Mexico's Finance Minister says lower capital requirements will boost lending

➤ Herrera Gutiérrez is optimistic that lowering capital requirements for banks on certain types of loans will lead to a combination of interest rate drops and increased lending.

➤ Risk segmentation based on gender should allow banks to offer softer loans to women.

➤ Global concerns over inflation and rate hikes will ease as market actors realize recovery from the pandemic will "take years," Mexico's Finance Minister said.

Mexico's government has faced criticism for not providing as much pandemic stimulus as some other countries. But Finance Minister Arturo Herrera Gutiérrez has defended his country's decision to limit spending on fiscal and monetary stimulus to 1% of GDP last year, compared to Brazil's 10%.

A more measured approach to austerity measures will help make Mexico attractive to investors in the coming years, he argues.

Herrera announced in March that the government's lowering of capital requirements for consumer, microcredit, small and medium-sized enterprises and mortgage loans would be permanent. The official expects the move, which takes effect next week, to sharply lower banks' lending rates.

He is confident that Mexico has "gotten past" the risk of a third wave of COVID-19, and that more than 63% of Mexicans will have been vaccinated by July. All of this, combined with the new USMCA North American free trade agreement and an ongoing low-rate environment at the global level will favor Mexico's economy, the official claims.

Mexico suffered an 8.5% contraction in GDP in 2020 — the third largest out of Latin America's six major economies — and is expected to recover by 4.9% in 2021, according to S&P Global Ratings.

The following conversation has been edited for length and clarity.

READ MORE: Mexico's bid to lower bank lending rates could be wishful thinking

S&P Global Market Intelligence: You recently announced the lowering of capital requirements for certain loan types to lower interest rates. Why would banks lower rates if the level of risk has not changed?

Arturo Herrera Gutiérrez: Potential clients' risk levels have not changed, but the levels of capitalization associated with that level of risk were above those recommended by Basel III. Now for the same level of risk, you have to put up less capital, so banks can do several things. If there is perfect competition, the interest rate has to change. Or with those additional resources, they could lend more at the same rate. They will surely do some combination of the two.

In what time frame would you expect banks to lower rates?

When the measure comes into force, then they will process it in their credit committees. There are three markets that are particularly impacted, including mortgages and SMEs. We also found that women pay for mortgages better than men, and when they default, they catch up quicker than men. So risk segmentation by gender can also happen, which would translate into lower interest rates for women. That is going to require banks to have specific products and to change their systems, which could take a few months. For a country like Mexico, where the participation of women in the labor market is one of the lowest in the region, this is very important.

Banks and analysts say they are not seeing demand for credit. What needs to happen for demand to recover?

They're not seeing it right now, but we're still in COVID-19 conditions. In the next few months, a very high percentage of the population is going to be vaccinated, and that changes perspectives on risk associated with all economic activity. Many banks wanted Banco de México's liquidity facilities to be leveraged, or for development banks to intervene. They were demanding guarantees for 90% of their loans. They were operating in an economy where there was very high uncertainty and only wanted to put down 10 cents of every peso borrowed. Those conditions have clearly changed already. The milestones that are being achieved in vaccination allow us to speak of a reopening. This conversation we are having today is very different from the one we will be able to have in three weeks.

Will you reach your target of having more than 80 million Mexicans vaccinated by July?

Yes, surely. The next group that is going to start vaccinating in parallel with teachers is the 50 to 60 age group, around 12 million Mexicans. Most of them are in the labor market. By May we have around 15-20 million vaccines assured. And almost certainly we will have another 20 million doses. We are on the right path. Not very different from other countries.

Regarding credit guarantees, Mexico spent approximately a total of 1% of GDP on monetary and fiscal stimulus, while countries like Colombia and Brazil spent 5% and 10%, respectively. Why did Mexico spend less than its peers?

