(Expansion) – The most superficial analysis would say that the appointment of Arturo Herrera to Banxico was obvious, because it comes from the Treasury, the financial sector, or simply because it is part of the current government.
But the reasons for this appointment are more interesting than the flat analysis or political gossip we commonly read out there.
The reason the announcement was made so far in advance is a message to the market of “hold on, the loose currency will continue throughout the year.”
The economic reality
Mexico is a country with first world economic institutions (like Banxico), but with a third world banking system.
The value of bank deposits over GDP is similar to that of an underdeveloped country, and well below Latin American peers such as Chile or Brazil. Therefore, bank credit also represents only a fraction of GDP. It is empirically proven that low credit penetration is associated with low economic growth and perhaps poor income distribution.
In other words, under a monetarist view of the economy, Mexico’s growth potential is restricted to what its banking system does.
The banking system is the great disperser of money in any free market economy through credit. Figuratively speaking, when an arm, a leg or a heart is missing, other agents of the financial system must make up for this lack. Most likely, the State will have to do so, since other entities within the financial system are not interested in doing low-profit businesses.
For this reason, direct transfers from governments become an option for the most vulnerable unbanked population, regardless of the color of the ruling party.
It is not only about the political aspect of delivering money, economically, it is the only distribution channel in a country with a banking system that seeks rents in more attractive segments of the population.
Our economic system has a paradox, it lacks money, but the current production frontier of the Mexican economy does not allow it to be released by the handful due to the imminent inflationary danger.
What does Banxico have to do with it?
Faced with this dilemma, Banxico becomes vitally important because it is the principal of the country’s monetary policy. It is the first and only channel of monetary issue and who determines the price of debt.
These days many want Banxico to apply monetary discipline in the face of inflationary pressure and inflation that has already developed among the price makers of the economy.
However, I reiterate that, in the Mexican case, monetary discipline or restrictive policy has a higher opportunity cost than in other countries where money flows more and better. By the nature of this banking system, the impact of disciplining the economy through higher interest rates has higher costs, because money becomes even more scarce and rivaled.
Faced with this economic dilemma, surely the next governor of the Bank of Mexico knows the paradox that monetary discipline is business for some, but with a high opportunity cost and a social cost for others.
We can expect the next governor to be in favor of a looser monetary stance for the remainder of the administration. Sure, the impact on inflation is implicit and unavoidable.
The most important point is the deficiency with which the traditional channels for the distribution of retail money work in Mexico, which promote incentives for the State to remedy it, perhaps excessively.
Editor’s Note: Iván Franco is the founder and director of the competitive intelligence consultancy Triplethree International. Follow him on and on. The opinions expressed in this column belong exclusively to the author.
