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

slide2

De-Dollarization:The Mexican Experience

  • Introduction
  • Exchange rate regime
  • Domestic currency debt markets in Mexico
  • Regulation of foreign currency operations
  • Conclusions
slide3

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

slide4

I. Introduction

Private Sector External Debt

(% of GDP)

Private Sector (Financial)

Total

Private Sector (Non-financial)

slide5

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
slide6

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
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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
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IV. Regulation of foreign currency operations

Deposits structure in Mexican banks (small vs. large depositors)

Source: Bank of Mexico, June 2004.

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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