Banco de México tries to avoid the collapse of the second Latin American economy. In a series of unprecedented measures, the central bank has announced this Tuesday the injection of 750,000 million pesos, about 30,000 million dollars at today’s exchange rate, which represents 3.3% of GDP. The main objective of this rescue operation is to facilitate access to credit for small and medium-sized enterprises, in bankruptcy danger by the suspension of activities caused by the coronavirus. It is a faculty, that of lender of last resort, which the institution had not used until now, according to the analysts consulted. In this way, the central bank intends to give air to millions of entrepreneurs before the amazement of the Ministry of Finance, which has not presented a forceful emergency plan for the looming economic crisis.
The institution makes this exceptional decision in an exceptional context. The IMF and ECLAC they predict a reduction of more than 6% of GDP for this year, one of the worst falls in the region. In addition, three agencies recently downgraded the sovereign and Petróleos Mexicanos (Pemex). For the oil company, two agencies reduced it to junk, with the consequent increase in interest to borrow. The Bank points to the negative impact of the pandemic on financial markets, as well as the “abrupt drop” in oil prices, to justify the reduction of 50 points in the interest rate to 6% and the deployment of “Additional measures” that accompany it.
Among the list, highlights the expansion of the scope of a liquidity mechanism aimed at banks and the creation of a window for the exchange of debt securities for government securities. However, the most important measure is aimed at facilitating access to credit for small and medium-sized companies. The Bank will support 250,000 million pesos, 10,000 million dollars, to development and commercial banks that seek to alleviate this sector of the economy, the most vulnerable to the shock caused by the suspension of non-essential activities.
Economist Valeria Moy points out that this support is a “breather” for the economy in the face of a government response that, like many other analysts, she considers insufficient to address the size of the problem. “It is going in the right direction, although it is unknown territory,” says the director of the Mexico analysis center. How are we doing? “The Bank had never used this lender power that I remember. The US Federal Reserve is doing the same. “
This support is given in parallel to the main commitment of the Mexican Government for economic recovery – the delivery of some three million loans of 25,000 pesos each to companies in both the formal and informal sectors. The monetary policy measure announced on Tuesday may complement this point on the Executive’s agenda, although there are substantial differences between one program and another. Unlike government support, Banco de México’s resources exclude informal companies and their distribution passes through banking institutions, which will decide the amount of the loans and the conditions to access them.
For economist José Luis de la Cruz, the question is whether companies will be interested in contracting credit at a time of so much uncertainty about the duration of the contingency. “It is positive but I think that, initially, the companies that are going to be able to benefit are those with a positive expectation once the strongest part of the contingency passes,” he points out. “Some companies could see that the situation of the economy is not going to be so favorable in the rest of the year as to be able to handle the payment of debt plus interest.”
In this sense, the success of Banco de México’s liquidity injection strategy may depend on the action of the Government, which until now has been very reluctant to ease the tax burden on companies. President Andrés Manuel López Obrador has ruled out tax exemptions, reductions or deferrals. The fiscal measures adopted by the Executive account for less than 1% of GDP, according to the IMF, a much lower percentage than the weight of the stimulus packages of most large Latin American economies.
Faced with this reluctance, De la Cruz points out that it would take a fiscal policy “in the same direction” as the monetary one and open the door to tax deferrals to encourage companies to apply for loans. “Or, if there is no such fiscal policy, at least a policy of directives with the banking sector to lower the requirements for access to credit,” he points out. “To make sure that these Banco de México resources really reach the economy.”
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