Mexico is suffering from volatility in the peso, its national currency, and the fear of inflation in the financial markets. The man in charge of resisting the financial system is Alejandro Díaz de León (Mexico City, 1969), governor of the Bank of Mexico. These are not the only challenges for the economist, whose term ends in December with the possibility of extending it one more period. In recent months, Díaz de León has faced a controversial bill in Congress that would transfer the risk of money laundering to the bank and violate its autonomy.
Prudence is perhaps the most important skill of the head of a central bank. An over or under word can trigger a panic in the markets. The governor dominates it. In an interview, he talks about the foreign capital that has left Mexico and is optimistic about the boost that the economic stimulus from the United States may have on the Mexican economy.
The Mexican peso has depreciated 11% against the dollar since February last year, when markets began reacting to news of Covid-19 around the world. So far in 2021, depreciation has accelerated. Although financial risks and pressure on the currency have intensified, the official assures that Mexico is well positioned and hopes that any adjustment in investor portfolios will take place in an orderly manner.
Ask. There are fears of a correction in the markets that could trigger an outflow of capital from emerging economies. What is your perspective? Is Mexico prepared to face severe financial instability?
Answer. This time it has to do with the large fiscal stimulus of 1.9 trillion dollars in the United States, which is almost 9% of its gross domestic product (GDP), on an already large deficit. That is what you have with the doubt of the markets, how much is this spending on public finances going to translate into inflationary pressures? This is what we are seeing, the pressure on rates in the US that is reflecting that the recovery at the global level is going to be markedly heterogeneous. There are two engines of support for recovery: one has to do with the dynamics of the pandemic and progress in vaccination processes, and the other with spending incentives. In both, the United States has important progress and good prospects. These are two elements that are giving rise to this adjustment with this pressure on interest rates among emerging economies and also, even, to portfolio adjustments that are giving rise to depreciation of the currencies of emerging economies. The challenge for the Mexican economy has two components. The expansion in the United States and this improvement in its growth prospects has a positive effect on economic activity, on the increase in exports, even on the income of compatriots in that country who send remittances. On the other hand, there is the financial challenge, which has to do with achieving an orderly adjustment in national markets. We have been seeing some adjustment in medium and long-term rates in Mexico and also some volatility in the exchange rate. As long as we have a solid macro framework, both with stable public finances, with low and stable inflation, and with a solid financial system, we can avoid a disorderly adjustment due to this situation.
P. Mexico has lost 350,000 million pesos of foreign capital since the pandemic began. We also know that JP Morgan is closing its private banking operations. Are we seeing a capital flight?
R. Last year there was a reduction in foreign holdings of government securities. I think it is due to several factors. They probably had an important position of this type of instrument in their portfolio and in the face of the environment, the recomposition of flows, the aversion to risk, etc., there was a reduction. This has been assimilated with order in the financial market. Otherwise we would not have had the interest rate reduction that we had from May and June, towards the end of the year and the beginning of this. The same in the exchange rate. There was a portfolio adjustment, which was of a significant amount. I would say that this adjustment, in some way, has stabilized those flows. The JP Morgan thing has to do with a turn in the business of a global bank, which is more of a particular element. I believe that part of the challenge is for the markets to adjust in an orderly fashion and I believe that both rates and the exchange rate reflect that, despite last year’s shock, we have managed to have an orderly adjustment.
P. The bank made 750,000 million pesos available to the banks. Part of the resources were to facilitate loans to small and medium-sized companies and individuals. However, the Treasury said the banks were not using the money. Is this one reason the economy hasn’t picked up?
R. The measures that we put in place seek to provide financing and liquidity to the financial markets, not necessarily all the facilities have to be used to their maximum capacity. The mere fact that intermediaries know that these facilities are there modifies their behavior and makes them more willing to carry out loan practices. Now, in the line that you indicate, the one that has to do with the financing of micro and small companies and also households, that has been one of the lines with the least use. I believe that there are several things that are happening in terms of financing. It has been seen that many of the bank’s clients have increased their savings. Partly because they do not have the possibility to make the expenses that they usually did. Some of these liquidity facilities, which may have been very evident and very necessary in the first months of the shock, throughout the year and until today have been less necessary as they have more liquidity due to the increased deposits. .
On the other hand, in terms of risk and credit operations, almost all credit items have slowed down, such as mortgages. That reflects several things. First, that Mexican families, households, individuals and also companies feel less confidence to assume a debt due to the uncertainty that their sources of income may have. Second, banks can identify that, faced with the shock of the pandemic, there are projects and there are sectors that are riskier and that are not necessarily good subjects of credit as they were before. That also makes it more difficult for there to be this intercession between whoever demands the credit and the manager that can be provided. There can always be reflections on whether the financing of micro and small companies, which are among the most affected, can be reactivated in a more agile way. I would say that the balance sheets are solid, with high capitalization levels. The level of nonperforming loans has been low and I believe that the banks are in a good position to reactivate financing as households and companies have greater need and more confidence and that there is also greater clarity on social risk.
P. Together with the Ministry of Finance, the bank announced measures for migrants to bring their remittances in cash, solving a problem that the reform of the Bank of Mexico Law was intended to address. Do you expect the initiative to be discarded in Congress?
R. What we have to do after this reflection on how to improve the cash-for-profit circuit, in the first instance, is to ensure that Mexican migrants can find exchange points that are safe and in good condition on their internment trips to visit their families. So we, in terms of this diagnosis and this area of opportunity, our turn was to be constructive. The actions that were announced seek to advance care and be respectful of what the Legislative Power determines.
P. Before these actions were announced, the bank itself warned about the risks that the reform could bring to the financial system. Has the perception of the bank changed?
R. The points that we make and highlight are there. The bank’s vision, our diagnosis and our vision are very clear. Is it so on our page in a series of documents. What has changed is that several weeks ago there was this commitment by the financial authorities in ways of attending to the problem that had been diagnosed and without us deciding what someone else should or should not do. Our diagnostic elements are and are what we have expressed. We are constructive in advancing tools for solving that agenda and we are also respectful of the powers and the reflection made by the Legislature.
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Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.