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De-Dollarization in Emerging Markets: Mexican Experience

Explore the de-dollarization journey in Mexico through exchange rate regimens, domestic currency debt markets, and foreign currency regulations. Learn key insights and conclusions from Banco de México Deputy Governor's presentation at the Inter-American Development Bank Annual Meeting in 2005.

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De-Dollarization in Emerging Markets: Mexican Experience

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  1. 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

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

  3. 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

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

  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. 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. 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. IV. Regulation of foreign currency operations Deposits structure in Mexican banks (small vs. large depositors) Source: Bank of Mexico, June 2004.

  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

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