huge losses. Lots of people lost their houses and their companies went bankrupt and the credit institutions are still dealing with the high past due loan portfolio.
As far as the list that contains the names of the Fobaproa debtors is concerned, recently the greatest Latin America millionaire said, that if we want to see a change in the way of doing things and in the banking culture in this country we should start by disclosing this list. May I have your assessment on this issue?
Bank secrecy is a very complicated matter. Here we have legal issues involved, since it is established in the Law its violation would create problems, even if the legislative body does the disclosure. There is a dilemma. lf this list is published, the whole issue probably will be demystified due to the fact that there are thousands of people in those lists, most of them innocent people that is working hard to pay their loans. It is also likely that there will appear the names of those that abused from the crisis situation, those that committed fraud or other crimes. However if the lists are published innocent people will be treated like criminals. Being in those lists is not a crime per se, since most borrowers do not know if their credits are in the portfolio sold to Fobaproa.
What would you recommend to stop this?
I think another crime should not be committed. This crime would consist on covering what really happened. Whoever is guilty, has to be prosecuted. Perhaps the answer is to disclose the names of those being prosecuted. It is not correct to treat everybody in the same way, some are criminals and others are victims. Innocent people will be negatively affected irreversibly; their name and their word would be damaged.
What do you think about fixing Mexican currency against the dollar as suggested by some experts?
I don't think it would be a good idea to fix the currency, but that is a very different matter of going into a monetary union. This is a long run project than just fixing the exchange rate. Fixing it has proven to be a very bad idea for Mexico. In the past we have suffered terrible devaluation because we had a fixed exchange rate. With a floating exchange rate we are, for the time being, better protected, because the market will immediately appreciate or depreciate the peso depending on the perception of the Mexican economy. | l would endorse a monetary union with the U.S. and Canada. This is exactly what is taking place in Europe with the Euro. Taking into consideration that 85 % of our commerce is done with the U.S., the dollar is practically another currency that works here.
In the Mexican-US border people have dollar bills in their pockets; more tan 85 % of the imports are made in U. S. dollars; many contracts are indexed to the dollar, etc; in the future, it will be important for Mexico to work in a monetary union scheme with the U. S. and Canada.
How do you see the penetration of Mexican banks into the insurance market and which are the market segments in which you forecast a major development?
I think the insurance market is very small and has a tremendous opportunity of growth. The financial intermediation in Mexico is something like 32 %, while in countries like Belgium or England it is above 100%. Mexico has an enormous potential with a hundred million people, a rapidly growing economy and a very low penetration of the financial system. There is enormous potential of growth both in the banking sector and on the field of financial products, being the insurance one of the most important.
I think that if Mexico is capable of maintaining a stable economy with important rates of economic growth with low inflation, we will see an exponential growth in the availability of financial instruments and of course a huge growth of the financial industry in Mexico.
Would you say that in general Mexican banks are sufficiently customer oriented, as you would like them to be?
I think they are; Mexican credit institutions have been oriented to their customers and they will be even more in the future. During the last four or five years most of the resources and efforts have been devoted to solve the inheritance of the crisis but also to pave the way for a more aggressive behavior in creating more products and resume the lending activity.
Once the banking system is recapitalized and all banks operate in a normal situation they are in a better position to address the needs of their customers in terms of credit and the variety of products. For instance Bancomer just announced its return to the credit activity with loans for different segments of the market with several products.
The arrival of the Spanish banks to Mexico will create incentives for domestic banks to compete with these institutions oriented towards the retail market. I am sure that Mexico is about to experience the emergence of a lot of new products based on a better use of databases that allow institutions to know and understand the needs and habits of our clients. New technologies will provide with more information and new channels to deliver financial services as well as information for more informed decision taking.
Do you think the nationality of the capital, whether it is Mexican or foreign, is the issue in the consolidation wave that is sweeping over the banking system in Mexico? Is there any other argument that should be taken into account as a priority?
From my personal point of view, I don't think that the nationality of the capital is an issue, specially in the context of a liberalized economy and its globalization. What Mexico really needs is a strong banking system and a clear and an efficient system to enforce the law.
