Mexico's lower house of congress postponed until February the debate on a bill that would compel Banco de México to buy banks' "excess" U.S. dollar holdings. The country's Senate approved the bill last week.
Following requests from the central bank, the Financial Intelligence Unit, Mexico's Association of Banks and several other institutions for more time to assess the bill's potentially adverse effects, legislators ultimately decided to leave the bill on ice until after their winter recess.
The reform could undermine the autonomy of Banxico, as the central bank is known, which would be obliged to buy incoming dollars from unverifiable sources, which could lead international authorities to freeze or even confiscate the central bank's accounts, analysts say.
After the decision to postpone its debate, the likelihood that the bill will be passed into law now seems more remote, according to Fernando Dworak, a Mexico-based political analyst.
"In a scenario of the law's approval in February, four months before the elections, that could imply a high electoral cost for Morena, the ruling party, especially if there is a comprehensive mobilization from affected interest groups and the opposition in the media," he commented. A potentially swift and negative reaction in the markets closer to the polls could also dissuade lawmakers from proceeding.
Within President Andrés Manuel López Obrador's party, the recess could be used to regroup and propose modifications to the bill.
"Some legislators have told us off the record that the bill doesn't have the required consensus within the Lower House, not even within the ruling party," BBVA chief credit strategist for Latin Edgar Cruz Borges said, adding that "it doesn't seem it was currently a priority for the President, either."
Cruz Borges nonetheless highlighted that the bill's progress to date already represented a blow to investor confidence. "If it ultimately is passed, it would be viewed negatively, especially from a perspective of compliance and terrorism financing and laundering prevention," he said.
"Postponing this was the right thing to do, because this is a very delicate issue, and more specialist evaluation is required to reach a consensus," Jorge Sánchez Tello, head of the Mexico City-based think tank Fundación de Estudios Financieros, said.
For the analyst, the proposed bill could threaten the autonomy of the central bank, which is something that legislators should be especially cautious about given that Banxico only established its independence in 1994.
"Banks that are struggling to repatriate this cash must talk to regulators and the government more closely to overcome their situation, because they do not represent large sums," he added.
Mexican banks' excess foreign cash holdings are primarily generated by tourism and migrant remittances. If lenders fail to allocate those funds within their client base, they proceed to exchange them for Mexican pesos with US banks.
But if that cash fails to meet US lenders' anti-terrorism and money laundering prevention standards, Mexican institutions are forced to keep an "excess" of non-performing assets on their balance sheets.
Should the new law prosper in February, Banxico would have to start buying banks' foreign cash surpluses, incorporating them as part of their international reserves.
Aside from entailing new operating costs, the monetary authority's autonomy would be "violated," Alejandro Saldaña Brito, deputy director of economic analysis at Banco Vé por Más, told S&P Global Market Intelligence.
"Part of its constitutional independence lies precisely in freely deciding how to manage its assets, in order to achieve its mandate to sustain the purchasing power of the Mexican peso," the economist said.
What's more, Banxico would take on a "grave risk," Saldaña Brito said, emphasizing that cash that banks fail to repatriate usually has "greater probability of having an illicit origin."
If these funds are incorporated into international reserves, foreign authorities could freeze or confiscate the accounts where those reserves are held in the context of money laundering and terrorist investigations, he continued.
"Reserves help to maintain macroeconomic and financial stability, as they counteract the imbalances that may arise when dollars enter and leave the country, so it is necessary that the central bank have total and perfect access to those accounts," the economist concluded.
In a Dec. 9 press release, Banxico itself warned that the bill would oblige it to "carry out high-risk active operations that may compromise the availability of international assets in reserves."
In migrants' interest
For Ricardo Monreal, the Morena ruling-party lawmaker who is sponsoring the bill, the initiative simply aims to address an exchange rate imbalance caused by the surplus of US dollars in the Mexican economy.
"It is evident that the volume of dollars that enters the country is much greater than that which leaves, resulting in an exchange rate imbalance," he said in an article on his website. The purchase of surpluses by Banxico would eliminate the high cost of financial, banking or commercial intermediation, and Mexicans would receive more pesos per dollar from their remittances, he added.