In 2014, Mexico enacted a much-publicized overhaul of its financial industry. Three years later, optimism remains high, but industry leaders say the transition to a high-performing economy is still a work in progress.
When Mexico overhauled its financial industry three years ago, most experts agreed that the moves were a step in the right direction. The question now: can the country’s economy accelerate to a sprint?
REACHING FOR REFORM
The amount of bank credit in Mexico has lagged significantly behind that in competing countries. Economists worried that the situation was holding back economic growth. In 2014, the country’s political leaders decided on a potential solution. They passed a package of improvements, which, among other things, strengthened property rights protections for creditors and formalized banking industry regulations that they hoped would spark greater competition among financial intermediaries.
Mario Maciel Castro, CEO of the banking firm CIBanco, says the reforms have not yet lived up to their full potential, but he remains optimistic. A number of sectors in the Mexican economy are poised for rapid growth, and that growth is made more likely with the reforms included in the 2014 legislation. “These measures have the potential to foster a more competitive, consumer-friendly, and healthy banking system,” he notes. A stronger financial sector will drive growth in GDP and also force down borrowing costs. This could have a major impact across the Mexican economy, but the banking executive highlighted a handful of areas where he thinks the potential is particularly high.
GEARED FOR GROWTH
Mexico’s aerospace sector has been growing at a supersonic speed of nearly 20 percent per year, making the nation an increasingly important international hub. The country’s medical devices sector, meanwhile, is attempting to generate growth by positioning itself as a lower-cost alternative to the United States. In the telecommunications sector, a series of recent industry reforms hold the promise of sparking competition in an industry that had long been dominated by an entrenched media monopoly. Maciel Castro believes that those industries will complement Mexico’s traditional strength in business sectors such as automotive, electronics, and household appliances.
ENERGY UPS AND DOWNS
The future is not so clear in the energy sector. The one definite bright spot is in renewables. Nearly one-quarter of the country’s installed energy capacity now comes from renewable sources, including wind, solar, hydroelectric, geothermal, and biomass power. That growth in green energy comes amid a backdrop of uncertainty; the country’s traditional energy industries face steep headwinds. A major drop in oil prices has hobbled Mexico’s government, which gets nearly one-third of its public revenue from the oil industry. Officials have responded by cutting the federal budget and trimming the budget of the state-owned oil and gas giant, Pemex. Maciel Castro points to those moves as helping the country avoid a large-scale financial disaster: “We believe the Mexican economy has enough fundamental strength to avoid a crisis and grow above two percent this year.”
At the same time, he sees an opportunity to lower the country’s high electricity costs through the funding of infrastructure projects that will help transport lower-cost gas imports and offset a decline in crude oil production. “Here, banking institutions will play an important role as a means to finance profitable projects,” he affirms. He adds that both traditional and alternative energy production will attract interest from investors in the future.
MARKETING TO MAIN STREET
While Maciel Castro sees room to facilitate growth in other industries, he says that banks still have plenty of work to do on the retail level. “In Mexico, there is still insufficient bank penetration.” Mexico has a small number of savings accounts relative to the population, even though the numbers of branches, ATMs, and point-of-sale terminals have increased over the last 20 years.
The biggest problem appears to be the high cost of servicing low-income communities in isolated locations. Technology such as electronic transactions and mobile phone banking will help more customers in remote locations to take advantage of banking services. Maciel Castro says that the banking industry in Mexico is committed to embracing technology and innovation. “Numerous experiences prove that modifying paradigms and using creativity to extend financial services is not only an activity with enormous social impact, but is also good for business.”