Light at the end of the tunnel for Mexico

A new trade agreement with the U.S. and the launch of BIVA bring good news for the business community.

The summer was not a good one for much of Latin America, with continuingcrises in Argentina, Brazil and Venezuela. I am happy we received good news from Mexico, which was able to sign a new trade agreement with the U.S.

Even if the conditions related to the rules of origin are stricter than in the previous accord,  Mexican companies can feel a sense of relief, as there seems to be again a stable framework under which they can operate. Mexican corporate leaders such Cemex, Grupo Bimbo, Nemak -part of Grupo Alfa-, América Móvil, Televisa and many others now need to adjust to the new rules, but the uncertainty has been removed. Not surprisingly, the Mexican peso went up against the dollar.

Other good news from Mexico has been the launch of BIVA (Bolsa Institucional de Valores), the second stock exchange to operate alongside the long-established Mexican Stock Exchange  (the Bolsa Mexicana de Valores, or BMV), created in 1975. The listings, market capitalization,  and liquidity in Mexico are far below what would be expected in an economy of its size and development.

Due to the absence of competition, the Mexican stock market was lagging those of other  developing countries both in sophistication and size. BMV was the second-biggest stock exchange in Latin America after that of Brazil. Yet, with just 140 listed companies — compared with 368 in Brazil — its market capitalization represented only 34% of gross domestic product, versus 42% for Brazil.

This leaves wide potential to boost stock market penetration.

Although Mexico’s fixed income  market was deep and liquid, its equity market struggled. Relatively few of Mexico’s family-owned companies opted to list their shares, often out of reluctance to adopt BMV’s required corporate governance standards, and those that did
tended to seek the debt markets rather than equity. Trading was thin among the majority of the names. In fact, only 12 securities were responsible for trading more than 50% of 2016 volume. Unlike more developed stock markets, BMV lacked heavyweight investors, such as hedge funds and high-frequency traders.

The introduction of BIVA could reduce transaction costs, encourage technological innovation,  boost liquidity for many inactive stocks on BMV and entice more companies to go public in Latin America’s second-largest economy. BIVA wants to be a tool to help finance companies and  expand the country’s economy. The initiative was launched in the middle of the political elections that brought leftist candidate Andrés Manuel López Obrador to power.

It has been interesting to watch the positive reaction of financial markets to his victory, which has provided a opportunity for Mexicans to unite and to give this new president a chance.  Although it is too early to know what will happen, today, this is an example of consensus  building for other Latin American countries and for the world.

LOURDES CASANOVA, senior lecturer and director, Emerging Markets
Institute, Cornell Johnson College of Business, Cornell University.
[email protected]

This article was published in Bravo 2018 edition in Latin Trade


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