High liquidity and reduced credits:
An important cause of Economic
Recessions in Dev eloping
countries
Paper prepared for the Conference
“Re-regulating global finance in the light of
the global crisis”
by
Noemi Levy
1
BACKGROUNDS OF THE ACTUAL CRISES
• A rise of capital index prices (financial inflation ―pF)
along financial deepness induced a credit boom
channeled to consumption and housing
• Financial expansion was stopped by the limitation of
DC productive capacity (low investment, income
redistribution in favor K owner) which demanded
increased credits to support economic expansion
• DeC face different crisis, not anteceded by credit
booms. Economic recession was led by reduction of
external demand (financial crisis can unfold)
• Main problem of DeC: A dichotomy of high levels of
liquidity and reduced finance.
2
HYPOTHESIS
• Financial liquidity (and innovation) have limited effects
in DeC (credit booms are lows low with reduced &
short term impact on economic growth)
• New financial structure eliminated domestic
mechanisms to revert economic growth in DeC
• Economic neoliberal policies based on market
mechanisms cannot solve DeC crises (e.r stability,
higher interest rate gaps with DC and economic
globalization (free trade production and finance).
We start discussing
• Different financial structure ant its impact finance
3
I. FINANCIAL STRUCTURES, LIQUIDITY AND
FINANCE
i) Anglo-Saxon system: Capital markets rules
with high liquidity
• Market mechanisms need to get right prices
• Deregulation and globalization
• Privatization of the economy
Financial Structures
• Capital market deepness (capitalization + turnover
+  p F)
• Financial deepening (M3-M1/ GDP)
Macroeconomic stability  maximizes economic
growth
4
ii) The bank-based
•
•
•
•
•
system: banks main providers of
finance with limited liquidity
High state intervention
Monetary policies: finance “priority” sectors w/ low &
stable prices  credit channeling policy
Active fiscal policies: priority sectors, anti-cyclical policies
Price differentiation
Compensatory mechanisms
Financial structural characteristic
• Strong public regulation, financial segmentation
• Limited capital mobility (market mechanisms are
blocked )
Strong relation between government, banks and
enterprises
5
iii) Capital Market based system in the
Financial led capitalist system (1980s)
• Financial segmentation and Q regulation
abolished
• Capital mobility raised in search of financial gains
• Exchange and interest rate risks shifts to the
private sector   Financial innovations
(Derivates + Securitization)
• Big banks & financial corporations (supranational
entities) with limited domestic control
• Institutional investors (Pension funds, mutual
funds, insurance companies, investment trusts,
etc.) increased financiarization
6
Financiarization
Financial inflation: DFS >  money market outflows
(FS remain in the K market, not linked to finance)
Finance wealth & redistribution of income in favor K owners
Financial Securities modify agents behavior: institutional
investors & banks, non – financial corporations and families
Consequences
Redistribution of wealth in favor of agents possessing FS
Reduced finance to domestic small & medium firms
Poverty increases
Big gaps between DC, DevC and especially w/poor countries
DevC reduced access to counter-cyclical policies
7
II. MEXICAN FINANCIAL ORGANIZATION IN THE
FINANCIAL LED SUSTEM
Deep institutional changes
Bank Deregulation: disappearance of compensatory
mechanisms
Financial deepening bond and capital segments
Trade openness & Financial market globalization
Promotion of institutional investors
