A review of the capital market in Mexico

File Copy Eco'nomics Dept. Report No. EC,104 This report was prepared for use within the Bank and the Association. It may not be published nor may it be quoted as representing their views. The Bank and the Association accept no responsibility for the accuracy or completeness of the contents of the report. TNTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REVIEW OF THE CAPITAL MARKET IN MEXICO January 31, 1962 Economic Staff  CURRENCY EQUIVALENTS JANUARY 1961 Unit = Mexican Peso (M$) US$ 1 = M$ 12. 50 M$ 1 = US$ 0.08  TABLE OF' CCNTENTS Page SUIThIARY i - iv CI-IAPTER I Investment and Economic Growth 1 CHAPTER II Financial Institutions 8 CHAPTER III Savings Accumulated at Institutions 21 CHAPTER IV Gross Domestic Investment and Its Financing 27 CHAPTER V The Central Bank and Its Role in the Capital Market 32 CHAPTER VI The Market for Securities 41 CHAPTER VII The Structure of Interest Rates 52 CHAPTER VIII Financing of Various Sectors of the Mexican Economy 57 APPENDICES Tables 1 - 15 (See page 64.)  IuM dlARy 1. During the last twc;nty-five years (1934-1959) the IM(Ixican economy has experienced a steady and relatively well-balanced growth. According to thc bcst data available, the real gross national product in 1950 prices rose at an annual average rate of 6.5 per cent between 1934 and 1945, and at a rate of 5 per cent from 1945 to 1959. The per capita real GNP grew at an annual average rate of 4.4 per cent from 1934 to 1945, and of 2 per cent from 1945 to 1959. 2. COver the same period 1934-1959 the gross national product increased from II11 15.9 billion to I3 63.4 billion (in 1950 prices) or to about its four-fold. Economic development in this period has been accompanied by a change in the structure of the economy as shown by the fact that the share of manufacture in GNP increased from 13.8 per cent in 1934 to 19.9 per cent in 1959, while the relative importance of agriculture declined from 22.3 per cent in 1934 to 18.3 per cent in 1959. 3. From 1934 to 1944, gross domestic investment represented about 10 per cent of GNP; during 1945 and 1946 the proportion increased to 11-12 per cent, and since 1948 it has been about 14 per cent. Investment in the public sector represented on the average about 4C per cent of the total, 4. Gross investment was financed from the followring sources: government savings (surpluses in the revenue budget and self-financing of semi-official enterprises) retained earnings and depreciation of private enterprises, other private savings, foreign loans and foreign direct private investment; and at various times, also from inflationary expansion of credit (forced savings). 5. Although the number and variety of financial institutions is great, the organization of the capital market is steadily improving to keep pace with the rapid economic development. 6. The existing financial institutions can be divided into those in the public sector and those in the private sector. Of the public sector institutions the most important is the Nacional Financiera, which has promoted a great many industrial enterprises, assisted in organizing the market for fixed interest securities and has a very good record. The Govern- ment Mortgage Bank has been active mostly in financing public works, but re- cently, has given increasing attention to the financing of low-cost housing. Two government-owned agricultural banks have been operating in the field of agricultural credit. 7. Among the private institutions the most important and successful are the Deposit and Savings Banks (comnercial banks). In recent years private financieras have shown a very rapid growsth and become an important channel of funds, particularly to industries. Private mortgage banks have been successful in organizing the market for mortgage bonds (cedulas), thus providing funds for financing mortgage loans on houses. The savings and building associations are not very important. The capitalization societics,  - 1Ji - after an initial period of success, havc reen stagnant for th(. 1;mt six years and lost in importance. The purchase of life insur;ance Jas boon limited to a small group of people, and t'r. funds accumulate(d at lif: insun:nce companies are not significant. 8. Substantial amounts of funds are, however, accumrulated yearly by the Social Securityr Institute and also by the Government Pens-ion Fund. 9. The position of the central bank (The Bank of Ic.;eico) is very strong in the money, as well as in the capitnl market. The, control cxc-rcised by the Bank applies primarily to the commercial banks, but recently had boen extended also to the private financieras. WSorking in a close cooperation with the National Securities Corrmission, the bank has a vcry important role with regard to the issue of securities. 10. The importance of the stockl exchanges is rather limitcd. The total volume of registered transactions is small, and about 90 per cent of it is in securities issued by the Nacional Financiera and in lhouse mortgage bonds (cedulas). These securities are, moreover, not really traded cn the stock ex- changes but are reported as exchange transactions after havring been carried out in the banks. The marlket in salares traded on the stock exchanges is very thin and the transactions in them account for little m-iore tlhan 1 per cent of the total turnover on the exchangfes. 'lore shares are traded outside the ex- change, mostly by commercial banks and financieras. Recently two leading commercial banks placed among their clients substantial issues of shares of two new comnanies. 11. In recent +ears, three n;utual funds were established; their assets totalled about I(p 200 million at the end of 1960, which can be considered as a success. 