# **I. Introduction**

Following the 1994-95 tequila crisis, Mexico experienced a significant ‘credit crunch’ that persisted into the early part of this century. The objective of this paper is to describe and account for the evolution in financing to the private sector between 2000 and 2005, a period in which the long-sought recovery in credit began to materialize. In particular, the paper describes the changes in the volume, accessibility, affordability, and diversity of financing to the Mexican non-financial private sector (households and firms), and identifies contributing factors. For the purposes of this document, financing to the nonfinancial private sector is defined broadly to include various types of instruments (loans, bonds, equity) by both domestic and external providers of finance (banks, non-banks and capital markets).

The paper focuses mainly on debt financing from a supply/provider point of view. Although this focus might have been sufficient in earlier years given the empirical evidence of a post-crisis credit crunch and supply side-driven evolution of bank lending, recent developments – especially in the composition of lending – require an analysis of the determinants of the demand for financing as well. However, such an analysis is constrained by the paucity of available information on the financial condition of the corporate and household sectors in Mexico<sup>1</sup> . As a result, the paper adopts a supply-side perspective and complements it, whenever possible, with a description of relevant real sector developments. Given the marginal contribution of equity financing to the private sector (see next section), the analysis focuses primarily on the evolution of (external and domestic) debt financing of firms and households.

In order to ensure consistency, the analysis relies principally on official statistics compiled by _Banco de Mexico_ (BOM)<sup>2</sup> . It is complemented by other data sources – such as the _Secretaria de Hacienda y Crédito Publico_ (SHCP), the _Comisión Nacional Bancaria y de Valores_ (CNBV) and the _Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros_ (Condusef) – as necessary. It is important to note that only performing loans are included in the definition of financing to the nonfinancial private sector, since the vast majority of non-performing credits (denominated in both inflation-index units<sup>3</sup> and pesos) in the early part of the period dated back to the 1994 crisis and did not therefore represent current lending activity<sup>4</sup> . In addition, private sector financing is mostly compared to GDP and is therefore implicitly deflated by the

> 1 Some information can be found in the statistics bureau INEGI (“ _Instituto Nacional de Estadística Geografía e Informática_ ”), the social security institute IMSS (“ _Instituto Mexicano de Seguro Social_ ”), the Ministry of Economy’s _Sistema de Información Empresarial Mexicano_ (SIEM) and in household surveys, but it tends to be general, outdated or incomplete, and cannot be cross-referenced or reconciled easily to supply-side financing data.

> 2 Some data (for example, on financing by banks that have been intervened) and definitions (for example, the definition of the non-financial private sector) differ from those used by the CNBV.

> 3 These are called _Unidades de Inversión_ or UDIs.

> 4 As explained later, the restructuring of credit portfolios in recent years has resulted in a much lower level of non-performing loans in 2005 that, with the exception of mortgages, represents current lending activity.

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