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underway, a new round of volatility is like- ly.
The peso’s fall was a particular challenge for Banxico. Since 1994, the bank has been autonomous and, by law, is mandated to maintain low and stable inflation. As Gov- ernor Carstens has said, “This has helped to keep inflation and its expectations well behaved, despite the large and persistent depreciation that the peso registered in the past couple of years.” Banxico Depu- ty Governor Javier Guzmán points to the inflation-targeting regime, along with the central bank’s commitment to transpar- ency and readiness to act during times of high uncertainty.
These commitments were tested after the sizable one-off hike in transport fuel prices in early 2017, followed by a boost to import prices from the drop in the peso. In early January 2017, with the peso’s real effective exchange rate (REER) hit- ting lows not seen since 1995, the central bank intervened directly in the foreign ex-
change market to support the peso for the first time in many years. In the meantime, higher import prices threaten to push in- flation above the official 4 percent target for most of 2017, causing Banxico to raise its policy rate to an eight-year high.
BATTEN THE HATCHES
The geopolitical landscape is in flux, and many governments are showing an increas-
ing tendency to protectionism: China and the United Kingdom are just two who are clamping down. In the midst of all this, the new U.S. administration’s policies remain largely a mystery. Thierry Mahé, General Manager of CNH Industrial–FIAT Group, warns that “short-term uncertainty and chaos are going to cause a lot of investment to be stopped or postponed until the future evolution of NAFTA is understood.”
Decisions made in Washington, D.C., will impact Mexico’s GDP growth, trade balance, and monetary policy. A new bor- der tax, for example, would have a negative impact on investment in the manufactur- ing sector, which in turn would weigh on external balances, adding to investor un- ease about the outlook for the peso and the sovereign debt rating. All of this would af- fect the degree of strain that might impact the financial sector.
The country’s financial institutions know that some bad weather is coming. For now, they are bracing for the storm.
The combination of higher in- terest rates, higher inflation, and greater peso deprecia- tion will weigh on investment going forward. On the plus side, higher interest rates will at least boost banks’ net interest margins.
Covering the Country
RECAREDO ARIAS
CEO
Mexican Insurance Industry Association (AMIS)
Mexico’s insurers are pulling out all the stops to get more people insured as efficiently as possible—even when that means using drones. The industry currently produces 2.2 percent of GDP, compared to the average in Latin America of 3.2 percent, but
Recaredo Arias, CEO of the Mexican insurance association AMIS, believes that technology, diverse options, and new government policies all lead to growth. “We estimate that we can grow our industry 7.5 and even 8 percent this year,” Arias says.
One key to increased coverage is customized policies, made possible by the explosion in data science. For example, a millen- nial’s insurance needs differ from those of a 60-year-old man. “There are already companies in Mexico that let you design your own medical product, depending on your interests and concerns,” Arias explains. Firms are also expanding inclusion with products that reach people at the bottom of the pyramid.
In the policy arena, Mexico’s government is requiring cars using federal highways to have automobile insurance. Congress is considering a general mobility law that will obligate all Mexican states to enforce third-party liability insurance for automobiles.
A national project to update infrastructure also means insurance sales will surge as companies cover new projects.
Finally, as they seek greater efficiency, insurers are using technology to respond to claims faster. One extraordinary way to achieve this is by sending drones over farmers’ fields or into disaster areas.
These changes all point to an insurance industry on its way to tremendous growth. “There are economic sectors that are being well developed, and we are one of them,” notes Arias.
“One insurance topic that Mexico is starting to take very seriously is that of cyber risk. The industry is developing products to cover such issues as hacking, cyber fraud, and the kidnapping of databases, for example.”
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