Secretaría de Hacienda y Crédito Público Some Pilgrim Tales about Financial Reform in Mexico 1
Index I. Structural reform in the financial sector as series of many steps II. The new Securities Market Law III. Chronicle of a reform foretold 2
At the beginning of the administration the financial sector was not contributing to economic growth Rather than a single all encompassing structural reform in the financial sector, during this administration there have been over 40 legislative initiatives approved and many other regulatory modifications. As a whole, these incremental changes translate into a far reaching structural reform. After almost six years, the financial sector was turned from a vulnerability and a drag on the economy into an engine for growth with more palpable results as time evolves. 3
Some examples of the legislative initiatives approved indicate the numerous reforms touched on a wide spectrum of financial sector activities. BANKING SYSTEM Reforms to the Credit Institutions Law (Jun. 01, Jun. 03 & Jun. 04) Law of Bansefi and its reform (Jun. 01 & Jun. 02) Law of Financiera Rural (Dec. 02) Law of the Sociedad Hipotecaria Federal and its reforms (Oct.01, Jun. 02 & Apr. 06) Law of Transparency and Promotion of Competition in Guaranteed Credit (Dec.02 & Jun. 03) Law for the Transparency and Ordering of Financial Services (04) Bank Resolutions (apr. 06) NON BANK FINANCIAL INSTITUTIONS, INSURANCE AND BONDING COMPANIES Reform to the Securities Market Law (Jun. 01). The New Securities Markets Law (Dec, 05) Reform to the Ley General de Organizaciones y Actividades Auxiliares de Crédito (Jun. 01) Savings and Popular Credit Law (Jun. 01) Reform to the Insurance Law (Jan. 02, Mar. 06) Reform to the Federal Bonding Institutions Law (Jan. 02) Reform to the Law of the Comisión Nacional Bancaria y de Valores (Jun. 01) FIBRAS (Fiscal: Art. 223 y 224 LISR, Jan. 04; Bill, May 04 & Decree, Jan. 05, Dec. 05) FICAPS (Fiscal: Art 227 & 228 LISR, Dec. 05) SOFOMES (Apr. 06) INSTITUTIONAL INVESTORS Reforms to the Law of Saving Systems for Retirement (Dec. 02 & Jan. 04) Mutual Funds Law (Jun. 01) OTHERS Payment Systems Law (Dec. 02) Reform to the Law for the regulation of financial institutions (Jun. 01) Law that rules the credit information companies (credit bureau) (Jan. 02) Guarantees Bill (Jun. 03) Money laundering and terrorism financing bill. (Jan. & May 04) *Dates correspond to the publication, in the DOF, of the Law (when it is new) or the reform. 4
Un manejo prudente de la deuda ha permitido a México alargar la curva de rendimientos en pesos a tasa fija, de un año en 1999, a 30 años en 2006. 20 18 Curva de Rendimiento en el Mercado Local (%) Nov,1999 Ene,2000 30.0 Deuda Neta del Gobierno Federal (% del PIB) Interna Externa 16 May,2000 25.0 14 20.0 4.2 4.8 4.7 12 10 Jul,2001 May,2010 15.0 7.7 7.2 7.5 7.9 7.3 6.0 4.0 3.8 8 10.0 19.2 19.6 20.2 6 5.0 9.6 10.6 11.3 11.7 11.4 12.2 14.4 15.1 4 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 Nov, 1999 Jan, 2000 May, 2000 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Mar. p/ Jul, 2001 may, 2010 */ Cifras al cierre de cada año. Fuente: SHCP. Fuente: SHCP 5
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Some results: The banking sector is solvent and aggressively returned to lending. 17 16.5 16 15.5 15 Capitalization Index, 2002-2009. Net capital / Risky assets, %. Bank financing to the non-bank private % growth sector (yoy) 100% 80% 60% 40% Miscellany on Credit Collateral Consumption Housing Businesses 14.5 20% 14 0% 13.5-20% 13 2002 2003 2004 2005 2006 2007 2008 2009 Source: Banxico. * Yearly average. Source: Banxico Includes: securities, outstanding credit portfolio, unperformed loans; interests ant securities related to the restructuring 6 process.