The NAFTA treaty and the reforms of the law in 1998, which advanced the opening of the banking system to the foreign ownership, have indeed paved the way for foreign capital participation and helped to complete the re-capitalization process. The 1998 reforms allow that a foreign institution or a foreign investor owns a 100 % of any bank in the country, even the largest banks.
I think what really is important is that all institutions, individuals and firms obey the Mexican law. I respect the point of view of those who argue that Mexicans should control the payment system. I would say to them that regardless of the nationality, we all have to act according to the Mexican laws and regulations and work for the advance and development of our country.
I think the institutions that are coming to Mexico, like Citibank and Santander, and other well known global banks, are serious enterprises that are committed to stay in this market since it has a huge potential. Most Mexicans do not have a banking account and this is a country with more than 100 million inhabitants, most of them are young; imagine the challenge and the opportunity.
That opportunity is the reason that explains the interest of coming to our country, that explains the need of having a professional and strong credit institutions to facilitate economic growth and improve the living standards of the population. We have to keep in mind that all credit institutions operate in compliance with the Mexican laws and that it is up to the Mexican government to regulate them and supervise them so they will not do anything against the interests of the country.
Could you give us an outlook of Mexico's major macroeconomic indicators?
Ithink the economy is doing very well. lt is growing rapidly. Probably we will achieve a GDP growth of 6% this year and inflation it is likely to be below 10 %. Exports are also growing very fast; they will reach 300 billion dollars this year, more than double of the figure observed in 1995. There is a lot of foreign investment coming to Mexico that is financing from 70 to 75 % of the trade deficit of the current account deficit.
I think that in general terms the economy is doing reasonably well. The markets have been stable until a few days ago. lf there are no incidents during or after the elections the market will be stable again and interest rates will decrease. I think that one of the risks for the Mexican economy is the behavior of the U.S. economy in the future. Given the degree of integration of both economies anything that happens to the U. S. is very important for Mexico. The price of oil is another variable we have to watch very carefully for two main reasons: 1) its impact on the rate of growth of the global economy and 2) the fiscal dependency of the government on oil income.
What should be done in order to address the eventuality of a significant increase in the current account deficit bearing in mind that Mexico badly needs capital from abroad to further expand its economy? Since the Mexican economy is heavily weighted on the export activity, should the government focus it on strengthening the domestic consumption?
The best way to maintain the inflow of foreign investment and increase it is to consolidate the macro economic achievements of stable growth with decreasing inflation towards the U. S. level. Also have a fiscal policy with no deficit and a clear legal framework and an efficient judiciary system that allows the enforcement of the law.
In other words, the best a country like Mexico can do to make its economy more attractive for foreign and domestic investors is to provide them with economic stability and legal certainty, with an absolute rule of the law. As long as these two conditions become real a higher number of investors will come to Mexico. To have current deficits for many years because savings are coming from abroad is not a bad thing per se, specially if there is not enough domestic capital to develop a country like Mexico and the incoming resources are direct foreign investment that will stay in the long term.
What is your opinion regarding the ongoing negotiations aimed at finalizing free trade agreements with Asian countries and how could it affect Mexico's industrial base?
As you may know Mexico is one of the most opened economies in the world. We have several free trade agreements with countries of different regions of the world and with economies with different levels of development.
The strategy followed by the Mexican government is to diversify our foreign trade; for instance we have just signed with the European Union a Free Trade Agreement that opens up an enormous potential of economic growth and development. If we look at the effects of the North American Free Trade Agreement: exports have exploded and Mexico is now the second largest partner of the U. S.
lf we are capable of taking advantage of the agreement with European Union in a similar way, our economy could become a relevant player in the world markets, without the risks of focusing on a single region or economy.
Now, Asia is another story. lt is more complicated. Countries like China and Korea are very aggressive potential competitors. Perhaps it would be better to concentrate on the treaty with Europe and to carry out the necessary reforms (electrical industry, petrochemical industry, among other changes) to attract foreign investment and make our economy and its products more competitive vis a vis the Asian ones. |
Bankers Association 