The IMF describes Mexico’s fiscal position as solid. Fiscal credibility, underpinned by prudent management and a strong framework, permitted a countercyclical response during the financial crisis.
The IMF describes Mexico’s fiscal position as solid. Fiscal credibility, underpinned by prudent management and a strong framework, permitted a countercyclical response during the financial crisis.
“The envisaged fiscal consolidation during 2010 to 2012 will return the structural fiscal stance to pre-crisis levels. Mexico is expected to return to the budget balance specified under the fiscal rule in 2012 and maintain it thereafter, ensuring a stable public debt path,” writes the IMF in a recent report.
It is one of the reasons that PIMCO founder, managing director and co-CIO, Bill Gross, points to the country as a desirable investment destination which, along with Canada, Brazil and Australia, he says has a “cleaner dirty shirt” compared to the US, Europe and Asia.
Still, the region faces significant long-term challenges that are not easily appreciated in a standard medium-term analysis, notes the IMF. The combination of age-related spending pressures and declining oil revenues implies that sustaining prudent levels of public debt would require a large (non-oil) revenue mobilisation effort and an expenditure reform strategy, while corrective measures may have long implementation lags.
The projected real GDP growth (accounting for inflation) for 2012 is 4.1 per cent and is expected to ease to 3.3 per cent between 2013 and 2015.
The slowdown is in part because the US accounts for some 70 per cent of Mexico’s exports. This means the country’s economy is particularly exposed to a material deterioration in US demand given the sluggish contribution from domestic growth, says Standard Chartered in a recent report.
“Mexico is not only vulnerable to US-centric shocks, but the knock-on effects from declining oil prices result in a ‘double whammy’ given that Mexico is an oil exporter,” says Standard Chartered, adding that the Mexican peso is, at its core, a US and global growth play.
Gloria Roa, head of custody services at BBVA Bancomer has a different angle.
“Our currency, the Mexican peso, is one of the thirteen most traded currencies in the world. It is traded 24 hours a day, which gives it great liquidity,” she says.
BBVA research shows that inflation is at a comfortable level with any rallies over four per cent highly unlikely, while Mexico’s exposure to the sovereign debt crisis in the eurozone is limited because of a low trade relation with the region.
So, although there are risks looking into the future, the immediate macroeconomic woes rattling markets are somewhat tempered.
BBVA Bancomer is one of four major players in the custody business in Mexico, along with Santander, Banamex (owned by Citi) and HSBC, providing services for financial institutions, pension funds and foreign banks that have customers holding Mexican assets like government entities, insurance companies, private corporations and trusts.
Though Mexico is not immune to global market turmoil, Roa has observed an increasing demand for professional custody services in the country.
“Companies perceive an increasing need to demand professional asset custody services, especially the treasuries of corporations, but we have also observed mutual funds starting to take advantage of having a professional custodian. As I say to my customers, we are your eyes and ears in the Mexican market, so you will always be informed,” she says.
Customers, she adds, are more sophisticated each day as well as cautious about taking unnecessary risks. In response, BBVA Bancomer provides transparency, real-time information and straight-through-processing (STP), which reduces the need for manual transmission.
Along with asset custody and safekeeping, cash management and other security services solutions, BBVA Bancomer is an ADR issuer.
“There are two ways of seeing the custody business - some consider it as part of the service for a broker house or as part of broker activity, but at BBVA and in other banks, we conceive custody as a business itself, while complying with “Chinese wall” practices”, she says.
The biggest risk going forward, Roa says, is keeping up to date on technological developments in order to provide real-time data and response that clients demand for customised reporting, often related to regulation compliance. At the same time, the pressure is on to keep commissions low in a fiercely competitive market. That has not stopped the bank from moving forward with expansion plans, taking advantage of the BBVA Group’s presence in other countries to attract clients seeking a custody services provider with a local presence in Mexico.
“Since September 2008, the financial environment has been very challenging for custodians and many things have changed, at BBVA Bancomer the customer’s assets are in Mexico with a Mexican custodian. Here it is a straight line so you know where your assets are kept without the intervention of third parties,” she adds. “The confidence and simplicity in providing our custody services has enabled us to obtain a leading position in the market.”
Think global, act local
Most asset servicing providers in the Latin American space note that investment activity and fund development is most pronounced within and between the region itself.
Mexico is no different, which is why an innovative product, referred to as a “reverse ADR” allows for any Mexican investor to access international securities through local infrastructures.
For the past decade, Deutsche Bank has been active in building the Mercado Global, the international market segment of the national exchange, Bolsa Mexicana de Valores (BMV) and, since starting to list these reverse ADRs, offers 653 international securities, of which 325 are in equities, 320 are ETFs as well as a few bonds (public information from Bolsa Mexicana de Valores), says Dirk Reinicke, regional head for Latin American Direct Securities Services and global head of transferable custody receipts for Deutsche Bank.
In providing access to the international market place for the Mexican investor, Deutsche Bank works with the entire local market infrastructure supply chain – custodians, brokers, the exchange itself and regulators. The firm is currently evaluating expansion of both transaction banking in the country as well as widening its product range.
“Mexican investors can now go to their local broker and through the local exchange to access the securities world, be it US, European, whether an ETF or a share. The Mexican investor can negotiate foreign shares, in pesos, at the local exchange,” Reinicke says. “Today the international market segment accounts for between 25 and 30 per cent of the daily trading volume of the entire exchange.
Though the assets are unique and require a high level of expertise to service, the idea is not unique to Mexico as Deutsche Bank has launched products in Argentina and, more recently, in Brazil, Chile and Colombia, though Mexico is clearly the front runner for uptake and growth at this point.
Deutsche Bank has been looking to create and develop these international market segments where the entire value chain remains in the local exchange, the local CSD, with local participants, and the local broker dealers.
“We see the trust and securities business growing in Mexico, have established risk controls and are being very selective going forward but at the same time seek to expand in the Latin American countries where Deutsche Bank has a presence,” Reinicke adds
