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Congreso de Investigación
Financiera IMEF
Universidad Panamericana
Mexico, D.F.
August 27-28, 2015
For the US and Mexico:
Financial and Economic Risk
on the Horizon
Nomi Prins
Author, Journalist,
Senior Fellow at Demos
US and Mexico Linkage
• Mexico economy and capital markets tied to:
– US economy / Trade (US top partner of
Mexico/ Mexico...
Ten Major Types of Risk
• Economic / Central Bank
• Capital Flight
• Liquidity
• Currency
• Interest Rate
Ten Types of Risk (continued)
• Oil / Commodity
• Credit Default / Derivative
• Remittance/ “De-risking”
• Bank Concentrat...
Capital Flight & Liquidity Risk
• Excess liquidity from central banks does not
stimulate general economy, but does move
sp...
Currency & Interest Rate Risk
• Mexican Peso at historic lows vs. US dollar,
above 16 per dollar, down 25% in past year.
•...
Oil Risk
• External private oil firms allowed to operate
(w/Pemex) for first time in Mexico since 1938.
• Mexico exposure ...
Credit Default Risk
• Speculative Capital attracted to high-yield/ EM
bonds in low interest rate environment.
• Corporate ...
Too Big to Fail /Concentration Risk
• Mexico has highest concentration of foreign-owned banks.
• G7 banks in Mexico hold 8...
Risk Enabling Central Bank Policy
• Big banks / capital markets have been fortified by
governments and central banks since...
Remittance Risk
• International remittances $583 billion in 2014,
$436 billion from developed to developing
countries.
• M...
Geo-Political Risk and
Four Drivers Of Volatility
1. Central Bank policies
(Interest Rate / Currency)
1. Debt / Default
2....
Que Podemos Hacer
What Can We Do? Reducing Risk
• Decrease debt (Public debt in Mexico rose to 44%
of GDP in 2014 from 36%...
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Mexico and the US: Rising Volatility, Economic, Finance, and Bank Risk

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Nomi Prins: Presentation to the Annual Financial Investigation Congress in Mexico City, August 28, 2015 on Economic and Financial Risks for the United States and Mexico

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Mexico and the US: Rising Volatility, Economic, Finance, and Bank Risk

  1. 1. Congreso de Investigación Financiera IMEF Universidad Panamericana Mexico, D.F. August 27-28, 2015
  2. 2. For the US and Mexico: Financial and Economic Risk on the Horizon Nomi Prins Author, Journalist, Senior Fellow at Demos
  3. 3. US and Mexico Linkage • Mexico economy and capital markets tied to: – US economy / Trade (US top partner of Mexico/ Mexico third of US) – Federal Reserve Rate Policy – Peso / US dollar fluctuation – US bank (and European bank) Activity –Foreign Investors and Speculators
  4. 4. Ten Major Types of Risk • Economic / Central Bank • Capital Flight • Liquidity • Currency • Interest Rate
  5. 5. Ten Types of Risk (continued) • Oil / Commodity • Credit Default / Derivative • Remittance/ “De-risking” • Bank Concentration – Too Big To Fail / Crimes • Geo-Political / Political-Financial Relationships Volatility in any one risk is hazardous independently, far worse together..
  6. 6. Capital Flight & Liquidity Risk • Excess liquidity from central banks does not stimulate general economy, but does move speculative capital around the globe through big banks in search of short-term opportunities. • Capital always exits more quickly than it enters a country or asset class. (bonds, stocks, property) • Looming US rate hike, or rumor, may spur capital flight from emerging markets previously been considered more stable, such as Mexico, first.
  7. 7. Currency & Interest Rate Risk • Mexican Peso at historic lows vs. US dollar, above 16 per dollar, down 25% in past year. • Brazilian Real down 53% vs. US dollar. • Euro at lows, core vs. peripheral problems (Greece, etc.) • Three Chinese Yuan devaluations in August. • Global “Currency Wars” • Higher US rates can cause capital outflows.
  8. 8. Oil Risk • External private oil firms allowed to operate (w/Pemex) for first time in Mexico since 1938. • Mexico exposure to oil price volatility (Government announced spending cuts by .7% of GDP for 2015 because of oil price drops). • Oil activities - one third of national revenue. Exports fell 45% first half of 2015. • Lower oil profits increase default probability/ decrease internal expenditures on public. • Oil prices down more than 60 % in past year.
  9. 9. Credit Default Risk • Speculative Capital attracted to high-yield/ EM bonds in low interest rate environment. • Corporate bonds bought by foreign investors, exposed to credit default and currency risk. • EM non-financial corporate bond market doubled to $2.4 trillion in 2014 from 2009 due to low rate central bank policy. • Oil company defaults / non-performing loans rising everywhere on US dollar strength.
  10. 10. Too Big to Fail /Concentration Risk • Mexico has highest concentration of foreign-owned banks. • G7 banks in Mexico hold 81% of all bank assets. • Top 5 banks in Mexico hold 72% of all financial assets (only 1 – Banorte-Ixe is local). • Top 5 foreign banks hold 64% (from 69% in 2008). • “Non-bank” banks hold just 3.8% of financial assets. • In the US, Big Six banks hold 42% deposits / 96% of US derivatives. JPM Chase holds 9% of global derivatives / Citigroup holds 8%. • Bigger banks, bigger problems. • Smaller banks, smaller problems.
  11. 11. Risk Enabling Central Bank Policy • Big banks / capital markets have been fortified by governments and central banks since 2008 financial, creating asset bubbles and giving “crime” a pass. • US Fed holds $4.5 trillion / ECB E2.5 trillion securities. • US and European banks have paid $130 billon in settlements since crisis, plus get central bank aid. • Bank of Mexico slashed 2015 growth estimate to between 1.7% and 2.5% from 2% to 3%. • Bank of Mexico announced two –month plan of $8.6 billion in Pesos to defend Peso.
  12. 12. Remittance Risk • International remittances $583 billion in 2014, $436 billion from developed to developing countries. • Mexico: 4th largest remittance recipient in 2014. ($25 billion). • De-risking hampers this flow of funds. • Not all cash is “criminal” but is still effected. • Foreign banks charging more, closing branches, or diverting funds elsewhere hurts national economies / revenue streams.
  13. 13. Geo-Political Risk and Four Drivers Of Volatility 1. Central Bank policies (Interest Rate / Currency) 1. Debt / Default 2. Geo-political Tension 3. Financial industry manipulation
  14. 14. Que Podemos Hacer What Can We Do? Reducing Risk • Decrease debt (Public debt in Mexico rose to 44% of GDP in 2014 from 36% in 2012.) • Decrease new issuance or fund more locally. • Decrease leverage. • Reduce bank concentration. • Increase localized financing activity as hedge for external factors. • Increase Cash Reserves / Stay Liquid in advance.

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