Interview: Carlos Rojo Macedo
What is the purpose of the Financial Discipline Law, and how will it affect public and private actors?
CARLOS ROJO MACEDO: The objective of the Financial Discipline Law is to assure that the country’s states seek their development based on a foundation of sustainable finance and financial responsibility over the medium and long term within the framework of an orderly process of laying out contracts and transparency in the publication of public finances. This law welcomes key actors to serve as facilitators for the granting of credit to states and municipalities, and to that extent will accelerate the development of the country from the bottom up.
Although the law creates limits for the granting of credit, it opens up space for other financial products and solutions such as PPPs, leasing and factoring ( commissioning), which will generate development opportunities for the financial sector as well as the public sector.
In the current environment of government cuts, what role do private institutions and PPPs play in financing key infrastructure projects?
ROJO: Considering the current budget cuts initiated by the federal government, banking institutions have become an important player in the task of maintaining the country’s development. Private initiatives and banks provide the capital for infrastructure projects in times that federal and local governments cannot invest in such matters. The positive dynamic of bank loans, growing at a 13.2% rate, and PPP projects that have experienced an outstanding growth in Mexico are clear evidence of this. In addition, with the promulgation of the PPP law, more projects are expected with a higher financial participation from private institutions. The main sectors expected to be targeted are health, public security and education.
Taking into consideration the current economic environment, PPPs could represent a sustainable way to generate growth. There is a real need for additional financing in order for states and municipalities to maintain healthy economic development. Basic infrastructure projects that have a direct impact on social well-being – schools, roads and hospitals – have never been cut from local agendas, even in critical economic moments, such as when GDP contracted by 4.7% in 2009. It is in this context that private financing comes to play a major role, and may even experience an increase in momentum. In addition, special economic zones (SEZs) will become relevant actors for the country’s economic development. The Federal Authority for the Development of SEZs is currently planning a MXN127bn ($7.7bn) investment over the next eight years, and President Enrique Peña Nieto has published an SEZ decree that includes special Customs terms and different kinds of tax incentives. SEZs could present a major opportunity for the southern regions of Mexico, and states such as Guerrero or Oaxaca could also invest in their compelling tourism potential. The exchange rate has become an attractive factor for foreign visitors; therefore, local governments are starting to invest in infrastructure projects such as hospitals, roads and museums.
To what extent has the adoption of Basel III regulations achieved its principal objectives?
ROJO: Even though Basel III has generated additional costs for institutions, it has also brought increased stability and strength to Mexico’s banking system. A large majority of banks have a liquidity coverage ratio of more than 100% when the regulation only required 70% in 2016. Nonetheless, maintaining higher active liquidity levels impacts the profitability of banking institutions in general. The decision to implement Basel III early in Mexico has been appropriate since, in spite of the elevated cost of maintenance, the financial system has become much safer and more reliable. This new set of regulations is bringing the necessary tools to better manage economic uncertainty and the significant volatility that has characterised the local currency of late.
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