Mexican Financial Markets

Mexico’s Economic: Highlights

GDP: $621 B GDP: $621 B Largest in Latin AmericaLargest in Latin America 1212thth largest of the World largest of the World

88thth Largest exporter of the world Largest exporter of the world 44thth Largest producer of oil Largest producer of oil

Economic Development 1950-1999

The Mexican Miracle: 1950-1970

Average growth: 6.7% Inflation: 4.2%Average growth: 6.7% Inflation: 4.2% Fiscal and Monetary DisciplineFiscal and Monetary Discipline Growth based on import substitutionGrowth based on import substitution Investment in infrastructureInvestment in infrastructure

The Downturn: 1970-1982

Average growth: 6.2% Inflation: 23.8%Average growth: 6.2% Inflation: 23.8% New oil reserves foundNew oil reserves found Growth based on government spendingGrowth based on government spending Government debt grew dramaticallyGovernment debt grew dramatically Ended with the 1982 crisis:Ended with the 1982 crisis:

Government defaulted on its debtGovernment defaulted on its debt Dramatic devaluation of the pesoDramatic devaluation of the peso

Adjustment: 1982-1988

Average growth: 0.0% Inflation: 94.6%Average growth: 0.0% Inflation: 94.6% Priority inflation abatementPriority inflation abatement Fiscal DisciplineFiscal Discipline Beginning of privatization and of transition Beginning of privatization and of transition

to an open economy (GATT)to an open economy (GATT)

The Salina’s Years: 1988-1994

Average growth: 0.0% Inflation: 94.6%Average growth: 0.0% Inflation: 94.6% The “Pactos”The “Pactos” Structural Reforms:Structural Reforms:

PrivatizationPrivatization Free tradeFree trade

Renegotiation of external debt “Brady plan”Renegotiation of external debt “Brady plan”

Salinas Years: Results

Pactos were effective controlling inflationPactos were effective controlling inflation 1987: 159.2% vs 1994: 7.1%1987: 159.2% vs 1994: 7.1%

At the same time GDP grew 3.3% in 1994At the same time GDP grew 3.3% in 1994 Exports were more than double those in Exports were more than double those in

1987 reaching $61 B1987 reaching $61 B

What went wrong? 1994 Crisis

A widening of the current account deficit that A widening of the current account deficit that reached almost 8% of GDPreached almost 8% of GDP

Strong appreciation of the Real Exchange RateStrong appreciation of the Real Exchange Rate Diminishing domestic savings rate (15% of GDP Diminishing domestic savings rate (15% of GDP

in 1994)in 1994) While financing to the public sector was growing While financing to the public sector was growing

extremely fast (from 5% of GDP in 1987 to 45% extremely fast (from 5% of GDP in 1987 to 45% in 1994)in 1994)

Political assassinations and uprising in ChiapasPolitical assassinations and uprising in Chiapas

Zedillo’s Years: 1994-2000

New stabilization planNew stabilization plan Refinance short term debtRefinance short term debt Rescue the banking sectorRescue the banking sector

Economic growth resumed in 1996 and was Economic growth resumed in 1996 and was strong until 2000strong until 2000

Inflation lowered to historical levelsInflation lowered to historical levels

Challenges going forward

Fiscal reform:Fiscal reform: Reduce fiscal evasionReduce fiscal evasion Reduce dependence on oilReduce dependence on oil

Electric sector reformElectric sector reform Reduce dependence on US economyReduce dependence on US economy Extremely unequal income distributionExtremely unequal income distribution

Mexican Stock Exchange

Founded in 1886Founded in 1886 The Stock Market Law in 1975 triggered The Stock Market Law in 1975 triggered

the development of the Mexican Stock the development of the Mexican Stock ExchangeExchange

The devaluation of 1976 also helped to The devaluation of 1976 also helped to develop the marketdevelop the market

Great performance until 1982 crisisGreat performance until 1982 crisis

Mexican Stock Exchange

Market cap grew from 3% of GDP in 1982 Market cap grew from 3% of GDP in 1982 to 45% in 1994to 45% in 1994

Over that period there were 76 IPO’sOver that period there were 76 IPO’s The government also helped developed the The government also helped developed the

market:market: Fondo MexicoFondo Mexico PrivatizationsPrivatizations

Historical Returns

Market Cap and IPO’s

International Comparisons

Securities Financing

Market Cap in 2001

Market Cap and IPO’s

Why this happened?

Corporate Governance IssuesCorporate Governance Issues Absence of Institutional InvestorsAbsence of Institutional Investors Mexican firms migrated to other marketsMexican firms migrated to other markets New Reforms to the Law of Stock Market New Reforms to the Law of Stock Market

Law(2001): Law(2001): Improve protection to investorsImprove protection to investors Increase transparencyIncrease transparency Access to the great public to capital marketsAccess to the great public to capital markets