Background on Sheinbaum and Her Role
Claudia Sheinbaum is the current Head of Government of Mexico City, succeeding Marcelo Ebrard in 2018. As a prominent figure in Mexican politics, she has been instrumental in shaping policies related to urban development, social programs, and now, financial matters affecting the broader economy.
Banco de México’s Interest Rate Reduction
The Banco de México recently lowered the one-day interbank interest rate by 50 basis points, bringing it down to 9%. This decision aims to stimulate economic activity by making borrowing cheaper.
Credit and Interest Rates: Current State
According to the central bank, the total amount of credit provided by commercial banks to economic agents in February of the current year showed a dynamic trend. Specifically, credit and values provided to the private sector amounted to 7,097 billion pesos, with a real annual growth rate of 9.6%.
- Credit to the private sector (excluding housing) grew by 9.7% in real terms.
- Consumer credit increased by 14.3% in real terms.
- Credit for housing grew by 3%.
- Credit to businesses and individuals with business activities grew by 11.6%.
Despite these growth rates, the financial penetration level remains low. The bank credit to the private sector as a percentage of GDP only reaches 20%.
Current Interest Rates
During February, the one-day interbank interest rate was 10%, while the weighted average bank capture cost stood at 8.82%. The rate for private short-term securities was 10%, and for medium-term securities, it was 10.4%. For home loans, the average Costo Anual Total (CAT) was 14.1%.
Key Issues: Low Financial Penetration and Interest Rates
There are two main issues to address: the low bank credit penetration rate (bank credit to the private sector as a percentage of GDP) and the current interest rate levels.
Low Bank Credit Penetration
- Informal Economy: A significant factor contributing to low bank credit penetration is the high informality in Mexico, where unregistered businesses employ 29% of the total workforce and are not subject to bank credit. To access bank financing, these businesses must formalize, which depends on key variables such as high regulatory entry costs and implicit taxes in employer social security contributions (IMSS, SAR, and Infonavit).
- Stringent Requirements: Legal businesses face burdensome requirements (notarized founding act, audited balance sheet and profit-and-loss statement, guarantees, etc.), making the credit process expensive, time-consuming, and inefficient. This encourages businesses to seek alternative financing sources like supplier credit.
Interest Rate Levels
Four primary factors determine the current interest rates charged by banks on credit:
- Bank Capture Costs: The average weighted cost of bank capture affects interest rates.
- Credit Risk: The likelihood of default determines the percentage of prudential reserves the bank must set aside for the credit amount.
- Administrative Costs: Bank administrative costs influence interest rates.
- Judicial Reliability: A reliable, impartial, efficient, and expeditious judicial system is crucial. Slower or less reliable processes discourage banks from extending credit, leading to higher interest rates.
Sheinbaum’s proposed judicial reform may undermine the reliability, impartiality, efficiency, and expediency of judicial processes. This could result in less bank credit to the private sector, especially at more expensive rates.
