Bank of Mexico Law Delayed Again

Changes to the Bank of Mexico Law have been put on hold until February 2021, for financial institutions and those involved to analyze the proposal thoroughly. The decision was the result of a clash of opinions and a depreciation of the peso after the Senate’s reform approval.

According to an article by El Economista regarding the Bank of Mexico Law release, part of the concern is that markets doubt that with this legal change the bank will maintain its autonomy. “The Bank of Mexico is the counterpart that has kept the peso stable thanks to its management of monetary policy, its credibility and international respect. President Andrés Manuel López Obrador has the famous ‘other data’ to support his administration: the peso and stable inflation,” mentioned Alejandro Valerio, Strategist of the international consultancy firm Frontier View, to El Economista.

Three important dates to take into consideration regarding this matter were Nov. 23, when the law initiative was first put on the map. The dollar at the time was sold at MX$19.99. On Dec. 9, when the Senate approved the law, the peso depreciated 1.9 percent at MX$19.74 per dollar. Lastly, on Dec. 15, the law’s postponement was announced and the peso reached an exchange rate of MX$20.24 at the beginning of the day, ending the day at MX$19.88, reported El Economista.

“Cashflows from illicit activities are possible, which can represent a significant risk for the domestic financial sector in its interaction with the international financial system,” Banxico’s statement warned, according to a previous MBN article. To address this, there is currently a proposal to create a "receipt" system that would improve the certainty around the money being handled. Still, Banxico would still be on shaky ground in the eyes of foreign markets.

Andrés Abadía, Senior Economist for Latin America at the international consulting firm Pantheon Macroeconomics, warned that if this law is approved, the Mexican economy's standing would be heavily punished in the eyes of foreign markets. There have already been repercussions in terms of how the country is seen. In London and other English-speaking countries, this law is already being referred to as the Laundering Bill, according to El Economista.

Abadía also mentioned relevant cases in other countries like Venezuela and Argentina, where laws like this brought problems in terms of deficit monetization, lack of confidence, dips in international reserves and high inflation. "The autonomy of a country's central bank is paramount. Events in recent decades highlight the disastrous result generated when governments begin to degrade that independence," he said.

The International Monetary Fund and the Center for Latin American Monetary Studies backed up Abadía's point, stating that the more independent a central bank is, the lower the inflation rate is and the simpler it is to meet sufficient growth and job goals, as mentioned in El Economista's article.