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The Peso Crash and Financial
Market Performance in Mexico


        José Antonio González
             Chief of Staff
  De...
Outline
• Stylized facts about the financial market
  performance in México.
• Some basic lessons:
  – Monetary policy
  –...
Looking back
• The early 1990s financial liberalization had
  four components (Aspe 1993):
  – Transparent monetary policy...
Like many other LAC countries, Mexico
embarked on an ambitious liberalization program

        1
      0.9
      0.8
     ...
Financial Development or Credit Boom?
                                                 Figure 3.1
                        ...
The puzzle: Bank lending fell but investment
  did not and GDP growth averaged 5.4%
              from 1996-2000
         ...
Bank vs market based?: Wrong question
                                    Bank Credit to Non-financial Private Sector/
   ...
Stylized facts conclusions:
                 financial depth is still shallow
                                Figure 3.2
 ...
Looking ahead: Do more of the
   same…with some twists
– Monetary policy based needs to prevent moral hazard
  in exchange...
Monetary policy: The probability of a vicious exchange rate-
            interest rate cycle has diminished.


      250
 ...
% of GDP




                       0
                           20
                                40
                   ...
Policies to reactivate bank lending:
                                   (i) Improve repossession laws (2002) and
         ...
At the same time

• Keep banks healthy with sound prudential
  regulation that reduces moral hazard (Gil
  2000):
  – Limi...
% of GDP
      M




                      0
                          25
                               50
              ...
A clear indicator of regulatory lag is poor
              minority rights
Orígen de las        Derechos        Derechos de...
As a result there has been a migration to
           the US stock market
                Indicators of migration by legal ...
In April 2001 Mexico passed changes to the stock
market laws which aimed to increase transparency.


    • Minority rights...
New reforms to corporate governance given
corporate scandals in the U.S.

   Accounting practices homologated to U.S.
   s...
Pension reform and financial innovation have
already and will continue to increase savings
  Saldo de Activos Manejados po...
Financial Reform is not enough. It needs to be
 anchored with sound fiscal policies otherwise the public
    sector consum...
Crowding out has real effects
                Déficit Financiero y                                 Déficit Financiero e
  ...
Conclusions
• Initial reforms were in the right direction
  but they need to be implemented carefully.
• Looking ahead req...
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The Peso Crash and Financial Market Performance in Mexico

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The Peso Crash and Financial Market Performance in Mexico

