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Mexico is in a unique position from the point of view its solid macroeconomic variables

Interview - November 7, 2012
The Mexican financial system is very solid, the banking system is well capitalized, it has capitalization parameters that are much higher than the rest of the world, and Mexican companies are fine because they aren’t highly leveraged

I would like us to make a comparison. You see a Mexico in 94-95, and see a Mexico with Tequila effect. And you see a Mexico in December of 2011 when Christine Lagarde becomes the director of the IMF, who says that Mexico is in an enviable position for all European economies and even for the U.S. From the point of view of this administration, what do you think has been the great secret that has had to put Mexico at current levels: with historical reserves, contained inflation and investment that ranks Mexico as the second Latin American country?

To start, it is a work of an administration; it is a work of a long time coming since 1982, with some setbacks along the way.

What Mexico sought to do is, first, to put their public finances in order. Mexico had a public finance system which was quite complex with a significant imbalance. Putting it in order is quite complicated and a good example is Greece today. The Mexican state, and therefore, public finances were very interrelated with the productive sector, accordingly the government produced a wide variety of goods from steel, televisions, bicycles, and all kinds of things. So first we had to get the government out of the production system without causing a major disruption.

Once this was done, we had to concentrate on the government spending, making sure the money was being invested in on the correct areas, and focused on where the government revenue/income was coming from.

It took many years to accomplish. Therefore in Greece it is clear that this will be very difficult. The structural adjustment plan that the Germans designed is unrealistic, clearly Germany, at least the Minister of Finance Mr. Schäuble ,had no experience in an adjustment program because an adjustment program, when the government is so involved in the economy, as it is in Greece, takes time.

Then, in Mexico it took some time to implement. In 1994, we had a crisis because the country tried to maintain a fixed exchange rate while trying to maintain a fixed exchange rate with a very strong pressure on the capital account caused by a series of political problems that year, and by an appreciation of the exchange rate that had been gathering since 1992 or 91, because they used the exchange rate as an anchor to reduce inflation.

All that said, what Mexico has followed is a very consistent fiscal and monetary policy, as a result, today we have a debt to GDP ratio of around 30%, with very low interest rates, fully payable, sustainable, one fully independent monetary policy and at the same time, an economic policy in different areas, such as the commercial sector, implemented consistently. It has been followed and that has given Mexico gradually a huge competitive advantage.

Brazil tried to repudiate the automotive agreement they had with Mexico (the trade automotive agreement with partial scope) when Mexico began to have a much higher surplus. A very mercantilist approach by Brazil.
Mexico has reached political agreements, where there has to be strong public finances, the central bank has to be independent by law, there has to be an open economy, and what's interesting is that this consensus, even if you interview left-wing Mexican politicians of the  PRD, it is a constant that they also share.
So Mexico could end the crisis of 2008 because the government understood very well that there was little room for fiscal expansion. The monetary fiscal expansion was done by The United States. So Mexico is in a unique position from the point of view its macroeconomic variables.

Let's talk about a very important issue requiring the financial system. Last year, on the Time magazine, the cover was not U.S. President Barrack Obama or Facebook´s Mark Zuckerberg, but the protesters. We were just talking about the 15th March movement in Madrid, and then, this whole issue came after the crisis in Wall Street and the sustainability in the global financial system. What do you think is the image we have of the financial system here in Mexico, of the Mexicans for the bankers?

The Mexican financial system is very solid, the banking system is well capitalized, it has capitalization parameters that are much higher than the rest of the world, and the Mexican companies are fine because they aren’t highly leveraged. In Mexico there was no leverage effect in the enterprises or households, that's the problem the U.S. had to deal with, and elsewhere. Here the problem is not caused by a bubble in the real estate sector or any other industry.

Then, when the economy starts to move forward in 2009 with a small bump in 2011, Mexican companies have the resources and borrowing capacity to take certain debt to increase their production levels, obviously they had some production, some capacity both used and unused.

This quarter is expected the Mexican economy is expected to post 4% real GDP growth. The Mexican economy will grow more this year than Brazil, It did last year. And what has happened is that an investor told me in London "Mexicans are quite boring but they are very consistent". Yes it is true, I wish we had done some very interesting things we have not done yet, but Mexico has been very consistent in its economic policy.

Speaking of interesting things, I would like to discuss the subject of internationalization. We were with Juan Pablo Cordoba from the Colombian Stock Exchange Market, and talked of Ecopetrol, Suramericana and the internationalization of Colombian companies. What is the attitude of Mexican companies regarding the internationalization?

