Mexico’s change of government and institutional strength – considerations from a financial services perspective

September 2018 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

September 2018 Issue

Financial systems are built on stability, strong institutions, sound public policies and predictability. All of which take a long time to develop and can be quickly and easily damaged. In developing countries, such as Mexico, where socioeconomic inequality is a reality, policymakers have great incentives to offer to their constituents the promise of amendments to commercial and financial policies directed at reducing such disparity. While such amendments are desirable and sometimes necessary, impulsive decisions or those based on short-term solutions could fail to achieve their purpose or have an adverse effect on financial and economic development by damaging the above-mentioned conditions. Efficient laws, strong institutions and political opposition help maintain stability and predictability throughout government transitions, by forcing the new administration and its political party to act within a known legal framework and to negotiate any proposed change to the country’s direction and policies.

On 2 July 2018, Mexico woke up to a new political reality. Several elections at the federal, state and municipal levels took place on 1 July, including presidential and congressional elections at the federal level, as well as various state and municipal executive and legislative elections, in which left-wing candidates were elected by a landslide.

With a record turnout of 63.44 percent, Mexican voters granted an ample margin to Mr Obrador, who was elected president with 52.9 percent of the vote. His closest opponent, Ricardo Anaya, garnered 22.4 percent. Mr Obrador is set to take office on 1 December 2018. His left-wing party, Morena, led the three-party alliance (Juntos Haremos Historia, formed by Morena, PES and PT), which, in addition to the presidency, gained the majority in both chambers of Congress and many state legislatures, as well as several state and municipal governments.

As a result, Mexico will have a left-wing government for the first time in decades. Mr Obrador’s government will also be the first since 1997 to have a majority in Congress at the federal level, including the seats won by the Juntos Haremos Historia alliance. This, together with the state legislatures where Morena has a majority, grants the new government the capability to approve and enact reforms to the Mexican constitution and federal laws, to secure the federal budget and to appoint relevant officials in all areas of government, including the financial sector.

Mr Obrador has promised much-needed policy reforms to tackle corruption, crime and poverty. Some of these will involve the financial system. Thus, the role of Mexican institutions, including the judiciary, opposition parties, civil servants and civil society organisations, will be fundamental as counterweights to unsound or unjustified changes and to offer guidance and counsel in areas where experience is a required asset.

Regarding institutional strength, over the past 30 years, several constitutional amendments designed to limit presidential power, empower the judicial and legislative function and create autonomous government bodies (with authority in areas where technical knowledge is important) have been enacted. These amendments have allowed Mexico to build solid institutions and, also, to adopt and enforce responsible laws in financial and fiscal matters, setting a healthy environment for financial and economic development.

The judiciary, for instance, has increased its independence, power and authority since the 1994 reforms and, particularly, since the 2011 human rights reform. This provides that human rights contained in international conventions and treaties of which Mexico is a party have a hierarchy equal to the provisions of the Mexican constitution and superior to the general, federal and local laws of the country. To the extent that there is continuation in the consolidation of the strength and relative autonomy of this power (in Mexico, Supreme Court Justices are proposed by the president and approved by the Chamber of Senators), there should be an effective restriction of the presidential power in the aspects of judicial competence.

Regarding areas where technical knowledge and protection from political interference is warranted, several autonomous constitutional bodies have been created. These institutions are granted organisational and financial independence. The term of their main officials is staggered and is longer than six years, exceeding the presidential term, in order to strengthen their independence. These institutions include the Bank of Mexico (the Central Bank), the Mexican National Electoral Institute, the Mexican Federal Economic Competition Commission, the Mexican Federal Telecommunications Institute and the Mexican National Institute of Transparency, Access to Information and Protection of Data, among others. It goes almost without saying that for commercial and financial matters, the autonomy and independence of these bodies, with respect to the federal government, is essential.

It is important to note that the only autonomous body with direct authority over the financial system is the Bank of Mexico. As with other central banks, its mandate includes fostering the stability of the acquisitive power of the Mexican currency, promoting the healthy development of the financial system and its regulations, and enabling the proper functioning of the payment systems. Though, indirectly, the Competition Commission also has the capacity to intervene in financial matters as its mandate is to guarantee free competition and financial competition.

It is worth mentioning that during the next presidential term, at least three out of 11 Supreme Court Justices and four out of seven Competition Commission Commissioners will be up for appointment, all of which will be proposed by the president and ratified by the Senate.

Mexico also has an important counterweight in the Auditoría Superior de la Federación, which is dependent on the Chamber of Deputies. This institution holds considerable authority and is in charge of supervising the management of Mexican federal public resources. This supervision might include political parties, which are partially funded publicly.

The president holds broad powers regarding the financial system. In addition to its policy-making authority, the executive branch has direct control over most financial regulators and, by holding the majority in Congress, the next president will also be able to appoint those that require legislative approval.

Regarding the Bank of Mexico, its board of governors is designated by the president and approved by the Senate. It is important to note that during the next presidential term (2018-2024) almost the entirety of the board of governors shall be renewed.