…… more importantly after NAFTA
Adoption of the North-American Financial System :
Derivatives & Securitization
FDI deregulation
8
• High Liquidity and reduced
finance
9
Two periods of financial inflation: Financial innovation
limited to external K movement and Mexican K-based
remained weak
D Price index (SPP)
Turnover ratio
120
250
Stock market capitalization
Number of listed firms
100
200
60
150
40
20
100
0
-20
50
-40
-60
0
10
Price index (SPP)
80
M3-M1/GDP
Nbank Instr(RESIDENTS)/GDP
Nbank Instr(non-res) /GDP
Dic 2007
M4-M1/GDP
Dic 2006
Ban Instruments/GDP
Dic 2006
50
Nbank instr/GDP
Dic 2005
Dic 2005
Dic 2004
Dic 2004
Dic 2003
Dic 2002
Dic 2002
Dic 2001
Dic 2001
Dic 2000
Dic 1999
Dic 1999
Dic 1998
Dic 1998
Dic 1997
Dic 1997
Dic 1996
Dic 1995
Dic 1995
Dic 1994
Dic 1994
Dic 1993
Dic 1992
Dic 1992
Dic 1991
Dic 1991
Dic 1990
Dic 1990
60
Dic 1989
Dic 1988
Dic 1988
Dic 1987
Dic 1987
Dic 1986
Dic 1985
Financial deepening increased
i) After 1994 crisis lead by non bank instruments
40
30
20
10
0
11
Oct-Dic 2007
Oct-Dic 2006
Oct-Dic 2005
Oct-Dic 2004
Oct-Dic 2003
Oct-Dic 2002
Oct-Dic 2001
60
Oct-Dic 2000
70
Oct-Dic 1999
Oct-Dic 1998
Oct-Dic 1997
Oct-Dic 1996
Oct-Dic 1995
Oct-Dic 1994
Private non financial sectors finance decreased in a
context of financial and capital deepness
M4-M1/gdp
Turonver ratio
Market Capitalization/GDP
FPNFS/GDP
50
40
30
20
10
0
12
Finance to private non financial sectors
 Main finance sources
 Favored activities
13
Finance to private non financial sectors dropped
Commercial bank credits shrank
New domestic sources of finance
External finance did not increase
0.6
BAN CRED/GDP
DEBT ISSUE/GDP
EXFSPNF/GDP
NBI/GDP
INFONAVIT/gdp
DFINPNFs/gdp
0.5
0.4
0.3
0.2
0.1
0
14
Enterprises the most affect sector: export led model
does not leave space to domestic enterprises and high
uncertainty became an important issue
Consumption/FPNFN
Housing /FPNFS
Families /FPSNS
Enterpises /FPNFS
90
80
70
60
50
40
30
20
10
0
15
Why finance to private non-financial
enterprises shrank
 No competition within institutions of the
financial sectors
Bank credit cards have high interest rates
 Small & medium enterprises have low access
depended in supplier finance
16
Financial Institutions specialization
Enterprises low access to bank credits (supplier
finance important for small & medium enterprises)
120
Financ exter a empresas/Fempresas
Cred Banc a empresas/Fempresas
INFONAVIT/Fvivienda
Ed empresas/Fempresas
Cred Ban a consumo/Fconsumo
100
80
60
40
20
0
17
Consumption credit card costs are very high and
development banks concentrated in housing finance.
High commercial bank income margins
45.00
Bank Credit Card averga interest (no VAT)
40.00
Housing. Averge total lending cost (pesos at fix rate)
35.00
30.00
25.00
20.00
15.00
10.00
5.00
Mar 2008
Mar 2008
Mar 2008
Mar 2008
Mar 2007
Mar 2007
Mar 2007
Mar 2007
Mar 2006
Mar 2006
Mar 2006
Mar 2006
Mar 2005
Mar 2005
Mar 2005
Mar 2005
Mar 2004
Mar 2004
Mar 2004
Mar 2004
0.00
18
Worrying signs
Bank financial indexes
Productive Structure
External capital movement
19
Bank index start to show some fragility (Default
index)
25
300
20
250
15
10
200
Defaul index
Solvency
5
150
0
1995
-5
2000
2001
2002
2003
2004
2005
2006
2007
marzo, junio, 08 sept, 08
08
Capitalization
ROE
ROA
100
Coverture index
-10
50
-15
-20
0
20
The Mexican productive structure changed: internal market
shrank (Reduced internal market, Led Export economy w/
negative net exports)
90
GDP growth rate
X-M/GDP
PrivConsump/GDP
Investment /GDP
15
X/PGDP
GDP growth rate
80
10
70
60
5
50
40
0
30
20
-5
10
0
-10
-10
2007/01
2006/01r/
2005/01
2004/01
2003/01
2002/01
2001/01
2000/01
1999/01
1998/01
1997/01
