José Marcos Ramírez, CEO, Grupo Financiero Banorte: Interview

Interview: José Marcos Ramírez

Who are the main beneficiaries of bank loans?

JOSE MARCOS RAMÍREZ: At present, 84.3% of credit is provided by private sector banks and 15.7% by government-owned financial institutions. Private sector loans are 50.5% corporate, 19.1% mortgages and the rest is consumption, including 11.3% on credit cards. The real tragedy is that bank credit to the non-financial private sector represents barely 16% of GDP, while the figure in Peru is around 20%, 40% in Colombia, 45% in Brazil ( excluding development banks), and more than 70% in Chile.

The two reasons for this significant under-penetration are a high degree of informality and inefficient collateral-recovery processes. More than two-thirds of the population work in the informal sector, so it is hard for them to prove regular income. This could be solved in some cases if they could post collateral. But it is quite difficult for banks to repossess a house when the related mortgage becomes delinquent, for example. Repossession can take three years. The recent bank-lending reform aims to improve collateral recovery and this could boost credit growth considerably.

What is the effect of insecurity on growth?

RAMÍREZ: In our view, Mexico has two issues regarding security: drug-related violence and a weak rule of law. When crime rates were low, the weakness went practically unnoticed. There is no doubt that the escalation of violence has had an impact on investment and economic activity. Although it is hard to put a figure on it, there are ways to compare investment and consumption trends between states that are faced with escalating drug-related violence and those that are not. In this context, we have estimated a negative impact of 1% of GDP per year since 2006.

If the government does not do something to improve the rule of law, it is highly likely the reforms will remain a nice change with no tangible benefits. As a result, it is my take that the incentives are there for the government to take action on it, particularly if the ruling party is seeking to retain the presidency in the next term.

How will the drop in oil prices affect public finances?

RAMÍREZ: Mexico is not an oil-based economy nowadays. Oil and gas products represent less than 6% of GDP, and oil and gas exports are under 15% of the total. As such, Mexico is in a quite different situation than in the 1980s, when over 80% of exports were crude oil and related products. However, oil will still provide one-third of fiscal revenue, even after the recent tax reform.

Fortunately, for over 10 years the government has been implementing an oil-hedging programme that has allowed it to continue spending, significant oil price declines notwithstanding, as happened in 2009. Nevertheless, this programme only covers one-year ahead revenues, and oil price hedging was done at $49 per barrel, well below 2014's $79. This is why the government recently announced combined spending cuts of 1.5% of GDP for 2015 and 2016 to keep its commitment to a balanced budget in 2017.

How would a US interest rate hike impact Mexico?

RAMÍREZ: While lower oil prices do pose risks to the economy, the other important risk is the expected US Federal Reserve rate hiking cycle. This has always put stress on emerging markets and Mexico is no exception. Moreover, the Federal Reserve has been in uncharted waters with quantitative easing and will now attempt to alter these unconventional policies.

Nevertheless, Mexico is far better prepared for this in comparison to the 1980s and 1990s, when the country was pretty much a closed economy from a trade perspective. The effect of the North American Free Trade Agreement and Mexico’s free trade agreements has been to increase the correlation between the economic cycles of the US and Mexico.

As a result, if the Federal Reserve does start its hiking cycle this will benefit the Mexican economy, helping it to compensate for any capital flows that a hiking cycle might induce. Mexico’s solid macro framework for fiscal responsibility and monetary soundness will help the economy to absorb the impact of this shock.