12. Serious efforts are being made to broaden the market for shares bv persuading closely controlled companies to issue shares to the rarket. 13. Savings and the accumulation of funds at financial institutions have been growing over the last years. This is shown particularly by move- ments of savings deposits at deposit and savings banks, by a veryr substantial rise of deposits (loans) at private financieras and by the accumulation of funds at Social Security Institute and Government Pension Fund. Including savings collected by the Government Savings Institute and the reserves of insurance companies, the total accumulation of transferable savings in 1959 amounted to about MSt 2,700 million which is equivalent to 2.5 per cent of national income. The figure for 1960 is estimated to be more than bi- 3,CCO million. 14. Apart frorn these, a significant amount of savings is being invest- ed by the non-financial sector in fixed interest securities. During 1059,  - iii - the holdings of fixed interest securities by private enterprises and individ- uals, exclusive of National Saving Bolids, increased by about 1i"" 1I00 rtllion and very probably the 1960 increase was substantially highor. This type of investment is very popular with 1ijexican investors because it is cornsidered as a liquid investment which can always be realized without loss. In fact, most of these securities can be sold at any time at par to the institutions which issue them. This feature accounts for the very stable price of these securities in the market. 15. The largest item of private gross savings is probably reinvestment of earnings, depreciation and ne^rly paid-in capital of corporations. Although a general consensus exists that the funds invested in this way are large, no information is available concerning the annual amount of this type of invest- ment. Similarly, no figures are available on direct investment in housing, trade, agriculture and non-corporate industries. 16. The structure of interest rates is some-rhat complicated. The central bank has no official rediscount rate and no free market for govern- ment bonds exists. Deposit and savings banks, financieras and insurance companies are required to invest a fixed proportion of their deposits (re- serves) in low-yielding (5 per cent) government bonds which they buy from the central bank. Furthermore, the deposits and savings banks must invest an additional part of their demand deposits in various other bonds mostly at 8 per cent rate of interest. 17. The rates on deposits rasnge from 4L per cent on savings deposits, to 6 and 7 per cent on time deposits to 11 per cent on loans to financieras. The Cedulas Hipotecarias yield 8 per cent, the new bonds of Nacional Financiera 10 per cent; and financial and industrial obligations 10-12 per cent. All interest payments are tax exempt, except those on loans to financieras. 18. The rates charged on loans by banks are on the average 12 per cent, and those charged by financieras about 14 per cent. The rate on mortgage loans arranged by mortgage banks and paid by the borrower is about 12 per cent.. 19. The relatively high level of interest rates can be explained by the continuous strong demand for funds but also by the still existing fear of inflation. WJith prices going up at least 3 per cent annually, investors calculate that they must have a high rate of interest to compensate for rising prices. The high rates on loans charged by cor:iercial banks are to some extent a result of lower rates which the banks obtain on a part of their deposits, which are subject to compulsory investment. 20. The experience in Mexico during the last decade has been very informative in the following respects: (a) Despite devaluation and continuous though inoderate inflation investment in industry and agriculture has  - iv - persisted continuously and on a substantial scale, suggesting that many lIexican investors have effective- ly learned how to use their savings in productive activities during periods of adjustment and rising prices. (b) In spite of an extremely limited organized market for shares, a capital market is being developed and funds are being effectively made available for thc financing of industries. (c) New special financial institutions have been created, with some of their operations outside the central bank7s control, to provide funds for the financing of activities which are considered very important. This was the case of private financieras and trust depart- ments until recent years, when the central bank began to control them. 21. As in a great many developing countries, emphasis is placed on in- dustrialization and funds for the financing of industries, including foreign capital, can be obtained more easily than funds required for investment in other fields. It should be added that investment in industries is made the more attractive also by protection against imports which is readily extended to new products. 22. As compared wjith the steadily improving organization for the fin- ancing of industries, credit facilities for agriculture, except commercial crops, are very limited. IEore also needs to be done with regard to financing for lmo-cost housing. 23. In general, the prospects are good for Mv1exico having a progressive- ly better working and better organized capital market. The basic prerequisite is that confidence in political and financial stability continues. The organization of the capital market will be greatly helped, if and as a real market for government bonds gradually develops. A country which like i'iexico is in the process of dynamic econormic development will need such a market to supplement existing instruments of the money and capital market. 