(Expansion) – The economic environment continues to show effects both nationally and globally, derived from geopolitical events and the effects on supply chains. The foregoing has led to a sustained upward trend in inflation at a global level, which has affected the dynamics of consumption and investment, with a negative impact on the prospects for economic growth for this year and next.
This economic situation has led to the continuation of the cycle of rate hikes by central banks globally, in a search to alleviate inflationary pressures. In particular, Banxico has maintained a restrictive monetary policy, taking the reference rate to a level of 8.50%, with the expectation of closing 2022 at a level close to 10.0%. Although I expect a normalization of economic conditions in the medium term, there remains some uncertainty about the timing of these inflationary pressures and their medium-term effect on growth.
For the investing public, an environment of higher rates could be attractive in terms of higher yields on debt instruments; even those with a low level of risk. For example, the Cetes rate has increased from 4.24% at the end of 2020 to 8.75% as of September 2022, according to data from the Bank of Mexico. This same behavior in rates is reflected in a variety of local and international assets, also considering that a significant proportion of the stock market debt is referred to a variable rate, so it follows the upward trend of the reference rates.
Despite the above, I identify a low risk appetite in the markets, where debt placements in the local market have slowed down, despite higher interest rates. In my opinion, the economic situation and the potential impact that inflationary and growth pressures could have on issuers are having a greater weighting in investors’ decision-making, which has led to investment demand being concentrated in low risk assets.
Focusing on the investment portfolios of commercial banks, this conservative stance in terms of taking risk positions is also observed in this sector, where banks maintain their investments mainly in government debt instruments and with a very low investment profile. risk. In the balance of risks, I believe that this position is adequate given the economic situation, where these instruments with a low risk profile are offering attractive returns not only to banks, but also to their savers and investors.
Turning to the growth prospects for credit portfolios, I think we are facing an economic environment that limits their growth prospects. In this sense, it should be taken into account that the demand for credit will possibly come from short-term liquidity needs or to compensate for a loss of purchasing power, and not from investment plans or the acquisition of durable goods. In my opinion, this would apply to both consumer loans and business loans, particularly in cases such as credit cards and loans for SMEs.
On the other hand, I expect that the context of rising rates and lower growth will impact the supply of certain credit products, particularly due to a higher cost for potential clients in an environment of high inflation that limits people’s capacity for indebtedness. In particular, I expect this effect to be seen in mortgage loans, and to a lesser extent, in auto loans.
In the case of non-bank financial intermediaries, I believe that this type of institution had maintained a greater appetite for growth compared to commercial banks, by serving mainly a segment of small and medium-sized companies that was neglected by banks, and that had financing needs for liquidity and working capital in the current context. However, this segment currently faces challenges associated with access to funding sources, so its growth prospects are also limited in the short term.
In conclusion, I believe that financial intermediaries face a challenging economic environment, where inflationary pressures persist in the short term and the balance of risks to economic growth remains on the downside. Considering these factors, adopting a conservative and low risk appetite stance is a prudent reaction. In particular, for commercial banking I observe a healthy and profitable operation, without this involving greater risk taking in the portfolio and investments, which favors the stability of the Mexican financial system in the short and medium term.
Editor’s note: Akira Hirata is Associate Director of Financial Institutions / ABS at HR Ratings. Follow him on . The opinions published in this column belong exclusively to the author.