2000 2001 2002 2003 2004 2005 Billion Dollars Some results: The Certificado Bursatil opened the possibility of foreign and domestic firms to obtain financing in the Mexican corporate bond market. Non bank lending increased in importance as well Corporate Debt Market Outstanding (Billion Dollars) 2.5 Outstanding Credit by Sofoles (% of GDP) 40 38.7 2.0 30 20 1.5 10 1.0-3.8 92 94 96 98 00 02 04 Fe b- Other instruments* Certificado Bursátil 06 0.5 7 Source: Mexican Stock Exchange (BMV) and CNBV
As a combined result of all the reform efforts, financial sector depth as a share of GDP increased after a period of stagnation. 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 % of GDP 55% Financial domestic savings* 50% 45% 40% 35% 30% 25% 20% 8 *M3a minus currency
Index I. Structural reform in the financial sector as series of many steps II. The new Securities Market Law III. Chronicle of a reform foretold 9
The importance of the new Law In today's globalized financial markets, stock exchanges compete for funds. Investors look for markets with the greatest liquidity, transparency, information, and shareholder rights. Corporate governance is an evolving topic that requires continuous adjustments. The U.S. corporate scandals are the latest in a series of corporate governance reforms. Despite many adjustments to the 1974 Securities legislation, the Mexican Stock exchange and capital investments in general did not develop to their potential. Two examples: 10
Venezuela Mexico Poland Turkey Philippines Italy Brazil India Korea Thailand Japan Spain USA Canada Chile Singapore % Examples: Mexico's stock market and its share of private equity funds is small by almost any measure. 210 180 150 120 90 60 Market capitalization (% of GDP) World Private equity flows Europe 22% Asia 9% Others 29% 30 0 Latin America 0.9% Mexico 10% Brazil 32% North America 68% Argentina 29% Source: Capitalization (BMV), GDP (World Bank) ** 2004 data (other countries) and June 2005 for Mexico NVCA Yearbook 2004. 11
In 2005, the World Bank Doing Business Survey ranked México 125 out of 145 countries in investor protection indicating that a proper regulatory framework for publicly listed companies was at least partly to blame for the lack of stock market development. N. Zelandia 1 Singapur 2 Canadá 3 EUA 6 Japón 15 Perú 22 India 29 Tailandia 33 Colombia 37 Chile 38 Paraguay 46 Argentina 52 Brasil 54 Nicaragua 73 Turquía 75 Corea 79 El Salvador 83 Latinoamérica Bolivia 98 China 100 Ecuador 113 Haití 123 Jordania 124 Senegal 126 Honduras 129 Costa Rica 134 Venezuela 142 Afganistán 145 10 9 9.7 9.3 8.7 8.3 Minority Protection Index 8 7 6 6.7 6.3 6 6 5.7 5.7 5.7 5.3 5.3 5 5 Prior to the new law 5 4.7 4.7 4.7 4.3 4.3 4 4 3.7 3.7 3.7 3.7 3.3 3 3 2 2.3 1 0.7 0 Source: Doing Business 2006, World Bank. MEXICO 125 12
Main objectives of the new Securities Law The new Law attempts to increase the depth of the Stock market by increasing the supply of listed firms and the demand for their stock. In particular: It promotes the introduction of new companies into the stock market by making medium size private firms more attractive for venture capital and private equity investments and easing the process of going pubic. It improves transparency, minority rights, and radically modernizes the corporate structure of listed companies in line with international practices. Other innovations include: modernization of the stock brokerage houses regime, clarification the notification process and the redefinition of legal violations and penalties, and a reasigment of responsibilities between the Ministry and the Supervisor. 13
Before the law, only companies in the stock market were subject to modern corporate governance standards This NEW optional regime for firms will signal investors that the company has better corporate governance and investor protection. Sociedad Anónima Promotora de Inversión Public Company + VENTURE CAPITAL DEBT ISSUER PRIVATE MARKET Common Company (Sociedad Anónima, in many cases a family company) - Investor protection and/or information disclosure standards 14
A radical modernization of the corporate structure and responsibilities of board members and management in publicly traded firms Aplication. of the law Board function General Director Old Regime Only to the listed entity. Day-to-day administration (including accounting). Without specific responsibilities. New regime The entire conglomerate Overall business strategy. Surveillance of the company s management. Day-to-day administration. Comisario Supervision of the company at all times in an unlimited way Corporate and Audit Committee Fiduciary duties Disappears and replaced by the committees below. Independent and its responsibilities follow international standards Clearly defined: create value for the company without benefiting a particular group of shareholders. 15