24h Another important objective should be to develop a more extensive and better working market for shares. A beginning has been made and strong forces are presently at work to achieve this objective. It will require, however, persistent effort to persuade corporations that they should place more shares in the market, and to induce investors who now buy fixed interest securities, also to buy shares. 25. IMexico, a country which is growing fast and diversifying its economy, a countryj with an increasing volume of savings and a growing new middle class, should find it not too difficult to develop capital market and to organize institutions and instruments to match the momentum of its economic development.  CHAPTER I II\ESTi"ENT AND ECONOMIC GRCWITH 1. From the viewpoint of the evolution of the capital market in Mexico, the country's modern economic development may be considered to have started in 1934. That year witnessed the introduction of the country's stock ex- change, the most effective of its financial institutions - the Nacional Financiera, and the growing importance of the Bank of IMexico. Behind it stretched twenty-five turbulent years covering: Civil War (1910-1921); chaotic aftermath to the Civil War (1921-1930); and Great Depression, which, taken together, had gone far to destroy the conceptual, institutional and traditional heritage from the past. To single out the year 1934 is by no means to belittle the economic achievements of previous years. Indeed, it was the foreign investments of the last two decades of the 19th century and the first decade of the 20th, in minerals, railways and petroleum exploration that, once the Civil WJar and its aftermath were out of the way, were to contribute to the substructure of the rapid modern industrial development of Miexico. Important efforts were also riade since tile 1920's to establish the basis for the present tax system and tile present social structure of the country. Thus the year 1934 is used as the starting point of Mexico's economic development because, better than other years, it helps to set a frame- work within which to review the growth of Mexico's financial institutions. 2. W4ithin this framework, it is apparent that the economy of modern Mexico has experienced a rapid and relatively balanced growth, in spite of adverse circumstances such as a continuous rise in prices and several de- valuations of the peso. It is also clear that the modern economy has been increasingly oriented to industrialization. As indicated above, the early development of Mexico was stimulated by foreign investment in gold and silver mining. It was in these undertakings that the first of Mexico's modern entre- preneurs got their initiation into risk-taking, and, as a result, follcwirg generations of Mbxican investors extended their activities by taking part in industrial ventures. 3. This trend was stimulated by other factors. The generally poor quality of agricultural cropland in Mexico, and the widespread lack of water, as well as the feudal organization of land tenure were strong inducements to orient private investment towards industry rather than agriculture. This orientation was furthered by the Civil War, a main cause of which was tihe country's long out-moded structure of land distribution. During the war, the armed forces on both sides absorbed large numbers of laborers from the traditionally labor-intensive estates, and agriculture suffered accordingly. When the Civil War was over, many of the demobilized soldiers n.igrated to the cities rather than returning to the land. This, together with a rapidly rising rate of population increase in the urban centers, caused a large ex- pansion of the urban population, and thereby provided core of a market for domestic industry.  - 2 - 4. Among the factors whichl have contributed to iMxico's economic grow,rth since 1934, perhaps the most important are the followiing: (a) the various policies of the Governrent to prornote economic development; (b) domestic social and political stability; (c) the inflow of foreign direct investment and foreign loans; (d) the effects of the Second World War; (e) the geographical location of the country, which enables it to supply the Arnerican market and to attract a large tourist inflow; and (f) the ability of a group of iexican businessmen and bankers to channel considerable amounts of funds into industrial investments. 5. Since the middle twenties, Ptexico has been one of the few Latin American countries to enjoy an extended period of political stability. While it is true that the Revolution set out to, and did, destroy the strong social and economic position of the large land owners, the ;!exican Govern- ment thereafter, aware of the need to accelerate econcmic development, has consistently provided good opportunities for investors, espec ally in industry. During the last thirty years tihe existence of dom-;stic political stability has undoubtedly been one of the most important factors in maintain- ing the confidence of investors. 6. The opportunities for investment in a peaceful climate have attract- ed increasing amounts of foreign investment, interrupted only by the expropri- ation of the petroleum industry. The climate for foreign investment has benefited from the deterrmined policy of one administration after another to maintain the free convertibility of the Plexican peso, even at the cost of devaluation. No foreign exchange controls exist in hiexico; on the other hand, the protection of industry, w hich includes import restrictions, high tariffs, tax incentives and medium and long-term credit facilities, has been a very important tenet of IMIexicots economic policy. In the last decade, private foreign investment increased substantially. 