Economics: Investor and consumer debt aversions

MEXICO - Report 22 Jul 2019 by Mauricio Gonzalez and Francisco González

Over the past year Mexican consumers and investors have grown increasingly cautious when it comes to taking on new debt as they brace for the potential ramifications of risks at home and abroad. The amount of financing entering the Mexican economy appeared to have been essentially flat during the second half of last year as fears of a slowing of the global economy, trade wars, as well as uncertainty regarding the direction of domestic policy mounted.

In fact, there has been a real-term erosion of foreign currency financing entering the Mexican economy since 2017, a reflection of heightened risk aversion globally and uncertainty as to the direction of monetary policy in the world’s leading economies. But even as foreign currency-denominated financing for the Mexican economy contracted significantly during 2H18 and narrowed by roughly 2pp in 1Q19, local currency financing has continued to expand by a real 5%, considerably higher than the pace of the Mexican economy, which has clearly slowed throughout the first half of the current year. During the first quarter, foreign currency funding fell to 23.1% of all credit as opposed to 26.4% in 1Q15.

Just as businesses in Mexico have been scaling back their use of foreign currency funding sources, reflecting an awareness of trade-related risks that could impede exports and the foreign currency flows needed to service foreign debts, households have become more restrained in their of consumer credit, although we should keep an eye on the extent to which banks and non bank lenders are willing to issue new credits.

So far, the current government’s fiscal and monetary policies have not raised clear negative alerts, so a relevant rise in saver and investor risks in Mexico has not been registered. Furthermore, Banxico’s recent stress test concluded that the Mexican financial sector is solid, and capable of resisting diverse risks. But new concerns have emerged as of July 2019 that need monitoring in the coming months.

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