Transcript The Peso Crash and Financial Market Performance in Mexico

The Peso Crash and Financial
Market Performance in Mexico
José Antonio González
Chief of Staff
Deputy Minister of Finance in Mexico
October 25, 2002
Outline
• Stylized facts about the financial market
performance in México.
• Some basic lessons:
– Monetary policy
– Good prudential regulation of banks
– Corporate governance
– Fiscal discipline
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
Like many other LAC countries, Mexico
embarked on an ambitious liberalization program
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1970 1975 1980 1985 1990 1995
Liberalization Index. Morley et al
Mexico
Chile
Latin America
Avg
Financial Development or Credit Boom?
Figure 3.1
Financial Sector Assets
120%
(% of GDP)
100%
80%
60%
40%
20%
0%
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Development Banks Assets
Public Bond Capitalization
Commercial Banks Assets
Private Bond Capitalization
Stock Market 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.
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
(Flows/GDP)
0.2
Foreign Savings
Private Bonds
Public Bonds
Commercial Banks
Development Banks
Gross Domestic Investmen
0.15
0.1
0.05
0
1988
-0.05
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Bank vs market based?: Wrong question
Bank Credit to Non-financial Private Sector/
Value Traded in the Stock Market
30
25
20
Relative Activity
Lower Middle Income(1986-1993)
High Income (1986-1993)
15
10
5
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Stylized facts conclusions:
financial depth is still shallow
Figure 3.2
Financial Sector Assets
450
400
350
250
200
150
100
50
itz
er
M land
al
ay
sia
U
J
n
U ite ap
ni d an
te
d Sta
K te
in s
g
G dom
er
m
an
Fr y
an
c
Sp e
Ca ain
na
da
Ch
M K ile
ex o
r
M ico ea
ex 19
ic 94
o
19
9
Br 9
A az
rg il
en
tin
a
0
Sw
% of GDP
300
Private Bond Capitalization
Public Bond Capitalization
Stock Market Capitalization
Banks Assets
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.
Monetary policy: The probability of a vicious exchange rateinterest rate cycle has diminished.
250
Indices Abril =100
130
230
210
120
Tipo de
Cambio
190
110
170
150
Fondeo
100
130
110
90
90
Abril- Octubre 1998
140
100
90
Fondeo
130
80
120
70
Tipo de
Cambio
110
60
50
100
40
90
Abril- Octubre 2001
n
pa
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
l ip
in
as
Br
az
il
In
A dia
r
M gen
ex
t
ic ina
o
19
Ec 99
u
Co ado
sta r
R
Co ica
lo
m
V
en bia
ez
ue
la
Pe
ru
er
G
Ja
% of GDP
Mexican banks need to recover
Figure 3.5
Bank Credit to Non-financial Private Sector
120
100
80
60
40
20
0
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
(% of good standing loans)
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
BBVA
BANCOMER
BANAMEX
SERFINSANTANDER
BITAL
BANORTE
SCOTIABANK
INVERLAT
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
ys
ia
U
.K
.
Ch
il
U e
.S
.A
.
Ja
p
Th an
ai
Ph land
M ilip
ex in
ic
o es
19
9
M Fr 4
ex an
ic
o ce
19
99
Sp
ai
n
In
G dia
er
m
an
y
Br
az
Tu il
Co rkey
lo
V mbi
en a
ez
ue
la
A Peru
rg
en
ti
Ec na
u
Co ado
sta r
Ri
ca
al
a
M
% of GDP
The stock market is shallow and needs
to develop
Figure 3.9
Stock Market Capitalization
200
175
150
125
100
75
50
25
0
A clear indicator of regulatory lag is poor
minority rights
Orígen de las
Leyes
(países)
Derechos
de
Accionistas
(0 a 6)
Derechos de
Acreedores
(0 a 4)
Eficiencia del
Sist. Judicial
(0 a 10)
Estándares
Contables
(0 a 10)
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).
As a result there has been a migration to
the US stock market
Indicators of migration by legal system
Capital Listed in US/Total capital
Firms with ADR in US/Firms listed locally
éx
ic
o
M
Fr
en
ch
vi
an
Sc
an
di
na
an
er
m
G
En
gl
is
h
40
35
30
25
20
15
10
5
0
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.
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.
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
Aseguradoras
Siefores
Rentas Vitalicias
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
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
Public Sector
1996
1997
1998
1999
Private Sector
2000
Crowding out has real effects
Déficit Financiero y
Tasa de Interés
Déficit Financiero e
Inversión Privada
(1982-1999)
(1982-1999)
300000
100
90
250000
80
70
200000
60
50
150000
40
30
100000
20
10
-5
50000
0
5
10
15
Déficit del Sector Público (% del PIB)
(miles de millones de pesos de 1993)
Fuente: SHCP y Banco de México
20
-5
0
5
10
15
20
Déficit del Sector Público (% del PIB)
(miles de millones de pesos de 1993)
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.