7. The growing trend to industrialization, aided by protection, by public investment in railroads, highw7ays, electric power and ports and by credit facilities received a solid irpetus during the Second WJorld W4ar. In that period, the M"exican industry was able to substitute domestic production  - 3 - for many imported manufactured goods without fear of retaliation or irrmediate competition. Moreover, under the pressure of clamoring wrorld demands, Mexico became in those years an increasing supplier of agricultural commod- ities and livestock to foreign markets. When the Uar was over, 1;exico had a balance of payments surplus which made possible the financing of increased imports. In connection with the increasing of the number of domcstic industries during and after the War, a rising proportion of the newly avail- able foreign exchange was channelled into the purchase of capital goods and raw materials, rather than manufactured consumer goods. 8. The geographical location of Mexico, next door to the United States, taken together with the heavy investment in railroads and highways connect- ing the two countries, has enabled 11exico to become an increasingly important supplier of various agricultural products to the United States, It has also led to Mexico's receiving a growing influx of tourists from the United States which has yielded very substantial amounts of foreign exchange. 9. The economic development which Mexico has enjoyed would not lhave been possible without the participation cf a group of foresighted businessmen and bankers who have directed the channelling of considerable amounts of funds into industrial investment. Good relations have prevailed between the government and private investors, and this probably has been responsible for establishing a smoothly -vworking coordination between private and public investment. 10. Over the course of tne last twenty-five years, moreover, the rate of investment as a percentage of GNP, has kept gradually increasing. From 1934 to 1944, gross domestic investment represented about 10 per cent of GNP; during 1945 and 1946, the proportion increased to 11 - 12 per cent and since 1948 it has been about 14 per cent. Gross Domestic Investment at Current Prices million Percentage Distribution Total Public Private Public Private 1930 216 82 134 38 62 1935 377 143 234 38 62 1940 773 316 457 41 59 1945 2,276 928 1,348 41 59 1950 5,937 2,643 3,294 45 55 1955 2/ 12,260 4,66o 7,6co 38 62 1960 Z/ 21,052 8,733 12,319 41 57 1/ Ernesto Fernandez Hurtado, La Iniciativa Privada y el Estado como Promotores del Desarrollo, in "Mexico 50 Anos de Revolucion", p. 605, except as indicated. 2 Banco de Mexico.  11. Public investment has been mainly in electric power, highways, railroads, irrigation and the petroleum industry. Thus, an important pro- porticn of the public investment has consisted of basic investment (infrastructure) which was needed to accelerate private investment. 12. Niost of the private investment has been channelled into industries other than agriculture. The attitude of private investors has thus com- bined with the incentives provided by government policy, to transform Ilexico into a growing, industrial country. As a result, over the last twenty-five years the country has achieved a relatively well-balanced economic growth. (See Table No. 1, Indicators of Economic Growth). 13. How considerable this growth has been is evidenced by the increase in the real GNP. According to the best data available, the real gross nat- ional product in 1950 prices rose at an annual average rate of 6.5 per cent between 1934 and 1945, and at a rate of 5 per cent from 1945 to 1959. The per capita real GNP grew at an annual average rate gf 4.4 per cent fromrr 1934 to 1945, and of 2 per cent from 1945 to 1959.2/ Estimate of Real Gross National Product (million iXi, at 1950 prices) Annual Total GNP Per capita GHP 1895 8,863 702 1910 13,524 892 1921 14,560 1,016 1929 16,666 1,023 1934 15,927 896 1939 20,505 1,055 1945 31,959 1,437 1950 41,500 1,610 1959 63,400 1,893 Source: Enrique Perez Lopez: El Producto Nacional, in "iiexico 50 Anos de Revolucion" I, La Economia, p. 574, for the years before 1939. For the later years, Banco de iiexico: Informe Anual 1959. / Enrique Perez Lopez: loc. cit., p, 585  - 5 - 14. The decline in the rate of growth of per capita inccme in the period 1945-59 can be explained in part by the swift rise in population shown by the following census data: Year Total Population Increase PercentaRe Distribution (millions) % Urban Rural 1930 16 5 - 33.5 66.5 1940 19.6 19 35.1 64.9 1950 25.8 32 42.7 57.3 1958 32.7 27 44.6 55e4 1960 34.6 6 n.a. n.a. The annual rate of increase at present is 2.99 per cent.l/ 15. The extent to wJhich the growth of manufacturing, petroleum product- ion, transportation, and agriculture has changed the structure of the lMlexican economy is shown below: Annual average rates of Composition of GNP Growth (per cent)i/ (per cent)2/ 1934/45 1945/59 1934 1959 Agriculture 4e5 6.3 14.3 13.7 Livestock 1.5 h.8 8.0 4.6 Mfining 1.9 -0.1 6.8 2.0 Petroleum 1.9 9.8 2.2 2.6 Manufacturing 9.1 5.8 13.8 19.9 Transportation 5.0 6.h 4.6 4.6 Other - - 5o.3 52.6 16. The growth of agricultural production, including livestock, is indicated by comparing the real gross product of agriculture in 193h, I", 3,548 million, with that in 1959, Mb 11,588 mi'llion (both in 1950 prices), This increase was due mainly to new irrigation,3/the opening of new land following the agrarian reform Act of 1915, and the use of agricultural machinery. By far the most important expansion in agricultural output has occurred in such export crops as coffee, cotton, sugar, hard fibres and various types of fruits, despite fluctuations in export prices. Similar progress has not been achieved in the remaining (larger) part of agriculture, J Banco de ivexico. d Enrique Perez Lopez: loc. cit., p. 585 y/ Irrigated land increased from 70,000 ha, in 1934 to 3,602,000 ha. in 1953.  - 6 - in spite of the numerous agrarian reforms resulting from the Civil War. However, Mexico is basically self-sufficient in foodstuffs and production of foodstuffs increased enough to keep pace with the growing population. The growth of agricultural production for the domestic market has been hampered by poor soil conditions. In addition, a major problem aplears to be lack of agricultural credit, especially in the cases of the small farmers working on community land (this land was organized after the land reform), Only about 10 per cent of these farmers have been able to obtain agricultural credit and technical assistance from official sources. The vast majority continue to depend on various forms of credit from local merchants, if indeed credit is available at all. 17. The rate of growth in manufacturing, electric pomer and the petroleum industry has been substantial. It is to these acJv:iLJ.ties that major efforts of private ini--.i.ative and the goverrnment have bcen applied, and they, together with expanding production and expeuts of cornmer-ial crops, have been key factors in Mexilcos r-ipid econionr`c growLh. The real gross product (at 1958 prices) of manufnc,aring end the petroleum industries rose from 1%4 3,542 mil'lion in 1934 to ii, 26,554 million in 1958, while the installed capacity of electric power increased from 525,00C KW to 2,470,OCO KW over the same period. 18. Highway construction increased by 41,OCO kilometers between the years 1934 and 1958 and the volume of highway freight from 6h8 kilometer- tons in 1934 to 11,500 million kilometer-tons in 1958. As a consequence of extensive investment in the improvement of railway equipment and roadbed, and in new trackage, roilway freig-it rose fron 4,158 million kilometer-tons in 1934 to 12,464 million kilometer-tons in 19580 19. The new transportation facilities provided the means of develop- ing the iron and steel -.ndustzy, the sharp increase in agricultural exports and the tremendous gro.wth in tourism. As noted earlier, these developments, in addition to their impact on gross product, had a very salutary effect on the balance of payments, and were responsible for the renewed foreign con- fidence in the stability of the Mexican peso which is so necessary to the financing of imports of capital goods and to the promoting of private invest- ment. 20. In concluding this chapter, it bears emphatic repeating that the significant changes, su^h as grow!ing diversificaLion of the country's economic activity, growing di ersification and specialization of the country's financial institutions, and growing dliversification cf exports which have taken place in MexIico's economy during ti-.e last twenty-five years, were only possible because funds were made available to finance the necessary public and private investment. In the pub:Lic sector the sources of these funds can be identified; they were government savings, including self- financing of the semi-autonomous enterprises, and internal and foreign borrow- ing.  - 7 - 21. In the private sector, on the other hand, it is difficult to determine the sources fror,: which investment has been financed, though in general it can be said that a substantial part was provided by retained earnings, depreciation accounts and newly subscribed capital of industry. A contribution was also delivered by foreign private investment and foreign loans; thus during 1939/50, foreign investment supplied 6 pcr cent of the private investment and during the period 1950-59, 10 per cent. Oome other sources of private investment can be more or less precisely dcfined for recent years, but even in these years the very great bulk of private in- vestment must be classified as self-financing for want of r,ore definite knowledge about it. 22. During the last twJenty rears there has been also considerable inflationary financing of investment thirough expansion of credit, either directly to the government or indirectly to the private sector; the cost of living index rose from 71 in 1948 to 162 in 1960. It should be pointed out, however, that despite inflation and devaluations, investment in industry and agriculture has persisted continuously and on a substantial scale in Mexico, suggesting that manv lexican investors have effectively learned hmr to use their savings in productive activities during inflationary periods.  .I;. CIAL I:h)ITUTICjU Introduction 23. Like most aspects of I':exico's institutional life the structure of Mexico's system of financial institutions underwent great changes as a consequence of the Civil War. Some institutiors failed ent+irely to survive; those which did survive, did so greatly modified in form or substance. 24. The Mexican banking system of thirty years ago consisted solely of commercial banks which provided short-term loans for commercial purposes with funds acquired chiefly through demand deposits. During the 'thirties, the government established a number of official institutions designed to provide more liberal forms of credit for special activities. 1M,ore or less pari passu, important amendments were made in the basic banlking legislation (General Credit Institutions Law) to introduce provisions dealing with industrial and mortgage loans, trustee departments, private financieras and capitalization banks. This trend to new official institutions and more modern and flexible banking legislation carried over into the 'forties and 'fifties, so that by the beginning of the present decade, 1Mexico had evolved a large and complex financial system with a considerable capacity for specialization in the bank- ing field. 