Formalizing the Mexican Financial Industry

While Mexico’s economy is strong, financial practice and corporate transparency need tangible improvement to reap the higher hanging fruit.

Mexico ranks among the world’s 15 largest economies and second in Latin America. World Bank data for 2021 indicates a GDP per capita of USD9,926.42. Latam overall grew by 6.8% in 2021, having contracted 7% in 2020, while Mexico printed a GDP of USD1.293 trillion and growth of 4.8%. Another impressive figure is the nation’s 70% internet penetration rate, which bodes well for initiatives to expand the formal economy by raising financial participation.

This in a country where cash remains king, even accounting for 67% of online payments. Sector research reveals that around 60% of the population remains unbanked, although 94% of consumers use mobile banking apps or online banking services. Raúl Gallegos is the President of AMEXCAP, The Mexican Association of Private Capital, established in 2003 as a non-profit organization to foster the development of Mexico’s private capital and entrepreneurial capital industry.

Speaking to TBY, he notes fierce competition from more formalized economies to woo the foreign investor. Yet Mexico, he notes, has scored well fintech uptake, the catalyst of financial participation.

Turning to the corporate world, one is struck by the fact that 95% of Mexican companies are family owned, with 90% run by a family member. Globally the number is 65% of companies. Such firms are often less transparent or are reluctant to go public, which in turn curbs capital market liquidity. And so the challenge is to reap…

…The Wages of Respectability

Guillermo Cruz, US Managing Partner of Maquia Capital, believes in the country’s potential to the degree that “businesses in Mexico should compare themselves on a global scale [because while] most of us compare ourselves within Mexico, or within Latin America […] the sky is the limit.”

He points out that Mexico, and Latam in general, predictably boast a vast deal pipeline because companies are cheaper to acquire than in the US, even though they might in actual fact have greater commercial potential.

Meanwhile, Gallegos highlighted his organization’s focus on “promoting transparency and ethics, having the most professional managers possible, and conducting optimal interaction with investors to have the best industry we can.” Notably, AMEXCAP’s objectives include the generation of actionable statistical information.

Taking Stock of the Market

The fact is that Mexico’s stock exchange lags other markets in the region. World Bank data shows that in terms of GDP, equity market capitalization, while rising notably from 17.7% in 2003 to 33.5% in 2016, hugely lags the 100%+ of the US or Japan. The Mexican Stock Exchange, Bolsa Mexicana de Valores (BMV) ranks second after Brazil by percentage contribution to GDP. It has a market capitalization north of USD530 billion.

The bourse’s integration to the Latin American Integrated Market (MILA) in December 2014, joining the Chilean, Colombian, and Peruvian bourses, transformed MILA into Latin America’s preeminent stock exchange.

Yet for the capital markets to reap the spoils of the wider economy, Fondo de Fondos (Fund of Funds) Managing Director Felipe Vilá stresses the need to better reach the investor. The firm champions productive investment in Mexico and Latam, notably to boost SME competitiveness.

It also pursues a strategic plan to “develop and invest in private equity, venture capital, energy, infrastructure, and social and environmental impact funds.” Vilá notes that once, the “stock market was a huge financing source for SMEs, though this later stopped and never returned.”

He proposes that the equity market enable these firms to opt for “short and medium-term issuances, for working capital or specific projects with a three to a six-year term.” This would present an enticing source of finance for firms that ultimately account for the bulk of the economy.

More Instruments Make More Sound

Maquia Capital, which eyes managing a USD1-billion portfolio, assists Latam companies in joining the public market through special purpose acquisition companies (SPACs) that assist firms with the leg-work of listing “audits, governance, and so on, [all] in English.” Cruz laments the fact that Mexico “has not recognized enough value in the capitalization of companies to make local listing attractive.” Meanwhile, “on the institutional side, there are few investors including pension funds due to the illiquid market,” he notes.

The prognosis, though, is hopeful. “We have had various cycles,” says AMEXCAP’s Gallegos, and today Mexico is “entering a different kind of phase, with what I consider a more mature industry.”

Mexico’s real estate investment trusts (FIBRAs), for one, play a role in raising liquidity through sizable property portfolios. Sector data reveals that these profitable instruments have seen annual earnings rises of 15% over the past three years, as revenues climbed 7.4% per year. As of August 2022, the Mexican economy had grown 5.7% YoY, exceeding estimates of 3.3%.

The race is on for the country to build confidence in its financial universe and enjoy the deeper liquidity pool it merits.