Mexico and the US: Rising Volatility, Economic, Finance, and Bank Risk
Congreso de Investigación
August 27-28, 2015
For the US and Mexico:
Financial and Economic Risk
on the Horizon
Senior Fellow at Demos
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
Ten Major Types of Risk
• Economic / Central Bank
• Capital Flight
• Interest Rate
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..
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.
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
• Three Chinese Yuan devaluations in August.
• Global “Currency Wars”
• Higher US rates can cause capital outflows.
• 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.
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.
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.
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.
• International remittances $583 billion in 2014,
$436 billion from developed to developing
• 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.
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
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
• Increase Cash Reserves / Stay Liquid in advance.