The rest of the financial authorities are part of the executive branch and their officers are not protected by fixed terms; therefore, they may be removed at any time by the president. Such is the case for: (i) the Mexican Secretariat of the Treasury and Public Credit, whose head is a member of the president’s cabinet and is designated by the latter (prior ratification from the Chamber of Deputies) and who, in general, has the authority to plan, coordinate and supervise financial entities; and (ii) the Mexican National Banking and Securities Commission, which regulates most financial entities, including public and private banks, broker dealers, credit unions, investment funds, investment advisers, rating agencies and clearing houses, among others and which, notwithstanding its technical autonomy, is still subject to the control of the executive as its head officer is designated by the Secretariat of the Treasury and Public Credit and its board of directors is integrated by officials linked to the federal government. In a similar situation to that of the Banking Commission are the Mexican National Commission of Insurance and Bonds (which regulates insurance and bonds companies), the Mexican National Commission of the Savings System for Retirement (which regulates and supervises the resources for pensions of private sector workers), the Mexican National Commission for the Protection and Defense of the Users of Financial Services and the Mexican Institute for the Protection of Bank Savings (which is responsible for the deposit insurance for banks), all of which government bodies are integrated mostly by officials linked to the federal government.

Through the above agencies and officers, the government will be able to issue rules regarding, among others, capitalisation requirements, authorised transactions, consumer protections, credit or investment limits, and corporate governance. It will also be able to decide on the supervision and enforcement of such rules. Additionally, it may implement programmes and plans involving financial services. All of which will have an effect on the financial system.

For the time being, it is difficult to predict how the new government will act regarding the financial system. However, the 2018-2024 ‘Project of the Mexican Nation’ prepared by representatives of the new president during his campaign, while not binding, provides a few guidelines regarding the direction in which the economy might move, as well as the financial regulation.

On economic matters, the project contains positive aspects, such as an intention to avoid further debt, fiscal equilibrium and strict financial discipline. It also recognises the need to increase the oil production capacity, even through Mexican national private and foreign companies within the framework of the recent energy reform.

Regarding foreign investment, there is an acknowledgment of the importance of maintaining and respecting trade agreements. This is relevant, as Mexico is one of the countries with the most international trade agreements in the world. The most relevant include the North America Free Trade Agreement (NAFTA), the European Union and Mexico Trade Agreement (EU-Mexico Trade Agreement) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Given that Mexico has several financial entities whose holding companies are located in the US, Europe and Asia, these agreements are important as they contain investment protection measures, including fair and equitable treatment, as well as protection and full security, and other measures such as nationalisation, expropriation or equivalent measures which affect investment. All of the above are subject to jurisdictional or arbitral control.

With respect to the financial sector, the project declares its preoccupation about Mexico having a highly concentrated bank structure and barriers for competition; therefore, it proposes legal reforms in order to provide incentives for the creation of more financial entities, diminish regulation and supervision costs, and strengthen and enlarge the faculties of the Competition Commission and the Financial Consumers Commission. While Mexico has made progress in this matter, as acknowledged by the Bank of Mexico and the Competition Commission, the latter recommends strengthening competition, albeit in very specific areas, such as bank tellers, guaranteeing the exchange of information owned by the customers among financial entities, and free and non-discriminatory access to the compensation networks.

The project also accuses financial entities of being the main responsible parties and beneficiaries of the lack of control over money laundering in Mexico. It proposes, among other actions, fostering and strengthening banking system controls over money laundering. In this area, it is worth noting that the Financial Action Task Force published the ‘Anti-Money Laundering Measures and Measures against the Financing of Terrorism-Mexico’ in January 2018. This document acknowledges that Mexico has a regulation against money laundering and against the financing of terrorism, which is mature with a well-developed legal and institutional framework. The document also highlights that the authorities have a good understanding of the risks of these practices and good cooperation and coordination of policies, and that the financial sector also shows a good understanding of the main threats.

It is too early to know whether the new policies will have a positive or negative effect on Mexico’s financial system. For the time being, Mr Obrador’s messages have been positive in the sense that entrepreneurial freedom will be respected, as well as that of the Bank of Mexico. He has also suggested that financial and fiscal discipline will be maintained, and that there will be acknowledgment of the commitments acquired with Mexican and foreign companies and banks.

Given that the government holds both chambers of Congress, it should be able to avoid legislative deadlocks and approve legislative amendments and secure budgets that will allow the implementation of policies which may solve some of the main problems in Mexico, including inequality, corruption and insecurity. However, impulsive decisions could weaken our institutions and have a negative effect on our financial system. Thus, support should be given to those initiatives intended to improve the overall situation of Mexico and its people, but attention must be kept on policies and decisions that can harm the stability needed for the development of the financial system.

Jorge Gaxiola Moraila is a founding partner and Alexis Leon Trueba and Gabriel Franco Fernández are partners at Gaxiola Calvo S.C. Mr Gaxiola can be contacted on +52 (55) 5682 6178 or by email: jgaxiola@gcsa.com.mx. Mr Leon can be contacted on +52 (55) 5682 6178 or by email: aleon@gcsa.com.mx. Mr Franco can be contacted on +52 (55) 5682 6178 or by email: gfranco@gcsa.com.mx.

Jorge Gaxiola Moraila, Alexis Leon Trueba and Gabriel Franco Fernández

Gaxiola Calvo S.C.