Economics: Credit to the private sector extends its slide

MEXICO - Report 14 Jun 2021 by Mauricio Gonzalez and Francisco González

Recent indicators as of April regarding Mexico’s financial system continue to reflect the effects of low levels of economic growth. This poor performance results from a mistaken implementation of economic policy, the pandemic’s impact on the economy and ineffective economic reactivation programs, and numerous bills promoted either by the administration or its supporters in Congress; all this has had a decisively negative effect on investment.

Credit to businesses dropped significantly (-20.2% yoy) in April, after having contracted 16.9% in March, while accumulating a streak of negative results over a period of nine months. This is especially troubling given that it could reflect a huge number of small and medium businesses in many sectors that have gone out of business, or perhaps a combination of banks' deciding to not run the risk of extending business loans in this period and a reticence by businesses to take on more debt at a time when the outlook for their enterprises is not encouraging

One thing that is especially striking when analyzing total bank credit is the stark contrast between the trajectory of its public and private components, as the latter has been significantly contracting at the same time as banks are lending more and more to the federal government. The public sector’s share of commercial bank credit portfolios has risen from 30% in 2019 to 36.9% in April of 2020, a 7-percentage point shift.

Credit flows contracted in almost every branch of the economy in April except temporary lodging and restaurants, for which credit increased 27.7%, with that expansion largely in the hands of large-scale companies that were able to refinance their debts as they look to cover their losses from last year. The construction industry, which does not enjoy a strong growth outlook for the intermediate future, experienced the most pronounced reduction in credit as banks remain reluctant to loan to the sector. Moreover, construction firms are reluctant to apply for loans if they aren’t confident that revenues will expand going forward.

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