In order to understand hos Mexico’s financial system got to where it is today and plan for its future, it’s necessary to retake an in-depth analysis of its foreign ownership in the wake of the 1995 financial crisis, according to Enrique Cárdenas, head of the Espinoza Yglesias Studies Center. Five of the top banks are foreign-owned: BBVA-Bancomer and Santander are from Spain; Banamex-Citi of the U.S.; HSBC of Britain and Scotiabank, Canadian. Only Banorte and Inbursa are Mexican-owned.

“We need to remove the political and mythical elements from the issue, since people have a right to understand the real consequences of the 1995 crisis, and whether or not it’s positive to have the majority of the banking system in the hands of foreign capital”, said Cárdenas.

The subject of foreign ownerships of the top banks is not much to the liking of those institutions. Their leading executives agree that they should not be regarded as foreign, since they operate within the Mexican market and are strictly regulated by Mexican laws. The issue came to a head recently during the election of the new head of the Mexican Banking Association, with a thinly veiled dispute over whose turn it was.

Effects of Insecurity

The high levels of insecurity the country is going through have become an element that hurts economic activity in certain regions of Mexico, something that in turn generates lower investments and development throughout the country, cautioned former president Ernesto Zedillo.

“I support President Calderón in his conviction to fight organized crime, but the struggle is already affecting every one of us in terms of personal security, and has become an inhibitor of both capital investments and development,” said Zedillo during a conference in Acapulco.

He cited the importance of reaching agreements among various segments of society, so that the rule of law will be maintained at all costs, and citizens will receive adequate protection by public servants who perform with ethics and professionalism. This was a way of saying that corruption among law enforcement agencies has become a real problem and must be eradicated.

Tax Cuts Proposed

With skepticism from the ruling PAN and the leftist PRD regarding its effectiveness, the majority PRI’s Sen. Manlio Fabio Beltrones submitted last week his long-awaited tax reform proposal, which turned out to be vastly different from the initial plan of reducing the value-added tax (IVA) from 16% to 12%. The actual plan leaves IVA at 16%, but with 3% deductibility on purchases not greater than 100,000 pesos (US$8,300).

It proposes to expand the 16% IVA to now-exempt food products, under the same deductibility mechanism, but with a food basket exemption that includes meats, tortillas, cornmeal, flour, bread, dry goods, milk, eggs, sugar, salt, cooking oil, tuna and sardines. Medicines will remain exempted, and the IVA would be raised to 16% in northern border states, where it is currently 11%.

The plan seeks to eliminate the controversial 2% IETU tax for corporations, and merging it with the income tax (ISR). Corporate income taxes would be reduced from the current 30% to 25% over three years. Personal income tax for those earning over 500,000 pesos (US$42,000) per year would rise to 35%, but with a number of deductions including school tuitions up to the high school level.

Foreign Capital Up

The foreign holdings of the total Mexican government debt outstanding rose from 19.87% at the close of December, 2010 to 21.83% at the end of February, equivalent to a 17.2% increase to 697 billion pesos (US$58 billion), according to figures released last week by the central bank.

During the same comparative period, foreign investor holdings of Cetes, or Treasury Certificates, went from 17.81% to 26.89%. These foreign holdings have had a direct impact on Cetes short-term yields, which have risen thus far this year in their one, three, six and 12-month maturities from 4.10%, 4.35%, 4.50% and 4.79% annual yield to 4.49%, 4.63%, 4.78% and 4.99%, respectively.

Santander analysts say the upward trend in Cetes yields is to be attributed chiefly to foreign demand, which seeks the best return possible through interest rate arbitrage. Luis Flores, an analyst at Ixe Bank, said the arbitrage strategies of foreign investors are what drive yields up. The share of foreigners in fixed-rate long-term bonds remained steady at an average of 31.33%, said the central bank.

Also, check out the following opinion columns:

“Rich and Powerful”, by Marco A. Mares

Two major reform initiatives were put on the public discussion table by the majority PRI: tax and labor reforms. Hardly anyone expected proposals of that nature at this stage of the game. However, the electoral timing opened a window of opportunity. The majority party in Congress feels quite certain it will retake the presidency, which is why it wants to set the stage for major changes even before next year’s election. In these circumstances, the ruling PAN is acting prudently. The Finance secretary is skeptical of the tax initiative, but the labor reform is backed by the secretary of Labor. If the ensuing debate is conducted with the nation’s interests foremost in mind, it should turn out to be positive indeed.

“The Great Depression”, by Enrique Campos

The oil crisis of late 2007 and early 2008 forced to world to think about energy alternatives to meet growing needs. Biofuels are an expensive and unviable option because they compete with basic food requirements. Solar, wind and other energy options are not sufficiently developed. Nuclear energy became an efficient option despite its high cost. But now, with Japan’s catastrophe, the nuclear debate is back in full force. After all, if Japan’s highly efficient reactors can fail, so can plants elsewhere. Mexico, which gained good nuclear experience with its Laguna Verde facility, refuses to rule out another nuclear plant despite the Japanese experience.

“Strongbox”, by Luis Miguel González

It’s better to be the King of Telecommunications in Mexico than the Prince of Liechtenstein, the Sultan of Brunei of the King of Saudi Arabia. Carlos Slim is 164 times richer than Queen Elizabeth of England, and 74 times wealthier than Prince Albert of Monaco. The USD$20.5 billion added to his fortune last year alone, thanks to his mobile telecoms arm, are enough to dwarf all European royal houses. One week’s revenues of 2010 exceed the US$200 million personal wealth of Queen Beatrice of The Netherlands. Slim is on his way to becoming the first billionaire in history to reach a nominal US$100 billion. But, John D. Rockefeller’s billion of 1916 would be equivalent to US$663 billion today, and the Rothschild fortune of Napoleon’s times would be US$900 billion today.

rmena@eleconomista.com.mx