Banxico Identifies Weaker Economic Activity, Liquidity Needs

Alejandro Díaz de León, Governor of Banxico, said that the economy is facing a very complicated scenario and will continue to do so in the next few months. In an interview with newspapers El Financiero and El Economista, Díaz de León said the combination of the adversity the global economy is facing, an acute financial shock, portfolio adjustments, FX adjustments, interest rates and risk premiums has created an adverse scenario for the national economy.

According to Díaz de León, the current environment could lead to a GDP fall of 5 percent for the first half of 2020. “We have identified an environment of economic contraction, uncertainty and risk aversion that can impact the economy’s credit channel when it is needed the most. Right now, both, businesses and homes need financing,” said Díaz de León to El Financiero.

However, the adverse local environment is nothing new and was already experiencing deceleration before the COVID-19 sanitary emergency fully hit the country. According to data from INEGI, the Global Indicator of Economic Activity (IGAE) registered in February 2020 a 1.6 percent annual contraction. This contraction had not been seen since the 2009 financial crisis. According to the IGAE, the activity that was the most hit was agriculture, which experienced an 8.3 percent contraction against February 2019. Secondary activities like manufacturing, construction, energy production and mining presented a 3.5 percent fall, while the tertiary sector presented a 0.3 percent contraction.

A weaker economic activity and the exit of foreign capitals were among the factors that led Banxico to a reduction in the reference interest rate for the country and the MX$750 billion (US$30.14 billion) injection to the financial system. Díaz de León told El Economista that Banxico has been monitoring for several weeks the operations of markets and has identified particular opportunities for Mexico. According to the Governor of Banxico, the MX$750 billion (US$30.14 billion) are a way to eliminate the current bottleneck that exists for new credits, specially for companies that do not have access to financing in the current economic juncture.

Díaz de León says that Banxico expects MSMEs that receive financial support will be able to return to their activities faster and more easily. According to him, commercial banks are aware that in times like these, economic relief measures and additional financing are what credit holders need to survive the current emergency period. Díaz de León says that in the next two weeks, Banxico will be sending the details of the operation to commercial banks, so credit holders will have to wait for a few more weeks before the funds are channeled to them.