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The US treasury market reaches breaking point

The US treasury market reaches breaking point

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September 2000

Can Fox’s reforms outwit opponents?


The policy team of new Mexican president Vicente Fox has thought of everything. An impressive set of reforms covering the central bank, capital markets, the fiscal deficit, the energy sector and judiciary are all laid out ready. But can they be got through congress and made to work free from interference and corruption? Mexico is facing one of the biggest make or break periods in its history, writes Andrea Mandel-Campbell




       

Mexico's Financial sector could use a miracle. The odds have been against the struggling industry ever since a currency devaluation in the mid-1990s sent the banking sector into turmoil and capital markets plummeted. A slow road to recovery remains the most likely prospect but ever since Vicente Fox was elected Mexico's new president the country seems to be alive with possibility.
The country's once staid political climate has suddenly turned interesting since the charismatic new president-elect swept to a surprise victory in a July 2 presidential vote. Candidate for the opposition National Action Party (PAN), Fox is not only being given credit for Mexico's smooth democratic transition after 71 years of one-party rule, but his credentials as a former Coca-Cola executive have made him a favourite among business groups and investors looking for fast, decisive action on the country's nagging problems.
The expectations when Fox, 58, takes office on December 1 already appear greater than the towering Figure he strikes at 6 feet 4 inches and many wonder if anyone is up to the gargantuan task of curing Mexico of its greatest ills. To push through many of his ambitious proposals he will have to face a divided Congress as well as a legacy of inertia, entrenched power and corruption left by the Institutional Revolutionary Party (PRI), which has been in power since 1929.
Initial euphoria over the problem-free elections has turned to cautious optimism as market watchers wait to see how he manoeuvres around a series of upcoming challenges. They range from the delicate task of naming his cabinet members to the handling of the 2001 federal budget and the passage of Fiscal policy and energy-sector reforms.
But if he is successful, New York-based brokerage Merrill Lynch predicts a re-rating of the Mexican market within two years.
Standard and Poor's, the US rating agency, could upgrade Mexico's sovereign debt to investment grade before the year is out. "The markets are just waiting for a detonator," says Timothy Heyman, former head of ING Barings in Mexico and the author of Mexico for the Global Investor. "The question is whether Fox will supply the spark."
For many, one of the key elements to lighting the Flame under Mexico's lacklustre equity market is Fox's proposal to allow the country's pension funds to invest in equities.
Miguel Hakim Simon, Fox's chief Financial adviser, predicts the country's $13 billion in pension funds will be permitted to invest up to 20% of their portfolios by the First quarter of 2001.
The move is expected to inject much-needed liquidity into the exchange, which boasts an average daily trading volume of between $100 million and $200 million. Dominated by foreign investors and with only 130,000 domestic accounts, the stock exchange was forced to drop eight thinly traded companies from its main IPC index in August, resulting in a $3 billion loss in market capitalization.
The cut follows on the heels of a decision by the exchange earlier this year to close its listing of medium-size companies. Hakim Simon, a former Floor trader with a doctorate in Finance from Claremont Graduate University in California, calls the decision "an error" and says he hopes to reignite interest in smaller companies long ignored by foreign investors set on blue-chip stocks.
"It could have a significant impact," says Pablo Riveroll, head of research for Merrill Lynch in Mexico. "It will bring into focus a market of 15 million people."
Not all are convinced that pension fund investment is the panacea for the lack of listings but the Fox team is hedging its bets with additional measures that include promoting the creation of regional venture capital funds, long stunted by high capital gains tax, as a source of corporate Financing.
More important, the president-elect is looking to ensure exits in less liquid stocks through the creation of specialists and market makers which, until now, have been hampered by a lack of capital.
"We are convinced there is money to be made here by specialists," says Hakim Simon. "The only difference compared to other markets with greater volume is that the return will be spread over a longer period of time."
The proposed changes, many of which have been the subject of past debate, already enjoy a wide consensus and do not require congressional approval in order to be implemented. Where Fox and his team expect to encounter more difficulties are with their proposals to provide the central bank with greater independence and create an independent and better integrated banking commission.
       
Although most welcome the move toward greater transparency and regulatory streamlining, similar policies have languished in Congress for the past two years. The disagreement, complicated by the lack of a clear majority in Congress, has revolved around how the projects should be implemented.
Hakim Simon expects that it will take two years before the new government gets everyone on board. Already some are expressing concerns that the proposed integration - which includes the banking and securities commission, the pension fund authority and the insurance and surety commission - will lead to bogged-down bureaucracy and lack of expertise.
Others, however, applaud the move. Hector Rangel, president of the Mexican Bankers' Association, says a highly dispersed regime involving seven separate regulatory authorities has been costly for the banks in terms of manpower, paperwork and fees paid to each of the organizations.
"A system that is more efficient and less onerous is very important for the future of the banking industry in Mexico," says Rangel.
Perhaps more significantly, plans to separate the banking and securities commission from dependence on the treasury will make the new authority less susceptible to political interference. Officials at the commission admit that some of Mexico's most powerful business leaders still have more influence than investors or even regulators when it comes to enforcing rules and creating new regulations.
"It's not clear [at present] that the day someone important asks for an exception to the rules, we would be able to uphold our criteria," says one commission official. "I believe with more independence we could manage those kinds of situations better." But even then, adds the official, it might not be enough. "The pressures could be very big. What concerns me is that while the new authorities may be sending impressive signals in the short term, they may very quickly be forced to take a step back when it comes to controversial issues."
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