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

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

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

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

5. 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. 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. 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. 8 IV. Regulation of foreign currency operations Deposits structure in Mexico Sight deposits and accounts Time deposits Total deposits in USD billion$48 % of deposits >10,000 USD68%81% % of deposits <10,000 USD32%19% Deposits structure in Mexican banks (small vs. large depositors) Source: Bank of Mexico, June 2004.

9. 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