Mexican markets pick up in second quarter, but risks persist

Mexican markets pick up in second quarter, but risks persist

Economy & Policy Regulation Mexico

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Mexico's financial markets performed better in the second quarter this year, but internal and external risks persist along with uncertainty about an economic recovery, Mexico's financial system stability council, or CESF, said earlier this week.

Despite a highly volatile environment, stability indicators improved in the second quarter. Interest rates were lower on government bonds, risk premiums went down and the peso appreciated against the dollar CESF said in a report on Tuesday.

But there are persistent external risks, including a slowdown of the global economy, uncertainty about an economic recovery, the possibility of greater volatility in international markets and capital flows towards less risky assets, CESF said.

Internal risks include uncertainty about the depth of the economic contraction in Mexico and the speed of recovery, given the gradual reopening of the economy during the COVID-19 pandemic, and the possibility of more ratings downgrades for Mexico and the state-owned oil company Pemex, according to CESF.

The council surveyed financial intermediaries and found an increased perception of credit and funding risk for financial institutions. Nonetheless, the system remains stable because it had sufficient liquidity at the beginning of the crisis, CESF said.

"We are in a situation in terms of financial stability in Mexico which is solid," Javier Eduardo Guzmán, deputy governor of the central bank Banco de México, or Banxico, said in a webinar hosted by the Institute of International Finance (IIF) on Tuesday. "We have a very strong banking system, and this is the result of policies that have been implemented over many years."

The non-banking financial sector is relatively small, even though it is growing rapidly, and it is not a source of systemic difficulties, Guzmán added.

Planning for the next steps, however, remains a major challenge for the central bank, he said.

"We are facing a situation of a lot of uncertainty," he said Guzmán. "The range of possible declines in economic activity that we have included in our scenarios for this year range from -4.6% to -8.8%."

According to Alejandro Werner, director of the Western Hemisphere department of the International Monetary Fund (IMF), Banxico has faced criticism for being too rigid with monetary policy and for keeping the official exchange too high. But those measures are precisely what allows the central bank to act aggressively to support the economy, he said in a podcast hosted by Banorte on Wednesday.