Recovering from the hangover after the Tequila Crisis
For most of the 19th and 20th centuries Latin America's economic growth was shaped by foreign capital. American investment developed Venezuela's oil fields while British money built Argentina's railways. But one of the marked features of the current boom in the region is that domestic capital is increasingly being used to fund local growth. Moreover there is an increasingly sophisticated range of financial services available locally.
Nowhere is that more true than Mexico. Following the Tequila Crisis of 1994 the Mexican banking sector was in disarray. Defaults led to a loss of confidence and foreign investors removed their capital with lightening speed. But the reforms carried out since then have helped to create a strong, well-regulated banking sector. Indeed the reforms were so successful that a string of European financial firms subsequently spent billions of dollars snapping up local operations.
Another important factor was economic growth. Well-crafted regulations are no use if there is no action in the market. Fortunately Mexico has enjoyed steady economic growth over the last ten years. Public debt stands at 35% of GDP and falling (even using the most forgiving measures, Britain’s is well over 60%). Inflation, historically a bugbear, is hovering around 3.8% - below the upper band of 4% targeted by the central bank.
The rise of local money
These stable conditions have created the ideal conditions for domestic banks. In the last few years, as Mexico’s economy has picked up, more Mexicans have started to use banks. Between 2006 and 2012 the total number of bank clients in Mexico rose 62% to 52 million. Indeed between 2009 and 2011, the share of the adult population using some form of banking or financial product has risen to 58% from 48%. As a whole, total bank credit to the private-sector is growing at around 14% per year. This is good for the wider economy as extra credit fuels expansion. It is also good for Mexico’s banks, which are growing at great speed. Moreover, there is plenty of potential for further growth as Mexicans are still underbanked. The total sum of credit made available by banks and other financial intermediaries stands at just 34% of GDP, compared to 63% in Brazil and 93% in Chile.
The extra capital created by economic growth has also helped domestic bond markets to develop, expanded stock markets both in terms of size and offering - there are now many alternative markets in derivatives, exchange traded funds and private equity – and boosted pension funds.
Meanwhile cash-rich local groups are starting to reclaim the finance sector from international competitors. For example Santander floated 20% of its Mexican operations for $4bn, while locally owned Banorte spent $800million to buy up half of Spanish bank BBVA’s Mexican pensions business.
In many ways this is part of a regional trend. In 2012 Chile’s CorpBanca bought up Colombian Helm Bank for $1.3bn. That followed its June purchase of Spanish bank Santander's Colombian assets for $1.2bn. Earlier, in 2011, struggling Dutch finance group ING sold its Latin American assets. Though this time a Colombian firm, Grupo Sura, beat off competition from CorpBanca to win the $3.5bn deal.
Another sign of Mexico’s growing financial strength is fixed income. Unlike some other Latin American countries – such as defaulters like Ecuador or Argentina – there is huge demand for Mexican sovereign or corporate debt. And even in the context of the current emerging market sell-off they look more solid than man of their peers.
It helps that central bank governor Agustín Carstens is seen as a safe pair of hands. As finance minister, he hedged Mexico’s entire oil output just before the oil price tanked in late 2008. It saved the nation $8bn and - so the joke went - made him “the world’s most successful, but worst-paid, oil manager”.
But while the signs are encouraging it is too soon for the Mexican finance industry to rest on its laurels just yet. A lot of investment in the country is controlled by conservative family holding companies. These companies have a fine record of preserving wealth but their risk averse nature means that capital does not always flow to the riskiest investments, which are often those that most need it.
Slowly a new generation of investors are adopting more aggressive strategies "
Andreu Tobella, the co-founder of Clicab, a Mexican technology firm that has a developed a smartphone application that allows people to order safe taxis – a major concern in Mexico City – feels that Mexico’s venture capital scene, still needs much development. “Of course what’s happening higher up the foodchain, with some of the largest M&As is very encouraging for the country. However, at a startup level Mexico is still not there.”
Clicab is already operating a successful business but Tobella, who is currently organising a second round of investment, is finding it difficult to attract the right capital. “In Mexico prospective investors want security. They want to know that a company is profitable before investing more money. As I try to explain to them, for a venture capitalist firm to make really significant profits, it needs to be prepared to take on more risk.”
Nevertheless the situation is improving, says Tobella. “Slowly a new generation of investors are adopting more aggressive strategies.” If this final piece of the jigsaw comes into place Mexico will have the sophisticated local finance capabilities its thriving economy deserves.