Nomi Prins: Presentation to the Annual Financial Investigation Congress in Mexico City, August 28, 2015 on Economic and Financial Risks for the United States and Mexico

1. Congreso de Investigación
Financiera IMEF
Universidad Panamericana
Mexico, D.F.
August 27-28, 2015

2. For the US and Mexico:
Financial and Economic Risk
on the Horizon
Nomi Prins
Author, Journalist,
Senior Fellow at Demos

3. US and Mexico Linkage
• Mexico economy and capital markets tied to:
– US economy / Trade (US top partner of
Mexico/ Mexico third of US)
– Federal Reserve Rate Policy
– Peso / US dollar fluctuation
– US bank (and European bank) Activity
–Foreign Investors and Speculators

4. Ten Major Types of Risk
• Economic / Central Bank
• Capital Flight
• Liquidity
• Currency
• Interest Rate

5. Ten Types of Risk (continued)
• Oil / Commodity
• Credit Default / Derivative
• Remittance/ “De-risking”
• Bank Concentration – Too Big To Fail / Crimes
• Geo-Political / Political-Financial Relationships
Volatility in any one risk is hazardous
independently, far worse together..

6. Capital Flight & Liquidity Risk
• Excess liquidity from central banks does not
stimulate general economy, but does move
speculative capital around the globe through big
banks in search of short-term opportunities.
• Capital always exits more quickly than it enters a
country or asset class. (bonds, stocks, property)
• Looming US rate hike, or rumor, may spur capital
flight from emerging markets previously been
considered more stable, such as Mexico, first.

7. Currency & Interest Rate Risk
• Mexican Peso at historic lows vs. US dollar,
above 16 per dollar, down 25% in past year.
• Brazilian Real down 53% vs. US dollar.
• Euro at lows, core vs. peripheral problems
(Greece, etc.)
• Three Chinese Yuan devaluations in August.
• Global “Currency Wars”
• Higher US rates can cause capital outflows.

8. Oil Risk
• External private oil firms allowed to operate
(w/Pemex) for first time in Mexico since 1938.
• Mexico exposure to oil price volatility
(Government announced spending cuts by .7% of
GDP for 2015 because of oil price drops).
• Oil activities - one third of national revenue.
Exports fell 45% first half of 2015.
• Lower oil profits increase default probability/
decrease internal expenditures on public.
• Oil prices down more than 60 % in past year.

9. Credit Default Risk
• Speculative Capital attracted to high-yield/ EM
bonds in low interest rate environment.
• Corporate bonds bought by foreign investors,
exposed to credit default and currency risk.
• EM non-financial corporate bond market
doubled to $2.4 trillion in 2014 from 2009 due
to low rate central bank policy.
• Oil company defaults / non-performing loans
rising everywhere on US dollar strength.

10. Too Big to Fail /Concentration Risk
• Mexico has highest concentration of foreign-owned banks.
• G7 banks in Mexico hold 81% of all bank assets.
• Top 5 banks in Mexico hold 72% of all financial assets (only
1 – Banorte-Ixe is local).
• Top 5 foreign banks hold 64% (from 69% in 2008).
• “Non-bank” banks hold just 3.8% of financial assets.
• In the US, Big Six banks hold 42% deposits / 96% of US
derivatives. JPM Chase holds 9% of global derivatives /
Citigroup holds 8%.
• Bigger banks, bigger problems.
• Smaller banks, smaller problems.

11. Risk Enabling Central Bank Policy
• Big banks / capital markets have been fortified by
governments and central banks since 2008 financial,
creating asset bubbles and giving “crime” a pass.
• US Fed holds $4.5 trillion / ECB E2.5 trillion securities.
• US and European banks have paid $130 billon in
settlements since crisis, plus get central bank aid.
• Bank of Mexico slashed 2015 growth estimate to
between 1.7% and 2.5% from 2% to 3%.
• Bank of Mexico announced two –month plan of $8.6
billion in Pesos to defend Peso.

12. Remittance Risk
• International remittances $583 billion in 2014,
$436 billion from developed to developing
countries.
• Mexico: 4th largest remittance recipient in
2014. ($25 billion).
• De-risking hampers this flow of funds.
• Not all cash is “criminal” but is still effected.
• Foreign banks charging more, closing
branches, or diverting funds elsewhere hurts
national economies / revenue streams.

13. Geo-Political Risk and
Four Drivers Of Volatility
1. Central Bank policies
(Interest Rate / Currency)
1. Debt / Default
2. Geo-political Tension
3. Financial industry manipulation

14. Que Podemos Hacer
What Can We Do? Reducing Risk
• Decrease debt (Public debt in Mexico rose to 44%
of GDP in 2014 from 36% in 2012.)
• Decrease new issuance or fund more locally.
• Decrease leverage.
• Reduce bank concentration.
• Increase localized financing activity as hedge for
external factors.
• Increase Cash Reserves / Stay Liquid in advance.