Liquidity: Tool to Boost Mexico’s Economic Recovery

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Whereas the pandemic greatly hurt Mexican businesses, the country’s reopening can place them on the path to recovery. But to achieve it, these businesses need access to liquid capital, argue financing experts. To boost the private sector’s cashflow in this crucial period, it is essential to build an investment-friendly environment and provide flexible financial support.

The pandemic hit Mexico hard, with the country’s economy contracting by 8.3 percent in 2020. While the GDP will likely bounce back 6 percent this year, the pandemic's overall negative impact is undeniable. SMEs have been affected strongly, said Alberto Saracho, Partner, McKinsey & Company: “Global markets experienced shocks in terms of demand and supply. People could not go to work. The service sector stopped from one day to the next. Companies went into savings mode and put their payments on hold.”

Mexico counts 4 million SMEs, most of which are small enterprises, according to the Organization for Economic Co-operation and Development (OECD). These businesses, which represent 12.4 percent of total gross production and employ almost half of Mexico’s workforce, were badly hit by the pandemic. But big enterprises are also facing tough times.

For most companies cashflow became a major puzzle during the pandemic but now that the economic reactivation has improved the panorama, liquidity continues to be a problem. Financial experts agree that access to funding is an ideal solution; but it is not a straightforward one.

In Mexico, private companies face four barriers to financing, said Mark McCoy, CEO, Banco Finterra. The first is enforcing the rule of law. The second is providing guarantees for foreign direct investment (FDI) and similar backing for private funding. This is not necessarily happening in Mexico, as evidenced by recent measures to curb private participation in Mexico’s energy sector. Third, Mexico requires improved infrastructure such as roads and access to water and stable electricity. Finally, more detailed regulation is also essential. While McCoy said that Mexico’s regulatory bodies in a variety of sectors are doing excellent work, there are some “areas of opportunity.”

“The rule of law is important to foster long-term investment, especially for SMEs,” said Francisco Lira, CEO, Banco Sabadell México. “If we can give strong certainty to investors, economic development can truly kick off.”

Fostering stable investment environments has yielded excellent results in Mexico’s past development. “When I drove through the Bajio region in the 1990s, people would only sell sweets and strawberries. This area has since turned into a crucial part of the global automotive sector,” said Saracho.

A local focus for private capital is therefore essential so more areas in Mexico can specialize and become significant hubs for the global and national industries. “Anchoring local capital is unbelievable important,” said Liliana Reyes, Director General, Mexican Assocation of Private Capital (AMEXCAP).  This capital should focus especially on companies in their earliest stages of development. “SMEs begin as efforts from single entrepreneurs and startups, but they need a lot of support to be able to grow. Who has not heard of Mexico’s five unicorns? The reality is that these companies require the attention of private capital to reach their goals and grow,” she said.

Successful startups such as Cornershop and Clip were also backed early on, allowing the platforms to become international success stories, said Reyes. But beyond support from private investors, blooming businesses need governmental support. “We believe that the government should be very concerned with fostering investment,” she said.

The of private financing institutions should not be understated either. Financiers did not come out of the pandemic unscathed: Lira estimated that demand for credit dropped by 3 percent. As the economy reactivates, banks can boost their own business and facilitate cashflow by taking a more flexible position in the market. “We can make asking for credit easier. Companies do not like to banks. In the best-case scenario, they see it like asking an airline for a refund. In worse cases, they have heard horror stories from family members,” said Lira. Banks can boost their reputation by making client interaction more pleasant and efficient by using online tools and focusing on customer experience. Financing institutions were able to comfort customers by being understanding of their situation during the pandemic, said McCoy.

Easy access to financing can be a boon for SMEs, said McCoy referencing Brazil’s case where businesses were able to access debt relatively easy. “We need to allow this to happen in Mexico too,” he emphasized.

A “close relationship” between finance and companies is necessary for faster operations, explained Reyes. “Business cannot stop and wait (for investment). They need to grow immediately when they find an opportunity,” she said.

A closer relationship stands to benefit both parties, said Lira. “Banks should be trusted advisors. The whole world asks for this but it is not a reality.” This can only be possible by addressing the major taboos permeating the financing world. “People should not be afraid of taking on debt, as long as the risks are calculated,” Lira explained.