  1. 1. The Peso Crash and Financial Market Performance in Mexico José Antonio González Chief of Staff Deputy Minister of Finance in Mexico October 25, 2002
  2. 2. Outline • Stylized facts about the financial market performance in México. • Some basic lessons: – Monetary policy – Good prudential regulation of banks – Corporate governance – Fiscal discipline
  3. 3. Looking back • The early 1990s financial liberalization had four components (Aspe 1993): – Transparent monetary policy – Liberalization of capital account and financial innovation to mobilize savings – Solid prudential regulation – Strong public finances as foundation
  4. 4. Like many other LAC countries, Mexico embarked on an ambitious liberalization program 1 0.9 0.8 Mexico 0.7 0.6 Chile 0.5 0.4 0.3 Latin America Avg 0.2 0.1 0 1970 1975 1980 1985 1990 1995 Liberalization Index. Morley et al
  5. 5. Financial Development or Credit Boom? Figure 3.1 Financial Sector Assets 120% 100% 80% (% of GDP) 60% 40% 20% 0% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Development Banks Assets Commercial Banks Assets Stock Market Capitalization Public Bond Capitalization Private Bond Capitalization • Financial sector depth doubled and fixed capital formation increased from 15% to 20% of GDP . • However, since1995 financial depth decreased from a high of 100% in 1994 to close to 70% of GDP in 1999.
  6. 6. The puzzle: Bank lending fell but investment did not and GDP growth averaged 5.4% from 1996-2000 Figure 3.3 Investment Flows by Source 0.3 0.25 0.2 Foreign Savings (Flows/GDP) Private Bonds 0.15 Public Bonds Commercial Banks 0.1 Development Banks Gross Domestic Investmen 0.05 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 -0.05
  7. 7. Bank vs market based?: Wrong question Bank Credit to Non-financial Private Sector/ Value Traded in the Stock Market 30 25 20 Relative Activity 15 Lower Middle Income(1986-1993) High Income (1986-1993) 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
  8. 8. Stylized facts conclusions: financial depth is still shallow Figure 3.2 Financial Sector Assets 450 400 350 300 Private Bond Capitalization % of GDP 250 Public Bond Capitalization 200 Stock Market Capitalization Banks Assets 150 100 50 0 Fr y M ico ea sia da G dom Sp e rg il ni d an Ca in a in s M K ile M land ic 94 Br 9 K te c tin an 9 A az a r an na U nite Jap Ch ex 19 19 ay d Sta ex o m en er g al er o itz Sw te U
  9. 9. Looking ahead: Do more of the same…with some twists – Monetary policy based needs to prevent moral hazard in exchange rate behavior (Gil 2000) – Bank recovery: solid banking prudential regulation needs to include banking resolutions and limited deposit insurance. – Sound market and corporate governance regulations to promote stock and bond markets. – Strong public finances (including public banks) is key to allow institutional investors and forced savings turn into private investment.
  10. 10. Monetary policy: The probability of a vicious exchange rate- interest rate cycle has diminished. 250 Indices Abril =100 130 230 210 120 Tipo de 190 Cambio 170 110 150 Fondeo 130 100 110 90 90 Abril- Octubre 1998 100 140 90 Fondeo 130 80 120 70 Tipo de Cambio 110 60 50 100 40 90 Abril- Octubre 2001
  11. 11. % of GDP 0 20 40 60 80 100 120 Ja p G an er m an y Fr an ce U .K U . .S M .A. al ay Th sia ai l In and do ne sia M ex Chi ic o le 19 Fi 94 li p in as Figure 3.5 Br az il In A dia r M gen ex t ic ina o 19 Ec 99 u Bank Credit to Non-financial Private Sector Co ado sta r R Co ica lo m V b en ia ez Mexican banks need to recover ue la Pe ru
  12. 12. Policies to reactivate bank lending: (i) Improve repossession laws (2002) and (ii) let go of the past (Gonzalez 2002) IPAB Bonds as a share of Goodstanding Loans 2 1.8 1.6 (% of good standing loans) 1.4 1.2 1 0.8 0.6 0.4 0.2 0 BBVA BANAMEX SERFIN- BITAL BANORTE SCOTIABANK BANCOMER SANTANDER INVERLAT
  13. 13. At the same time • Keep banks healthy with sound prudential regulation that reduces moral hazard (Gil 2000): – Limit deposit insurance and have a credible resolution framework. – Complement monetary policy with liquidity requirements on dollar liabilities to level the playing field
  14. 14. % of GDP M 0 25 50 75 100 125 150 175 200 al ay sia U .K . Ch il U e .S .A . Ja p Th an ai Ph land M ilip ex i n ic o es 19 9 M Fr 4 ex an ic c o e 19 99 Sp ai n Figure 3.9 In G dia er m an y Br az Stock Market Capitalization Tu il Co rkey lo to develop V mbi en a ez ue la A Peru rg en ti Ec na u Co ado sta r Ri ca The stock market is shallow and needs
  15. 15. A clear indicator of regulatory lag is poor minority rights Orígen de las Derechos Derechos de Eficiencia del Estándares Leyes de Acreedores Sist. Judicial Contables (países) Accionistas (0 a 4) (0 a 10) (0 a 10) (0 a 6) Inglés (18) 4.00 3.11 8.15 7.01 Francés (21) 2.33 1.58 6.56 5.12 México 1.00 0.00 6.00 6.00 Alemán (6) 2.33 2.33 8.54 6.27 Escandinavo (4) 3.00 2.00 10.00 7.40 Mundo (49) 3.00 2.30 7.67 6.09 Fuente: La Porta, Lopez-de-Silanes, Shliefer, Vishny, "Law and Finance," (1998).
  16. 16. As a result there has been a migration to the US stock market Indicators of migration by legal system 40 35 30 25 20 15 10 5 0 o an h ch an ic is m en vi gl éx na er En Fr M G di an Sc Capital Listed in US/Total capital Firms with ADR in US/Firms listed locally
  17. 17. In April 2001 Mexico passed changes to the stock market laws which aimed to increase transparency. • Minority rights Corporate governance of stock issuers and intermediaries. Related transactions Restricted stock emissions. Control changes through public offerings Information standards Use of inside information.
  18. 18. New reforms to corporate governance given corporate scandals in the U.S. Accounting practices homologated to U.S. standards Imitate de SEC in the practice of certifying accounting statements. Firms with ADRs in the U.S. will have to subject themselves to SEC requirements. Install a national corporate governance board.
  19. 19. Pension reform and financial innovation have already and will continue to increase savings Saldo de Activos Manejados por Aseguradoras y Siefores (Miles de Millones de Pesos) 1,000 800 600 400 200 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Aseguradoras Siefores Rentas Vitalicias
  20. 20. Financial Reform is not enough. It needs to be anchored with sound fiscal policies otherwise the public sector consumes most of the financial resources Use of financial resources in México 100 90 80 70 60 50 40 30 20 10 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 Public Sector Private Sector
  21. 21. Crowding out has real effects Déficit Financiero y Déficit Financiero e Tasa de Interés Inversión Privada (1982-1999) (1982-1999) 100 300000 90 250000 80 70 200000 60 50 150000 40 30 100000 20 10 50000 -5 0 5 10 15 20 -5 0 5 10 15 20 Déficit del Sector Público (% del PIB) Déficit del Sector Público (% del PIB) (miles de millones de pesos de 1993) (miles de millones de pesos de 1993) Fuente: SHCP y Banco de México
  22. 22. Conclusions • Initial reforms were in the right direction but they need to be implemented carefully. • Looking ahead requires the same basic principles: – Sound fiscal policies – Banking credit needs to recover.

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