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Guillermo Güémez García Deputy Governor, Banco de México Okinawa, Japan April 8, 2005

Inter-American Development Bank Annual Meeting. De-dollarization and Domestic Currency Debt Markets in Emerging Markets: The Experience of Mexico. Guillermo Güémez García Deputy Governor, Banco de México Okinawa, Japan April 8, 2005. De-Dollarization: The Mexican Experience.

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Guillermo Güémez García Deputy Governor, Banco de México Okinawa, Japan April 8, 2005

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  1. Inter-American Development Bank Annual Meeting De-dollarization and Domestic Currency Debt Markets in Emerging Markets: The Experience of Mexico. Guillermo Güémez García Deputy Governor, Banco de México Okinawa, Japan April 8, 2005

  2. De-Dollarization:The Mexican Experience • Introduction • Exchange rate regime • Domestic currency debt markets in Mexico • Regulation of foreign currency operations • Conclusions

  3. I. Introduction Dollarization in Mexico has decreased in recent years. Dollar Deposits (% of broad money) Federal Government External Debt (% of total debt) Total In US Banks Domestic

  4. I. Introduction Private Sector External Debt (% of GDP) Private Sector (Financial) Total Private Sector (Non-financial)

  5. II. Exchange rate regime • We were forced to float • Measures to improve liquidity in the foreign exchange • markets • Eliminate restrictions on forwards operations • Facilitate trading on Mexican peso futures contracts in the CME • Issue regulation for derivative operations • Develop a structured futures market in Mexico (MexDer) • Auctions of dollars when market liquidity is low • Automatic and transparent mechanisms to accumulate reserves • Even when you float, you need foreign reserves • Low and stable inflation

  6. III. Domestic currency debt markets in Mexico • Government debt is the backbone of most fixed-income securities markets • Simple and standardized structures • Transparency and predictability • Liquidity: primary dealers • Participation of foreign investors • Derivative markets to take and to hedge positions • Develop an investor base for long term bonds: Private Pension and Mutual Funds • The private debt market has developed • Domestic banks: long-term finance • Housing finance • Enlarging maturity of commercial loans

  7. IV. Regulation of foreign currency operations • Mexico’s experience with dollarization of banks’ liabilities has not been very good • Regulation limiting foreign currency deposits: but allowing alternatives (deposits abroad and investment in foreign currency mutual funds) • Regulation of banks’ foreign exchange risk: • Limits to bank’s currency mismatches • Liquidity coefficient

  8. IV. Regulation of foreign currency operations Deposits structure in Mexican banks (small vs. large depositors) Source: Bank of Mexico, June 2004.

  9. V. Conclusions • Fixed or pegged exchanges rate regimes do not work with global markets and capital mobility. • “Economic fundamentals” are crucial for both exchange rate regimes: float and full dollarization. • Conditions for a successful floating exchange rate regime: • Strong economic fundamentals • Central Bank Credibility • Liquid foreign exchange markets

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