25. Important institutions produced by this trend were the Iacional Financiera, the National Urban Mlortga;,e and Public Works Bank, and the National Institute of Savings (Patronato Nacional del Ahorro). The most successful of all these institutions has been the Nacional Financiera. 26. The country's non-governmental institutions now include a very important group of commercial banks which operate savings and trustee depart- ments, in addition to accepting demand deposits. They include, also, a large number of private "financieras" which provide a special type of banking for industrial development, several mortgage banks, some savings and loan banks for family housing, and a number of capitalization banks which are declining in importance. 27. Perhaps the most important financial development to result from the proliferation of institutions of the last thirty years has been a growing availability of medium and long-term credit through the mechanism of fixed- interest securities. Such instruments as mortgage "cedulas", mortgage and industrial bonds, and "loans" by individuals to the private financieras now perform a very important function in the channnelling of savings.  - 9 - 28. The relative importance of the various financial institutions can be judged by the following comparison of their total assets: Government Institutiors: 1Lj' l;illion Nacional Financiera 4094 (1959) National M/lortgage Bank 1997 (1959) National Bank for Ejido Credit (est.) 1390 (1959) Agricultural Credit Bank 1591 (1959) National Foreign Trade Bank 772 (1959) National Institute of Savings (est.) 900 (1959) Other Official Banks (est.) 1500 (1959) Private Institutions: Commercial Banks 14825 (1960) Savings Departments of CoMmercial Banks 3C93 (1960) Private Financieras 11456 (1960) Mortgage Banks 575 (1960) Capitalization Banks 878 (1960) Savings and Loan Banks for Family Housing 137 (1960) Mutual Funds (est.) 200 (1960) Trustee Institutions 213 (1960) Life Insurance Companies 1446 (1959 ) 1/ Bank of Mexico excluded. A. OffiCial Institutions 29. The government owns or controls 19 institutions with 25 br:.nche_2, of which the most important in size are the certral bank (the Bank of 1,exico, S.A.,) the Nacional Financiera, the I'ational Bank for Ejido Credit (Banco Nacional de Credito Ejidal), the Netional Agricultural Credit Bank (Banco Nacional de Credito Agricola), the National Urban Mortgage and Public Works Bank (Banco Nacional Hipotecario Urbano y de Obras Publicas) and the National Savings Institute (Patronato del Ahorro). The Bank of 11exico 30. The Bank of Mexico was established in 1925, to perform the dual functions of a central and a commercial bank. In its early days, the bank played an important part in remedying the conditions which led to a scarcity of credit after the Civil War (1910-21), and in forcing a reduction in the 2/ Including Regional Agricultural Banks which arc associated with the Banco Nacional de Credito Agricola.  - 10 - prevailing high rate of interost. The right of currency issue by a number of commercial banks was abolished and the issue privilege firmly aeronced in the central bank. As administrator of the governrrent's foreign exchange reserves, the bank was able to check the speculation in foreign exchange. In its role of central bank, the Bank of Mexico has carried out most of its monetary and banking refonns through exercise of the power which it possesses to set legal reserve deposit requirements for the commercial banks, and through its authority to specify a schedule of compulsory pronor- tions in accordance with which other financial institutions must invest their deposits or reserves. The authority conferred upon the Bank of IIexico has made it the most important instrument of governmental policy in connection with selective credit control and thus control over an important part of the capital market.J/ 31. Taking into consideration the liquidity preference presently pre- vailing in 1viexicov it is very difficult to distinguish clearly between the central bank's policy as regards the money market and its policy as regards the capital market. Present indications, however, are that IMiexicols finan- cial system is moving into a transitional period of crystalization of public confidence from which in future years will emerge a much clearer separation of money market funds (short-term financial resources) and capital market sources (medium- and long-term available financial resources). As this dis- tinction in the financial resources becomes rnore clear, and as the liquidity preference lessens, the policy of the Bank of Mexico undoubtedly will have to change. The Nacional Financiera 32. The Nacional Financiera was established in 193L with the purpose of promoting the industrial development of the country. In contrast to some other development banks established in Latin America, the tiacional Financiera has also played a very important role in dcveloping the capital market, by virtue of its active participation in promoting the market for fixed interest securities and because of the primarily industrial destination of its medium- and long-term loans. At present, it is the largest and most important finan- cial institution in Mexico, and for the lIexicans it has become a symbol of the industrialization of the country. 33. While at the time of its creation the Nacional Financiera was expected to perform its task by increasing the liquidity of some assets of the banlcing system,Z/ the great array of bottlenecks impeding liexico's economic development soon led the government to give this institution the follow-ing major functions: (1) to establish in Mexico a genuine securities market; (2) to act as the financial agent of the government; (3) to organize, transform, administer and invest in all types of enterprise, and (4) to participate in the issue of stocks, bonds or obligations. 