Published: June 01, 2010
Mexico is still in recovery from the 2008 crisis. The country is slowly registering signs of improvement in its industrial production, exports and level of employment, but as yet nothing compared to the Mexico of the early years of 2000. The financial authorities have continued to deploy strong fiscal policies in order to sustain the economy, lowering interest rates from 8% in January 2009 to 4.5% today. After a short rebound at the end of ‘09, the first quarter of 2010 still registered a negative GDP growth (-0.35%) with inflation at a level of around 4%.
As a very open economy Mexico was badly hurt by the crisis and has not yet recovered. Managing cash and treasury in this type of cycle is challenging but unlike many other countries in the region Mexico provides a very flexible and cash management friendly environment.
A very large proportion of payments, maybe close to 70%, are still made today by cheques by or cash.
Mexico is certainly only one of a few countries in the Latin American region such as Chile, Peru, Uruguay or some Central American countries, where managing treasury and cash management is relatively simple - nothing like Brazil, Argentina, Venezuela or Colombia for example. The strong trade ties with the US (85% of Mexican exports goes to the US) and participation in NAFTA (North America Free Trade Area) have dictated an early liberalisation of exchange controls and free movement of funds. Mexico does not have exchange controls: companies whether resident or non-resident can open current and savings accounts in both local currency and USD. Chequing accounts are interest bearing accounts and are taxed according to the location of the company: For resident companies interest payments are taxed at a rate of 0.5% on the capital from which the interest is derived. Mexican resident companies are allowed to have offshore accounts.
Clearing is done by the Central Bank of Mexico which only clears Mexican pesos. Mexico has a very efficient single RGTS system which can deal with all payments with no limitation in value. The system is called SPEI and provides for same-day credit. A separate clearing house, SICAM, also controlled by the central bank, deals with cheques and some other forms of small electronic transfers. Cheques are cleared between 24 to 48 hours depending on the geography. A very large proportion of payments, maybe close to 70%, are still made today by cheques or cash. Given the poor reliability of the postal service, cheques need to be physically delivered and collected. This is a negative on the collection side in Mexico as the country cannot implement any form of lockbox. Some banks provide cheque collection services and cash can be collected by specialised security companies in Mexico, with cash remittance at the bank on D +1; however, the volume of electronic transfers is in constant growth and the country is slowly but surely moving towards electronic payments.
SwiftNet is not yet used extensively. Mexico does not appear in the 2009 top 25 country users of Swift in terms of volume. Thirteen banks are members of Swift and 39 institutions connected, but volumes would remain very small even if they increased by 5% in 2009.
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Mexican companies can do physical and notional pooling without any restrictions. There are no restrictions on notional pooling when merging current account balances to create a single balance on a centralised entity. Payment of interest to each sub account is without restriction either. At the same time there is no regulatory obligation for banks to request cross-guarantees of participating entities. ZBA are also commonly used, as there are no restrictions on automatic funds concentration, funding of account balances or intra-day overdrafts. Net, net, making life simpler for treasurers using the best tools to manage their local currency cash position efficiently.
Operations can be funded either by borrowing locally or by bringing funds from offshore in the form of loans or recapitalisation. There is a withholding tax on interest paid on offshore loans and for non-resident companies the rate of WHT would depend on the type of entity (corporate, financial institution, banks). Obviously Mexico has signed numerous double taxation treaties and they need to be considered. For companies contracting inter company offshore debt there is a 10%–15% for tax treaty countries while non treaty countries would pay 21% and Tax Heaven domiciled parent companies 40%.
On transfer pricing, Mexico has been at the forefront of all other Latin American countries following the OECD arm's length principle since 1994.
Mexico has a ruling on ‘thin capitalisation’ whereby non-residents can only deduct interest received when the ratio between the debt of the Mexican entity and its net worth is below 3 to 1. This applies for inter company debt contracted with the mother company for example. Such rules do not apply when the offshore loan is provided by a bank as here interest is fully deductible – the same as for local borrowing. It is also interesting to note that any FX loss incurred on offshore loans (denominated in currencies other than MXN) are also deductible. There are no other taxes or duties payable on loans.
It is important to mention too that on transfer pricing, Mexico has been at the forefront of all other Latin American countries in following the OECD arm’s length principle since 1994.
Liquidity management is nearly as easy as in the US and Europe. Banks pay interest on both pesos and USD accounts (savings). You can also zero-balance funds on a daily basis for accounts in the same currency and companies within the same legal entity. Many multinationals and obviously US ones are pooling their Mexican onshore USD in the US. There are no stamp duties to be paid or taxes on offshore remittances and transfers.
A large variety of placement products is available in the market and some banks are offering very interesting conditions to attract new customers. Banco Inbursa (Carlos Slim group) has recently offered some very attractive placement products, and it is the same for other banks. Treasurers have to shop around to find the right risk/return combination. Classical products are offered by most of the banks such as CDs (2, 3 or 6 months but with a specific tax regime), commercial paper and mutual funds depending on the tenor of the placement. The money market also offers a variety of government bonds such as CETES bonds which are auctioned on a weekly basis by the central bank every Thursday mid-day, and also Ajustabonos which bear fixed yield adjusted for inflation or Tesobonos bonds which are indexed to the US dollar. Banks and corporates also issue bonds, with minimum maturities of 15 days for banks for example. All in all there are plenty of instruments available to manage liquidity in a very efficient and profitable way. A well-managed short-term liquidity position should earn close to 60% of the interbank rate, before taxes. Interest on deposits or funds are considered revenues and taxable at the general corporate tax rate of 28%.[[[PAGE]]]
There is a very active forex market where MXN is traded spot and forward with USD and most of the other hard currencies. The daily volume on the spot market exceeds USD10bn. The NDF (Non Deliverable Forward) market is huge and very efficient. No document is required by the central bank to enter into spot or derivative transactions. From a tax perspective foreign exchange losses and gains are treated as interest and are taxable as such. The full spectrum of derivative instruments is also available from plain vanilla to structured options or swaps.
The banking sector in Mexico is still highly concentrated and mainly in the hands of foreign investors. While the country has more than 30 banks, in reality six banks account for more than 80% of the sector’s assets and 80% of all the branches in the country.
Some interesting internet links provide more information on the banking sector and the financial system in general :
Besides the banking sector some financial companies which specialise in hire purchase are growing, such Sofodes and Sofomes, but they still represent only a very small share of the credit market.
Bancarisation rate is still low in Mexico with only 25% of the population with a bank account. The credit card market is growing rapidly however, and has become a substitute to a bank account for many. There were about 60 million cards in circulation in 2009 with 70% of the market concentrated in the hands of two banks, Banamex (Citi) and Bancomer (BBVA). HSBC also has a strong platform.
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