Mexican companies are very international companies; even Mexican midsize companies are international. You can find small Mexican companies that sell specialty coffee, different kind of services or design companies selling their products in the U.S.

There is an organization called Endeavor, which is dedicated to promoting tiny companies to transform them into medium and large companies, it is interesting. Recently there was a prize competition, where I was invited to a jury and what is interesting is that many of these companies are seeing the Mexican market and the U.S. and as a single market.

Mexican entrepreneurs and I must say that there is a new generation of Mexicans managers younger than me, say in their 30s and early 40s, they are much more about businesses than it was my generation and see America as being quite normal. Therefore internationalization in Mexico is a natural phenomenon, much more natural than in the rest of Latin America, except perhaps Chile. Because the elder Mexican entrepreneurs had to adapt to a free trade agreement and the young entrepreneurs were born and raised in an internationalized economy closely tied to the United States.

And these entrepreneurs who have managed to internationalize, have understood that the stock market can be imperfect yet or the perfect support to do so, or not yet?

The Mexican Stock Exchange is relatively much smaller than the Brazilian Stock Exchange. It is a stock market that has changed a lot. The Mexican financial system has changed a lot in recent years because of, first, Mexico has created a pool of large institutional investors through pension funds with more than 130 billion dollars that did not exist before, which means, a few years ago they didn’t exist and when they came to the scene they were unable to invest in the stock market. Now you can invest in shares of almost any listed company.

So, that has helped us to have initial public offerings since the beginning of the Mexican market and agreements like the one recently made with Alpek. Alpek is a very large Mexican petrochemical company. It must have a market capitalization of 7 billion dollars, it went up about $800 million in an initial public offering, and increased up to 50% in Mexico.

We now have an important number of institutional investors that can, and they are playing a very interesting role. An advantage that Brazil had over Mexico before

Now, let's talk about MILA (Integrated Latin American Market). One sees that at the international level, there have been cases such as the Euronext Amsterdam Stock Exchange, Brussels, Lisbon, Mexico is still here, according to Bloomberg this morning, said that these are final weeks for entering Mexico in terms of regulation. If Bloomberg was right or not, I do not know, depends on them, but I'd like you to tell us what is the importance of MILA to Mexican investors?

No, that is not right. There aren’t ultimate weeks. MILA is very different from Euronext. Euronext is a company that was formed. Finally New York ended up buying the Euopean Stock Exchange and there is just a single European company that owns those stock markets, which is New York Stock Exchange Euronext.

MILA is simply a routing agreement. Routing means that orders are placed in a country and received orders arrive in another. And that has changed, financial investment flows can change significantly in between the four Latin American countries, which are now included in MILA, and eventually Mexico will be in.
But it isn’t a topic that I think that will make the Mexican Stock Exchange change or not, it is important and marginal but not a major issue.

And within the margins of this issue, who are the most supportive groups, the listed companies the intermediaries? … who is it?

Everyone is. All market participants are concerned that this will conclude and finish, and is going to end well.

Speaking of deepening or extension of this Stock Market, I have understood the Mexder and the agreement they have with the Chicago market, 2012 is one of the main objectives this institution has. What is being done about it and how it will be by the end of this year?

The Chicago market is the largest derivatives market in the world. The stock markets and financial markets are having a major change, going from doing transactions bilaterally between banks and between financial institutions, but are carried out through established markets. This is the Dodd Frank legislation in the U.S., Europe EMIR legislation and, well, with the millions JP Morgan lost last week and the pressure to dilute Dodd Frank, because I think it will greatly reduce or the regulators will not allow it.

The MexDer is an Established Derivatives Market in Mexico where we are working and there are especially many orders ranging from south to north, i.e., from Mexico to the U.S., companies are hedging their positions in copper, financial positions, etc. We expected to have much more flow from north to south but there wasn’t, therefore it is interesting, I think it is something that is obviously going to take its time to level up but is working and is doing so very well.

Jim O'Neill has put Mexico after the BRICS, as one of the future growth markets amongst dynamic emerging market. That makes investors more likely to invest in the country.

The BRICS is an invention of Goldman Sachs. I met people who coined that term. They put BRICS because "Mexico" did not fit in the BRICS. In other words, the "m" cacophony did not sound well. We are a much more important country than South Africa for example, in terms of per capita income, in terms of total income; we are a country that has a per capita income higher than Brazil, Russia, and obviously China and India.

