Mexico’s Financial System Will Survive the Storm

A recent report from financial authorities has declared the country’s financial system to be in robust health and well able to head off the current economic contraction that the world is experiencing. However, Banxico has warned against complacency and said that capital outflow has proven problematic to balancing books. Despite economic difficulties, remittance inflows have grown again as employment climbed.

All this and more in The Week in Finance!

Mexican Financial System Will Survive

A report by the Financial System Stability Council found that Mexico’s financial sector has “high levels of capital and ample liquidity” to cope with the current economic crisis.

The report published this week underscored the council’s opinion that though the economy is certain to feel pain into the next year as a severe contraction occurs, its financial entities will be able to withstand the assault. Among the positives noted by the report were “the price of the national currency against the dollar” that had “appreciated since April” and the measures that had been taken by financial authorities to ease difficulties, such as Banxico’s recent interest rate cut.

Banxico Governor Warns of Capital Flight Impact

Alejandro Díaz de León, Governor of Banxico, said in a Banorte podcast this week that the central bank’s last week’s decision to reduce the benchmark interest rate by 0.25 percent to 4.25 percent – the 11th cut since August 2019 – was partly influenced by capital outflow from Mexico since COVID-19’s appearance.

According to El Economista, foreign interests held 28.75 percent of the government securities in circulation at the end of 2019. This included CETES, M bonds and Bondes D bonds, that the government offers for investment to drum up capital. However, by Aug. 18 this year, the market share had fallen to 22.9 percent of the government securities in circulation.

The governor explained that Banxico’s governing board has been attempting to “find balance between the favorable financial conditions that allow an orderly adjustment to the market and guiding medium and long-term inflation expectations” for the last four to five months and that this drop in securities holdings had “made adjustments in the financial markets more complex.”

Remittances Remain Strong

Remittances that are so vital to millions of Mexican families have grown for the fifth straight month, hitting an annual increase of 5.32 percent as migrants outside of Mexico continue to support their loved ones.

Mexican homes have now received US$26.395 billion from January to August this year, says El Economista, an unprecedented figure.

According to the Head of Economic Statistics at the Center for Latin American Monetary Studies Jesús Cervantes, the most recent push of remittances, which is buckling the trend that many experts had predicted at the start of the year, is down to increases in employment levels of Mexican migrant workers and a parallel decrease in the unemployment rate between May and August.

Director General of Western Union Mexico Pablo Porro told Mexico Business news this month that “Mexico is the third-largest market for cross-border person-to-person finances worldwide, behind corridors in India and China” and that “though Mexico ranks third globally in terms of inflow, the outflow of remittances from the US into Mexico is the single-largest cash corridor globally.”

Read the full interview here.