‘Til Debt do us Part’-Mexico Financial Reforms
A package of financial reforms proposed in Mexico has quietly been presented to congress. Although it hasn’t garnered much attention anywhere but in the business press, the proposal hasn’t escaped the attention of the U.S. financial sector. But critics argue the reforms could increase consumer debt and repossessions in Mexico, and lead to publicly funded bailouts of foreign-owned banks.
On May 8, Mexico’s Finance Ministry (SHCP) presented the financial reform to congress. The reform is 927 pages long, consisting of 13 decrees, which will amend 34 federal laws. The same day as the reform was published, Fitch Ratings raised Mexico’s credit rating to BBB+, citing “greater than anticipated commitment of the new administration and Congress to pass structural reforms.”
The financial reform follows controversial labor and education reforms that lowered minimum wage and introduced standardized testing for teachers.
In a speech delivered the day the financial reform was presented, Finance Minister Luis Videgaray explained that the reform aims to increase competition in the banking sector and creating incentives for lending. Videgaray twice pointed to Chile, long the Latin American poster child of neoliberalism, as a model for Mexico’s financial system.
“A poor track record of paying back loans, limited consequences for non-payment and a challenging legal environment for collections also dull lending in Mexico,” reads an article in the Wall Street Journal. Among the key objectives of the bill, according to U.S. law firm Gardere Wynne Sewell LLP, is “Improving trial procedures seeking faster resolution of controversies and granting enhanced rights to lenders through the courts, which are likely to expedite collections.”
The Mexican Banking Association (ABM), which represents the largest banks in the country, immediately indicated its support of the proposal.
But not everyone is convinced that Mexico’s financial reform is everything its boosters pretend. Dr. Luis Ignacio Román Morales, a professor and researcher in the department of economics, administration and finances at the Western Institute of Technology and Higher Education (ITESO) in Guadalajara, Mexico, says it is the big banks that will come out stronger with the reform.
“The Mexican system is profoundly monopolized, between Banamex, which is to say Citibank, and Banco Bilbao Vizcaya Argentaria, they basically control the financial system of the country,” said Román Morales in an interview with the Americas Program. “If you add three more, Banorte, HSBC and Santander, the control of the Mexican economy is practically total. So the economy is extremely dependent, and dependent on transnational actors, because the only bank of Mexican capital is Banorte.”
A ccording to the Mexican government, the financial sector is the second most important area for Foreign Direct Investment, after the Maquila Sector. In 2011, FDI in Mexico stood at $19.43 billion, primarily in the manufacturing sector (44.1 per cent) followed by financial services (18 per cent) and mining (8 per cent).
The reform, according to Román Morales, would privilege these foreign interests and could lead to the “devastation” of credit unions and smaller savings banks, especially in rural areas.
“The financialization will take place through an increased penetration in small and medium-sized communities, including poor and rural areas, that could finally mean an even deeper process of indebtedness of a good part of the population of Mexico,” said Román Morales. “For the banks and financial institutions in general, it will become much easier to collect from the debtor. That’s very serious on a number of levels.”
Ejido land, which was formerly only owned by groups of farmers, can, since pre-NAFTA Constitutional reforms were passed in 1992, be parceled and converted to private property. Once made fee-simple, these lands could be collected for debts in the countryside, further devastating the rural land base of small producers. “In other words we could go back to having banks as our major land owners,” said Román Morales. Banks could also seize goods and real estate for non-payment, and take over small businesses.
Isabel Cruz Hernández, director of Mexican Association of Credit Unions in the Social Sector (AMUCSS) and President of the Latin American and Caribbean Forum on Rural Finances, points out the financial reform will not assist the millions of Mexican farmers who have resisted converting their lands to fee simple title.
“Those who receive credit are those who have material guarantees, but 80 per cent of our farmers have social property, which is to say, they’re part of ejidos and they can’t use their land as collateral for a loan, that is forbidden by the constitution,” said Cruz Hernández in an interview with the Americas Program. “This reform will never, benefit [farmers with less than 5 hectares or using ejidal land], never ever, and there is no movement within the financial reform to ensure that rural and agricultural credit can be activated for food production.”
Both Román Morales and Cruz Hernández are concerned about the role of the Mexican Development Bank.
“In the reform, the Development Bank is conceived of fundamentally so that it does not compete with private banks, which means that if private banks offer riskier credits for investments in production, if those investments aren’t profitable and fail, theoretically it’s the bank that loses, but as the bank will be financing those projects together with the public Development Bank, in the end it becomes public debt,” he said. “In the end it’s not the bank that comes out for the worse, but the country.”
“The financial reform opens up the Development Bank as a source of lending capital for private banks, which is absurd, because they have a lot of money that they aren’t lending, they don’t lend more than 40 per cent of what they hold, so there’s an enormous over-liquidity in the financial system which isn’t going back into the economy, and still, the government is offering access to the Development Bank,” said Cruz Hernández. Though guardedly optimistic about some parts of the reform, Amucss wasn’t consulted in the lead up to the reforms. Cruz Hernández emphasizes that her organization’s concerns far outweigh their hopes for the reform, which she says won’t help urban poor and especially rural families get access to credit.
According to the National Council of Peasant Organizations (CONOC), of which Cruz Hernández is also part, the the Trusts Related to Agriculture (FIRA), the rural bank, and the National Savings and Financial Services Bank (BANSEFI) are not considered in the proposed financial reform. “The financial reform doesn’t make a single mention of how to improve their operations, by integrating into a single rural development bank that includes savings, credit, insurance, training, technical assistance, commercialization, etc, or specializing each of the three entities in order to improve equity and access for producers to credit and to recognize rural savings as a jumping off point for productive credit…” according to a position paper by CONOC.
Perhaps because of the favors to large banks at the expense of economically marginalized groups, Mexico’s macro-economic policy making has garnered high praise over the past years. The International Monetary Fund has cheered on the financial reforms, underscoring their importance towards the privatization of Petroleos Mexicanos (Pemex). Mexico’s Finance Minister has admitted that the financial reform is complementary to other reforms currently being pushed ahead in Mexico by the Pact for Mexico, supported by all of the major political parties. In December 2012, the IMF awarded Mexico a $73 billion loan renewal, noting “a broad structural reform agenda would be needed to unleash Mexico’s growth potential.”
US President Barack Obama sung the praises of Mexico’s recent reforms during his visit in May, days before the text of the financial reform was released to the public. “I want to commend President Peña Nieto and the Mexican people for the ambitious reforms that you’ve embarked on to make your economy more competitive, to make your institutions more effective,” said Obama.
While Obama was careful to emphasize that Mexico’s reforms were designed in Mexico, USAID-backed groups in Mexico have been promoting a version of financial reform which appears to be very close to what was presented to congress on May 8. The USAID funded Centre for Research for Development, for example, made a series of recommendations for the reform of the financial sector, which are primarily focused on credit card lending, and not other forms of extending credit and banking services to economically marginalized areas.