1996/01
1995/01
1994/01
1993/01
1992/01
1991/01
1990/01
1989/01
1988/01
1987/01
1986/01
1985/01
1984/01
1983/01
1982/01
1981/01
-15
1980/01
-20
21
External capital flows highly unstable: Higher
current account deficit & unstable FPI and FDI
flows Service balance
Trade balance
60000000
FPI
Lending and deposits leabilities
FDI
Total External Liabilities
40000000
20000000
0
-20000000
-40000000
-60000000
Oct-Dic 2008
Oct-Dic 2007
Oct-Dic 2006
Oct-Dic 2005
Oct-Dic 2004
Oct-Dic 2003
Oct-Dic 2002
Oct-Dic 2001
Oct-Dic 2000
Oct-Dic 1999
Oct-Dic 1998
Oct-Dic 1997
Oct-Dic 1996
Oct-Dic 1995
Oct-Dic 1994
Oct-Dic 1993
Oct-Dic 1992
Oct-Dic 1991
Oct-Dic 1990
Oct-Dic 1989
22
Counter-cyclical economic programs
• PICE (Program to increase employment and
economic growth) October 2008
• Program to support families economies and
employment (January, 2009)
The spirit these programs remain neoliberal
Exchange rate Stability & market mechanisms
No policies to strengthen internal market
23
Ene 2009
Ene 2009
Ene 2008
Ene 2008
Ene 2008
Ene 2008
Ene 2008
Ene 2008
BdeM reserve action
Ene 2008
Ene 2008
Ene 2008
Ene 2008
Ene 2008
Ene 2008
Ene 2007
External reserve Changes
Ene 2007
Ene 2007
Ene 2007
Ene 2007
Ene 2007
Ene 2007
Ene 2007
Ene 2007
Ene 2007
6000
Ene 2007
Ene 2007
Exchange rate stability policy: External reserves fall and
FMI debt
8000
16
Exchange rate Pesos por dólar EUA
14
4000
12
2000
10
0
8
-2000
-4000
6
-6000
4
-8000
2
-10000
0
24
• Loose Monetary policy (2009): Interest rate
objective had not strong impact on finance
|
Interest rate central Average interbanking
bank goal
interest rate
21/01/2008 - 19/06/2008
20/06/2008 - 16/07/2008
17/07/2007 - 14/08/2008
15/08/2008 - 15/01/2009
16/01/2009 - 19/02/2009
20/02/2009- 09/03/2009
7.5
7.75
8
8.25
7.75
7.5
7.9306
8.1727
7.8750
8.6392
8.0591
7.908
25
Other policies
• Integral reform to PEMEX & the construction of one refinery: Postponed
Collective Transport (1300 millions of dollars). Not done
• Program to support families economies and employment
(January, 2009). Insufficient to increase economic growth .
Supported corporations linked to the external market (car
industry)
Deters unemployment in big enterprises link to the external
market
Price squeeze of goods that undergone before strong rises
(electricity and gasoline)
Social Policies
• Extended coverage of social security from 3 to 6 months
• Ability to retire savings from workers own pension funds
26
• Fiscal policy: No serous contra-cyclical
measure
• Based on exchange rate market intervention
and more foreign trade: Market based policies
- Tariff reduction 
- Exchange rate stability (central bank sold
reserve to prevent exchange rate devaluation
27
Conclusions
 Need to reform the Mexican Financial System increasing links
between bank and non-bank financial institutions and
enterprises
 Excess liquidity needs to be limited :
External capital mobility need to be restricted (taxes)
Banks ownership need to be domestic
Institutional investors need to be re-organized
Public bonds need to be reduced
Financial segmentation needs to come back (increase
capital reserves for investment activities)
Limit non-bank financial institutions
 Active fiscal policies: Priority sectors
28
 New Monetary instruments
Reserve requirement in case of excess liquidity
Interest rate cups, commissions and fees need to
be limited
Reintroduce direct central credit to government
 Compensatory mechanisms are required
Development bank
Government guarantees for domestic productive
entrepreneurs
 Reduce external dependence &  internal market
 Distribution of income to be changed in favor of
salaries and production
29