The BRICS is an invention by Goldman Sachs and which became popular, and it is now common to hear of BRICS and Non BRICS, including the Financial Times has a blog called: "Beyond BRICS".

Mexico, I think is a very special country in that sense because it is a country with a very strong league in North America, it is a sophisticated country, a country that has a very special demographic: today and in the following, I think, 20 years, we will have a higher working population than those studying or retired.

So Mexico is a country with great potential: we will make a quantum leap and become a country with per capita income rising to $22,000 annually. That will depend largely on the economic policy that keeps pace that has continued and they now make some additional changes that give more flexibility to the Mexican economy.

The first one, I think, is that there is an absolute respect for the law, and we have a judicial system that is much more agile in order to solve problems that arise in any economy and in any contract, etc. But I think Mexico has a very important opportunity to grow and take a quantum leap very strongly in terms of income per capita.

The subject of the stock market sometimes is like the great unknown to, say, the everyday population, as it sounds massive, however, for "large" investors, can be a savings and investment system very important for any citizen. What actions, in terms of education or culture, is the stock market taking on the financial industry to raise awareness among Mexicans and how they can benefit from this strength that the country clearly has?

Well, as you mention, you're absolutely right. In other words, the stock market actually looks like a rich man's club. Here in front, with the reform, people who always walk by the stock exchange, see it and say, "well, here are the rich"-with other adjectives.

But what is interesting is that in Mexico pension funds have 24 million accounts, that does not mean that there were 24 million cardholders in pension funds, as you know, our social security system was converted to a system of individual accounts and not a pay as you go system as they do in the United States and as the vast majority of countries. And those 24 million Mexican account holders have AFOREs stocks because Mexicans now are able to buy stocks.

Mexico, curiously, has become a country in which there is a middle class, and lower middle class or middle-income groups, I mean, all Mexican workers in the formal sector. They are employed and belong to Social Security and, therefore, have an account in their AFORE, shareholders are involved in the Mexican Stock Exchange.
So there has been a major democratization of the stock market but either way it requires a great effort of education so that people understand what the stock market is, etc. But that is required in Mexico, Great Britain, Holland and all over the world.
Really as an educational and financial priority, I think it is much more important to start with simple things and then, go to the stock market. We have an area of education that works and makes it functional. What is interesting is that many Mexicans are increasingly becoming market participants.

And looking to the outside and the investor profile, because we talked about such as institutional investors AFOREs but abroad also many people would want to invest in the stock market in Mexico. What actions are also being taken to attract these investors, how is it promoted?

Mexico is one of the most accessible markets in the world, there can be foreign investment in Mexico with absolutely no problem, have direct access, they have to go through a stock market house but they have direct access to the Mexican Stock Exchange.

So there is no restriction for who wants to buy Mexican stocks in the Mexican market, they can do fine without any problems, and the fact is that it is being done. We have a very important activity for both institutional investors and individuals in the Mexican market that invests in other parts of the world.

And now, companies that are planning to enter into the stock market; will they be ten? What are their expectations and especially considering that there are elections in between?

The elections have no problem in terms the Mexican stock markets are open or not. What will happen is that right now nobody is going to put money on the markets because Europe has again created huge volatility in all markets: what happened between the French elections, the ongoing Greek crisis, Italian local elections, the Christian Democratic Party's defeat in Germany’s recent elections and the lack of a quick response to what happened in Greece.

It's amazing because some of Greece’s problems were resolved in December and we have experienced a complicated macroeconomic crisis, we know that the solution given was a short-term solution that would not work and obviously is not working. The combination of politics and economics as it has made markets volatile has had a significant drop in the past two weeks and; that makes Mexican companies that are looking to be on the market with valuations, they are waiting for adequate conditions.

The sustainability index for listed companies will be a real test to know the sustainability is in their DNA and not simply marketing and advertising?

Well, it was a real test and it was very interesting because the index has performed much more profitably, i.e., the shares traded in the sustainability index have performed more positively than the stocks in the beginning. So, it means that companies that are in the index are well-priced, therefore, I think more companies will have an incentive not only because they believe in sustainability, but by a real economic incentive.

In the next five years, do you see a stock market becoming more diversified on other sectors, such as renewable energy or others not participating to date?

Well, the sector is not participating to date in the Mexican market is the energy sector, and that depends primarily on the Mexican State changing the legal conditions for private investment in energy. I hope that changes. Enrique Peña Nieto, the winning candidate of the PRI, has openly said that he would make changes in this area.

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