2 See Chapter V for details on the role of Central Bank. / Law of August 30, 1933, quoted on page 16 of Economic Development of Mexico During a Quarter of a Century (1934-1959), Nacional Financiera S.A., Mexico, D.F.  - 11 - 34. The Nacional Financiera is the only institution authorized to administer the servicing of the public debt of the Federal Gov(:rnment, and to contract and administer foreign loans, whether private, govcrninental or international, in cases where these require the guiarantee of the Federal Government. 35. The loans and investments of the Nacional Financiera have been one of the very important sources of financing for both industry, public and private, and the activities of the autonomous institutions. The National Urban Mortqage and Public Works Bank (Banco Nacional Hipote ario Urbano v de Obras Publicas) 36. The National Mortgage and Public Works Bank was established in 1933 with the purpose of promoting investment in public works, public utilities and low-cost housing. Its financial resources consist of its capital and re- serves, the proceeds of its own bonds, loans contracted at homte and abroad, and special official deposits. 37. About 80 per cent of the bank's outstanding loans are loans to the government for public works, and a fuirther 12 per cent consist of mortgage loans for housing for industrial workers. The National Savings Institute 38. The National Savings Institute (Patronato del Ahorro) was established in 1950 to promote savings by middle and lower income families through the medium of Savings Bonds. The Institute has wide freedom, under the general supervision of the N;inistry of Finance, to set up plans for the sale of savings bonds. The relatively high rate of interest paid by these savings bonds and a lottery feature incorporated in them have made them an important instrument for collecting savings from the middle and lower income groups. 39. If held till maturity (10 years), the savings bonds yield 7.2 per cent on the average and have the right to participate in 39 lotteries in which the prize is worth 10 times the nominal value of the bond if the prize is collected in bonds and 5 times the nominal value if collected in cash. 40. In recent years the Institute has been collecting about .I$ 100 million a year. Agricultural Banks 41. Two agricultural banks have been established by the government: the National Agricultural Credit Bank (Banco Nacional de Credito A>ricola) and the Niational Ejido Credit Bank (Banco Nacional de Credito Ejidal). The first was  - 12 - established in 1926 to provide loans to the small farmer, and the second in 1936 to make loans to small farmer associations working communal land. Al- though both these institutions were established to help the land reform program of the Revolution,their resources are only sufficient to enable them to provide credit to 10-12 per cent of the country's small farmers. 42. In the past these banks, and particularly the National Ejido Credit Bank, have run into serious financial difficulties as a consequence of de- faults growing out of unsound administration. It is understood, however, that a general reorganization and a revision of practices are taking place at the present time. Other Official Banks 43. In addition to the above, the government owns or controls a number of special banks which extend credit to specific activities, such as the National Foreign Trade Bank, the Transportation Bank, the Motion Picture Bank, the Financiera Azucarera, etc. B. Private Institutions 44. According to the latest banking census, Mexico has 245 private bank- ing institutions. The oldest are the deposit and savings banks, of which there are about 100 with branches all over the country. More specialized private institutions irnclude 97 financieras (private industrial development banks), 26 mortgage banks, 3 trustee institutions, 3 savings and loan banks for low-cost housing and 13 capitalization banks. Deposit and Savings Banks 45. The deposit and savings banks are commercial banks which have savings, as well as commercial, departments. The commercial departments operate in the traditional manner, though they are closely regulated by the Bank of Mexico in respecu of the investment of their funds. A largo pl rt of tho deposits collected by the commercial banks are required to be invested in the controL- led capital market described in Chapter V. At the present time the commercial banks must invest 35 per cent of the demand deposits in their Mexico City branches and 10 per cent of their demand deposits outside of Mexico City in low interest rate long-term government securities. Since they must invest a further 15 per cent of their demand deposits in loans of up to 5 years, tUhey are also being called upon to provide medium-term credit. 46. The largest commercial bank is the National Bank of Mexico with 169 branches scattered throughout the country and assets of M$ 3750 million in 1959. Some of the most important banks have formed tight little financial groups around them. The very extensive financial cluster is that centered  - 13 - on the Bank of Commerce whlich has formed an import-ant financial g-roup of 30 institutions with total assets amounting to over i; 3 billion in 1960. The International Bank has established another similar financial group of 48 institutions. Smaller but important groups mainly associated w-jith the operations of some of the financieras have been established bv the Bank of London and Mexico, the Mlexican Bank of Comrmerce, and the liexicnn Bank, .. 