Index I. Structural reform in the financial sector as series of many steps II. The new Securities Market Law III. Chronicle of a reform foretold 16
2001: Amendments to the 1974 law introducing many modern concepts of corporate governance to public firms. The problem was that the modern concepts sat on top of corporate standards that were based on legislation dating back to 1934. Summer-2002: Corporate Governance scandals in the United States provide a potential opportunity to make further adjustments. January -2003: Technically consensus is reached that a new law is needed instead of a new set of amendments. 2001 2002 2004 2005 2003 February- 2003 A small team of 6 people from the Ministry, the Supervisory Agency and two external lawyers begin working on a draft. March 2004: First draft is finished and distributed widely. (Too late to submit it to Congress). 17
2001 Amendments August-2002: US Corporate Scandals 2003 January: New law over amendments 2003 February Drafting begins March 2004: First draft finished. 2001 2002 2004 2005 2003 April-December 2004 : A wide consultation and ownership process A lead group of the top 15 corporate lawyers in met every Thursday from 5-8 from April to December to review every article of the law. There were meetings with representatives of all groups involved: Investment banks, investment advisors, accountants, lawyers, exchanges, etc. There were over 200 meetings with external groups to hear comments. There were hundreds of written comments received and thousands of oral comments incorporated. The spirit of the law was maintained but the actual draft of the law was completely different. A wide ownership process took place. Individuals involved would talk about their initiative no the President's. 18
2001 Amendments August-2002: US Corporate Scandals 2003 January: New law over amendments 2003 February Drafting begins 2001 2002 2004 2005 2003 April-December 2004 : A wide consultation and ownership process March 2005: Bill is submitted to Congress. April - 2005: The law is approved by the Senate. Modifications do not fundamentally change the law: March 2004: First draft finished. May-December-2005: The lobbying continued in the lower chamber. The Doing Business Report played a key role: 19
New Zeland 1 Singapore 2 Canada 5 USA 5 Japan 12 Peru 15 Chile 19 Colombia 33 India 33 Mexico 33* Thailand 33 Paraguay 46 Brazil 60 Korea 60 Turkey 60 China 83 Nicaragua 83 Argentina 99 El Salvador 99 Bolivia 118 Jordan 118 Ecuador 135 Senegal 135 Mexico 125 ** Haiti 142 Honduras 151 Costa Rica 156 Venezuela 162 Afghanistan 173 The World Bank study indicates a substantial improvement in Mexico's investor protection with the approval of the new Securities Law 10 9 8 7 6 5 4 3 2 1 0 9.7 9.3 8.3 8.3 7 6.7 6.3 Investor Protection, Corporate Governance Index With the New Law* 6 6 6 6 5.7 5.3 5.3 5.3 c 5 5 4.7 4.7 4.3 4.3 With Old Law** 4 4 3.7 3.7 3.3 3 2.7 0.7 Source: Doing business Report, World Bank. *The ranking and grade after passing the New Law corresponds to the latest data released by the WB in the Doing Business Report 2007. 20 **he ranking and grade for Mexico under the Old Law and with the revisions proposed during its negotiation process correspond to those published in the Doing Business Report 2006, as they were published by the World Bank in 2005.
2001 Amendments August-2002: US Corporate Scandals 2003 January: New law over amendments 2003 February Drafting begins 2001 2002 2004 2005 2003 April-December 2004 : A wide consultation and ownership process March 2005: Bill is submitted to Congress. April - 2005: The law is approved by the Senate. Modifications do not fundamentally change the law: May-December-2005: The lobbying continued. The Doing Business Report plays a key role: March 2004: First draft finished. December 2005 The law is approved by the Lower chamber with two minor revisions and sent back to the Senate which approved it two days afterwards. 21
Final Thoughts Mexico has achieved macroeconomic stability which is a necessary but not sufficient condition for growth. Successful financial markets have a set of laws and institutions which allow them to be efficient and with sound rule of law. Six years into the administration, financial sector reform through numerous incremental changes has resulted in true structural reform. The new Securities Market Law set a new precedent in the level of involvement of interested parties which became a crucial element in its approval. 22
Secretaría de Hacienda y Crédito Público Some Pilgrim Tales about Financial Reform in Mexico 23