Mexican Financial Markets

Mexico’s Economic: Highlights GDP: $621 B GDP: $621 B  Largest in Latin America  12 th largest of the World 8 th Largest exporter of the world 8 th Largest exporter of the world 4 th Largest producer of oil 4 th Largest producer of oil

Economic Development

The Mexican Miracle: Average growth: 6.7% Inflation: 4.2% Average growth: 6.7% Inflation: 4.2% Fiscal and Monetary Discipline Fiscal and Monetary Discipline Growth based on import substitution Growth based on import substitution Investment in infrastructure Investment in infrastructure

The Downturn: Average growth: 6.2% Inflation: 23.8% Average growth: 6.2% Inflation: 23.8% New oil reserves found New oil reserves found Growth based on government spending Growth based on government spending Government debt grew dramatically Government debt grew dramatically Ended with the 1982 crisis: Ended with the 1982 crisis:  Government defaulted on its debt  Dramatic devaluation of the peso

Adjustment: Average growth: 0.0% Inflation: 94.6% Average growth: 0.0% Inflation: 94.6% Priority inflation abatement Priority inflation abatement Fiscal Discipline Fiscal Discipline Beginning of privatization and of transition to an open economy (GATT) Beginning of privatization and of transition to an open economy (GATT)

The Salina’s Years: Average growth: 0.0% Inflation: 94.6% Average growth: 0.0% Inflation: 94.6% The “Pactos” The “Pactos” Structural Reforms: Structural Reforms:  Privatization  Free trade Renegotiation of external debt “Brady plan” Renegotiation of external debt “Brady plan”

Salinas Years: Results Pactos were effective controlling inflation Pactos were effective controlling inflation  1987: 159.2% vs 1994: 7.1% At the same time GDP grew 3.3% in 1994 At the same time GDP grew 3.3% in 1994 Exports were more than double those in 1987 reaching $61 B Exports were more than double those in 1987 reaching $61 B

What went wrong? 1994 Crisis A widening of the current account deficit that reached almost 8% of GDP A widening of the current account deficit that reached almost 8% of GDP Strong appreciation of the Real Exchange Rate Strong appreciation of the Real Exchange Rate Diminishing domestic savings rate (15% of GDP in 1994) Diminishing domestic savings rate (15% of GDP in 1994) While financing to the public sector was growing extremely fast (from 5% of GDP in 1987 to 45% in 1994) While financing to the public sector was growing extremely fast (from 5% of GDP in 1987 to 45% in 1994) Political assassinations and uprising in Chiapas Political assassinations and uprising in Chiapas

Zedillo’s Years: New stabilization plan New stabilization plan  Refinance short term debt  Rescue the banking sector Economic growth resumed in 1996 and was strong until 2000 Economic growth resumed in 1996 and was strong until 2000 Inflation lowered to historical levels Inflation lowered to historical levels

Challenges going forward Fiscal reform: Fiscal reform:  Reduce fiscal evasion  Reduce dependence on oil Electric sector reform Electric sector reform Reduce dependence on US economy Reduce dependence on US economy Extremely unequal income distribution Extremely unequal income distribution

Mexican Stock Exchange Founded in 1886 Founded in 1886 The Stock Market Law in 1975 triggered the development of the Mexican Stock Exchange The Stock Market Law in 1975 triggered the development of the Mexican Stock Exchange The devaluation of 1976 also helped to develop the market The devaluation of 1976 also helped to develop the market Great performance until 1982 crisis Great performance until 1982 crisis

Mexican Stock Exchange Market cap grew from 3% of GDP in 1982 to 45% in 1994 Market cap grew from 3% of GDP in 1982 to 45% in 1994 Over that period there were 76 IPO’s Over that period there were 76 IPO’s The government also helped developed the market: The government also helped developed the market:  Fondo Mexico  Privatizations

Historical Returns

Market Cap and IPO’s

International Comparisons

Securities Financing

Market Cap in 2001

Market Cap and IPO’s

Why this happened? Corporate Governance Issues Corporate Governance Issues Absence of Institutional Investors Absence of Institutional Investors Mexican firms migrated to other markets Mexican firms migrated to other markets New Reforms to the Law of Stock Market Law(2001): New Reforms to the Law of Stock Market Law(2001):  Improve protection to investors  Increase transparency  Access to the great public to capital markets