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Loan-Less Mexico Losing on Growth as Pena Nieto Prods Banks

A bill to be introduced in congress soon will boost competition in the financial industry, provide state guarantees on some loans and make it easier to seize debtors’ assets, according to Mexico's Finance Minister Luis Videgaray. Photographer: Susana Gonzalez/Bloomberg
A bill to be introduced in congress soon will boost competition in the financial industry, provide state guarantees on some loans and make it easier to seize debtors’ assets, according to Mexico's Finance Minister Luis Videgaray. Photographer: Susana Gonzalez/Bloomberg

April 16 (Bloomberg) -- Gonzalo Garcia, 45, thought 10 years as a branch manager for Citigroup Inc.’s Banamex unit in Mexico would help qualify him for a loan to start up an herbal medicine business. He was wrong. Banamex, along with two other leading lenders, turned him down.

“I felt utter frustration,” said Garcia, who obtained credit through the government. “From inside we were constantly denying loans. From outside I wasn’t able to get one.”

Mexico’s commercial credit market, the smallest of any country in Latin America, has weighed on the nation’s economy, which expanded less than its regional peers over the past decade. Improving lending rates would boost gross domestic product expansion by about 1 percentage point a year in Latin America’s second-biggest economy, says Jose Perez, associate financial services regional director of Standard & Poors’.

Commercial bank lending as a percentage of GDP is 19 percent in Mexico, half the rate of Brazil’s and the lowest of any Latin American nation, according to the most recent comparable data compiled by the International Monetary Fund.

After four months in office, President Enrique Pena Nieto wants to revive risk taking in an industry that lends less money as a percentage of GDP than it did before its banking system collapsed in 1995, according to BBVA Bancomer, with most of its business loans going to large, established companies.

The Bill

A bill to be introduced in congress soon will boost competition in the financial industry and make it easier to seize debtors’ assets, according to Finance Minister Luis Videgaray. The changes are part of a plan to double the nation’s 2.5 percent average growth in the past decade. The region grew at a pace of 3.6 percent in the period.

“Mexican banks don’t lend enough,” Videgaray said at Bloomberg’s Mexico Economic Summit in Mexico City on March 21. “The figures become particularly dramatic when we look at how little access micro, small, and especially mid-sized companies” have to credit.

Small and mid-sized businesses, which account for 98 percent of companies in Mexico and employ 70 percent of its workers, bear the brunt of the credit scarcity, according to Eva Gutierrez, an analyst at the World Bank.

Banks prefer to dole out credit cards at high interest rates, amass government bonds or lend to larger companies, while smaller enterprises suffer, Gutierrez, the bank’s lead regional financial sector specialist, said in a telephone interview from Washington.

Smaller firms receive 15 percent of business loans offered by commercial banks, Videgaray said April 9.

Risk Averse

“Why are the banks so risk averse?,” Gutierrez said. “Because executing collateral in Mexico is expensive.”

It may take as much as 5 years for creditors to collect on a defaulted loan, Roberto Galarza, the Mexican banking association’s coordinator of credit to small and mid-size businesses, said in an interview.

Establishing courts that specialize in recovering defaulted debt and creating a faster process for creditors to register guarantees would bring down the cost of loans, Galarza said.

Under the plan to be presented this month, development banks, which lend a quarter the amount of Brazil’s as a percentage of GDP, will offer more guarantees through commercial lenders, and the government will improve regulatory frameworks, said Enrique Jacob Rocha, president of the Economy Ministry’s entrepreneurs institute.

Mexico Optimism

The nation’s growing exports, record-low interest rates and the second-lowest inflation rate helped the economy expand 3.9 percent in 2012.

Grupo Financiero Banorte SAB forecasts the economy will grow faster if Pena Nieto carries out his pledge to increase private investment in the state-owned oil industry and close loopholes to lift tax revenue. Nomura Holdings Inc. predicts the economic overhaul may help the nation’s GDP surpass Brazil’s within a decade after being overshadowed by Latin America’s biggest economy since 2005.

Mexico’s economy will outpace Brazil’s for a third straight year in 2013, expanding 3.6 percent, according to analysts surveyed by Bloomberg.

The yield on government peso debt due 2024 has fallen 73 basis points, or 0.73 percentage point, since Pena Nieto took office Dec. 1, reaching 4.79 percent as of 9:28 a.m. in Mexico City. It dipped to a record low of 4.75 percent last week. Foreign funds tracked by the EPFR Global index invested a record $8.78 billion in Mexican debt last year.

Informal Economy

Under the new administration, stocks have risen 2.9 percent, reaching an all-time-high on Jan. 28, while the peso has strengthened 5.6 percent this year, the most of any major currency tracked by Bloomberg. The peso rose 0.9 percent today to 12.1685 per dollar.

The drought in commercial loans keeps many businesses in an informal economy that already employs 60 percent of the labor force and where below-average productivity levels are a drain on growth, said Lisa Schineller, an S&P sovereign ratings director.

Lack of credit and the informal sector “feed on each other,” Schineller said by phone from New York.

Felipe Gutierrez, a 29-year-old street vendor who sells Adidas backpacks near Chapultepec Forest, Mexico City’s central park, said he tried to take out a loan to turn his informal stall into a tax-paying storefront. He said BBVA Bancomer and Bank of Nova Scotia turned him down because he had no receipts to prove his income.

“The government says we should commit to paying taxes but they don’t give us a way to do it,” Gutierrez said. “I’m not asking for a handout. I just want a loan.”

Turning Point

The president’s press office declined to comment on Mexico’s poor loan access, as did Banamex, Bancomer and Scotiabank. The Finance Ministry didn’t respond to a phone request and message seeking comment.

Lending may be reaching a turning point. Healthy capitalization of banks and higher consumer and small business loans put Mexico on the “verge of a credit boom” that would boost financing 15 percent on average, up from 12 percent last year, according to Credit Suisse.

Nomura says Pena Nieto’s economic changes will boost growth as much as 1.5 percentage points, allowing banks to sustain a 15 percent to 17 percent loan-growth rate through 2020.

Well Positioned

Banorte is well-positioned to reap the benefits of a credit boom, according to the April 4 Nomura report and Credit Suisse’s March 14 report.

Banorte extends more loans to small business than any other institution operating in Mexico, granting 28 billion pesos in credit to more than 20,0000 firms through government guarantee programs, said Galarza of the banking association, who’s also deputy director general of small and medium enterprises at Banorte. Banks in general are paying more attention to smaller enterprises, boosting credit to such firms by 30 percent last year, Galarza said.

Gonzalo Garcia, whose business generates enough profit for him to send his daughter to private school, plans to have four holistic drug stores running with 10 employees by the end of the year, and 20 pharmacies by 2018.

After being denied commercial bank credit from 2009, Banorte granted him his first loan last year at 12 percent interest under a special entrepreneurs’ program. Banamex followed with another loan shortly after.

“Banks are just waking up” to lending to small businesses, he said.

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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