Not only was that different, the indebtedness is also different. Brazil's debt after this reached 90% of GDP. If Mexico had that debt level, we would have to be collecting almost 1 trillion additional pesos just to pay interest. The tax conditions are different. Brazil has a collection including social security of 34% of GDP. It is the country that raises the most money in Latin America. Mexico collects 14% of GDP from tax revenues, less than half. You named countries that have completely different conditions. In terms of reopening, we have also gone down a different path. We were very clear that what was holding the economy back was the pandemic, and that to unlock it we had to control the pandemic. There is no federal entity [state] in the country that has more than 50% occupancy in its hospitals. We have all levels under control. I do not want to personalize, but there are several countries that have levels high enough.... [to] have forced them into additional lockdowns. Not only in Latin America, also in Europe. The closures and the restrictions on economic activities in Mexico are already quite moderate.

We passed the ultimate test to see if we were going to have a third wave three weeks ago. We were concerned with what was going to happen during Easter. The levels of contagion show we've gotten past that. We have invested a lot more in vaccines. We have contracts for 250 million doses [for] more or less 145 million people. In Mexico there are 126 million people, 92 million of whom are over the age of 16. The potency of the vaccines varies from one to another, and we made the decision to diversify the portfolio. It is a deliberate decision and to this day it is working quite well for us.

Mexico registered three consecutive years of falling net foreign investment between 2018 and 2020. Why did this happen and how can Mexico regain the trust of those investors?

Last year the reason was the pandemic. During crises, the first thing to be postponed is long-term spending. Families postponed durable consumption and companies postponed investment. But by December we were already exporting more than in December, 2019. As there was still uncertainty, people were producing with existing inventories and not with new investment. There are three central themes in the coming months: first, vaccination in Mexico and the U.S. The first federal entities to recover jobs lost during the pandemic are on the border. Second, the free trade agreement, which for us is a centerpiece of economic activity for the next few years. To capitalize on it will require courting the companies that are elsewhere today, so that they come to Mexico.

I hope I do not commit any indiscretion when I say that everyone presumes that the conflict between the U.S. and China in 2019 necessarily will lead to a reorganization of global value chains, and that some of the links in China or Southeast Asia will go to other countries, like Mexico. We have the proximity with the U.S., stable macroeconomic conditions, a stable financial fiscal framework and without great indebtedness, neither at government nor corporate level. Curiously, banks are coming out with a higher capitalization level. That capitalization was part of the bulletproof vest with which they armored themselves thinking that there could be greater losses than in reality there were. It is also no secret that some Mexican banks are already wanting to pay dividends, so the mentality is already moving from crisis management to paying returns.

How could the expected horizon of inflation and interest rate hikes in emerging markets affect Mexico over the coming years?

In Mexico, the cycle of falling interest rates was much slower than the rest of the world. Brazil's rate increase took it to 275 basis points. In Mexico today we have 400 basis points. Second, there is a central factor, on which the Fed and European Central Bank have been very clear. Some analysts and market sectors are trying to discount that the U.S.' fiscal stimulus of $1.9 trillion and the $3 trillion for infrastructure will fully close the output gap, and they will generate such a level of economic activity that they will put pressure on rising prices. The US is coming out of its worst year in the last 44. Jumping from your worst year to inflationary pressures seems to me a little like a leap. If it turns out that they close the entire output gap, well, good, we'll see how we are.

But what worries us is the level of unemployment that exists, not a scenario in which the entire unemployment level has been closed and prices are being pressured. [Fed Chairman Jerome] Powell and [ECB President Christine] Lagarde have been very emphatic in recent weeks saying that the normalization process is going to take years. You cannot think that it will be immediate. I think the increase in interest rates was premature. It was mostly in the long part of the curve, and that is what they would seemingly be trying to discount [inflation]. We will see to the extent that the markets begin to calm down, when they see that this will be slow. I believe this [rate hikes] may be much more temporary than what many market players are now anticipating.

As of May 4, US$1 was equivalent to 20.25 Mexican pesos.