47. Most of the commnercial banks operate savings departments, some of which have been very successful in recent years. The amount of savings deposits collected during the last five years has averaged about 4j 300 amillion a year. 48. Two of the most important comnmercial banks, the National Bank of Mexico and the Bank of Commerce, recently purchased, underw;rote and then sold to a widespread clientele of private investors, important blocks of shares in foreign-owned corporations in Mlexico. These pilot operations wJere sufficiently successful that undoubtedly they vill stimulate the use of the commercial banks in the future as an important factor in the Iexican capit^l market. MIortgagze Banks 49. These institutions, of hilaich there are 26, are authorized to make mortgage loans, to issue mortgage bonds, to guarantee mortgage "cedulas" issued by private individuals, and to negotiate the purchase and sale of such "cedulas". In fact, the bulk of their activity consists of dealing in cedulas. Mlost cedulas are issued for 10 years; their average maturity is five years. They are backed by real property and in general pay 8 per cent. The borrower pays an additional charge of 2-4 per cent. In order to maintain the confidence of investors, the mortgage bank will, if necessary, support the price of the cedula at par. Because investors associate the cedula with tangible real property, it is a very popular type of investment paper in Mexico; at the end of 1960, more than one billion pesos of these cedulas were in circulation. Because of the extremely liquid nature of the cedula and the large quantities issued, the Bank of MIexico recently limited increases in this type of security to 12 per cent per year. Financieras I0. The private financieras have in recent years been Eexico's most successful private financial institution. They were introduced in the 'thirties as private development banlcs wzith the following functions (1) to promote the organization and expansion of industrial enterprises; (2) to subscribe to equities and other securities issued by industrial or comriercial enterprises; (3) to subscribe to, and sell, obligations of private enter- prises, and to guarantee such obligations with regard to interest and amor- tization; (4) to make loans to manufacturing enterprises; (5) to act as a conmrmon representative of bondholders; (6) to issue their Own bonds; and (7) to receive time deposits (loans) for periods of not less than 180 days.  51. As private enterprise and the government came to recognize the importance of industrialization in Miexico, the increasingly active and ponfer- ful body of industrialists was induced to seek a type of financing institution which could grow with the growth of their investment needs. The commercial banking system was not suitable for this purpose in viecw of its traditionally conservative practices. A further impetus may have been pro- vided by the gradual success of the Nacional Financiera in relieving the dearth of medium and long-term official capital. It is not unlikely that the industrialists were thereby encouraged to demonstrate that private initiative could pursue the same line of financing as the Nacional i'inanciera- INoreover, while initially established by small groups of inclustrialists looking for funds with which to finance their own business ventures, some financieras progressively tended to associate themselves with important industrial groups able to obtain the backing of important cornuiercial banks. A considerable flow of funds developed from the commercial banks to the financieras, especially through the trust departments of the commercial banks. 52. The banking authorities, also aware of the importance which this type of investment banking had for industrial development of the country, did not subject the financieras to the same rigorous investment requirements as were applied to the commercial banks. This more liberal treatment of reserve requirements and qualitative credit and investment controls by the central bank soon led the banking community to realize that there was greater freedom of action and profit possibilities in the private financieras than in other branches of the banking business, and the financieras grew rapidly in size and numbers. 53. To date the success of the financieras has been warranted by the contribution they have made to the country's economic growth. The rapid expansion of the most imriportant Ilexican industrial enterprises was greatly assisted by the financieras, through their provision of medium-term loans (up to five years), their guarantee of private industrial bonds, and their facilities for placing such securities on the market. So far the financierasV principal activity has lain in providing loans; investment in securities is still relatively small. 54. The outstanding feature of the operations of the private financieras is that they have been financing long-term investment with short-term funds. }Mhile most of the financierast loans were granted for a five-year term, the funds collected from the general public have been at three, six and nine months. Such funds have enjoyed the assurance of reimbursement at any time, which in reality means on call, an assurance made necessary by the high degree of liquidity preference prevailing in the iliexican market. On the other hand, most of the funds collected consist of current private savings, and have tended to be renewed every year. Among bankers the impression exists that the financieras have served as a major support to monetary policy in periods of fear of devaluation and inflation, since the investment optimism arising in these institutions has contributed towards maintaining confidence in the currency and in the future development of Mexico.  - 1 5 - 55. Because so many of the financieras had come to depend to a large extent on very short-term funds, the Bankc of Mexico in 1