Mexico Strengthens Its Financial Resilience

Challenge

Affected by the global financial downturn of 2008, Mexico’s financial sector confronted worsening access to capital markets and distressed financial intermediaries in the housing sector. Domestic demand experienced a severe decline in 2009, when the country’s gross domestic product (GDP) contracted by 6 percent.

A severe contraction of external demand, particularly from the United States, and the effects of a severe flu outbreak added to the growing economic uncertainty and credit crunch. In addition, the bankruptcy of a large retailer, exposed to exotic exchange rate derivatives that bet on a continuous peso appreciation, froze the Mexican commercial paper market.

In this context of increasing risk aversion, com- mercial banks curtailed credit growth. To support the housing and commercial paper markets and to play a countercyclical role, public guarantee credit schemes were enhanced and Mexican public banks expanded their balance sheets.

Solution

The World Bank worked with the Government of Mexico to develop and implement a customized and innovative package of services to support growth and increase the resilience of the Mexican financial sector to external shocks. The services responded to four strategic pillars with a short and medium-term horizon: (i) strengthening the financial sector, (ii) improving crisis prepared- ness, (iii) supporting the implementation of countercyclical policies to support growth, and (iv) improving productivity of the Mexican economy to sustain economic growth. Between 2008 and 2011 the specific engagement of the Bank included:

Financial Services:

• Supporting low-income housing financing through a restructuring of the balance sheet of the Federal Mortgage Society (Sociedad Hipotecaria Federal – SHF).
• Customizing the financial conditions to manage roll-over and foreign exchange risks.
• Improving crisis resilience and improved business environment through budget support lending.

Knowledge services:

• High level mission led by the Bank’s Chief Economist in response to the mortgage housing crisis.
• Financial crisis simulation exercise.
• Evaluation of financial sector stability and development and formulation of medium-term reform agenda for the sector (Financial Sector Assessment Program, FSAP).

Convening services:

• Two Regional conferences on Development Banks and Competitiveness.
• Entrepreneurship Forum with CNN Expansion on Innovation and Entrepreneurship.

Results

The World Bank’s comprehensive engagement helped minimize the impact of the global financial crisis in Mexico. Specific results include:

• Contribution to the stabilization of the mortgage financing markets in Mexico, helping 40,000 low-income families to gain access to housing finance during the global financial crisis.
• Measures to boost productivity, support counter-cyclical policies and strengthen financial market resilience supported the strong economic recovery in 2010-2011.
• Access to IBRD funding reduced the Government’s financing cost, supporting their fiscal expansionary efforts to mitigate economic and employment contraction. To illustrate, the ex- tension of the temporary employment program increased the work-shifts of employees hired by this program by 15 percent.

World Bank Group Contribution

In order to strengthen financial sector resilience and support growth through countercyclical policies and enhance productivity, the International Bank for Reconstruction and Development (IBRD) provided US$2.5 billion through three lending operations.  In addition US$450,000 were mobilized from trust funds, largely from the Spanish Fund for Latin America the Caribbean (SFLAC), to support advisory and convening services. IBRD also funded several knowledge services through its budgetary resources.

Partners

The Bank maintains close partnerships with other donors and multilaterals, especially the Inter-American Development Bank (IADB) and the International Monetary Fund (IMF). For example, the 2011 Financial Sector Assessment Update, conducted jointly by the Bank and the IMF, formu- lates a series of recommendations to foster sound financial sector development in Mexico. In addition US$450,000 were mobilized from trust funds, largely from the Spanish Fund for Latin America
the Caribbean (SFLAC), to support advisory and convening services.

Moving Forward

The Bank will continue to support the Mexican authorities in their efforts to improve competitive- ness and productivity by enhancing the business environment, promoting competition, fostering sound financial sector development, supporting
the Mexican innovation system and developing infrastructure. In addition, Bank engagement in Mexico focuses on addressing other key challenges to sustain shared prosperity such as improving the quality of education, assuring energy security, and strengthening institutions.

Beneficiaries

The population of Mexico as a whole benefited from the financial and advisory support to the financial sector and to boosted economic growth for the country. In addition, 40,000 low-income families were able to access housing finance as a result of the project.