manuel sanchez : structural challenges for the mexican economy remarks by mr manuel sanchez, deputy governor of the bank of mexico, at the hong kong university of science and technology, hong kong, 14 november 2014. * * * it is an honor to be at such a prestigious university in hong kong, one of the world ’ s most emblematic centers of impressive economic growth. thank you for the invitation to share my thoughts with you on challenges faced by the mexican economy. i will touch on three themes, starting with the mexican economy ’ s modernization over the last few decades. second, i would like to describe how the current structural reform agenda and other policies could foster higher long - term growth. third, i will talk about the economy ’ s recent developments and outlook. as always, these views are entirely my own and do not necessarily reflect those of the bank of mexico or its governing board. structural transformation since the 1980s, mexico has undergone a profound transformation toward a more marketoriented economy. measures implemented include the privatization of many public - sector enterprises, deregulation, improved public finances, and notably, the opening of the economy to trade and investment with the rest of the world. as of 2013, adjusted for purchasing power parity, mexico is the world ’ s eleventh - largest economy, with an income per capita above us $ 17, 000. its population approaches 120 million, with almost half younger than 25, and most living in urban areas. 1 the dynamics of fertility and mortality rates have led to a decrease in the dependency ratio, with a wider base of working - age people, yielding benefits in terms of total employment. this demographic bonus will likely remain in place for more than another ten years. the economy is largely concentrated in services, which account for more than 60 percent of total production, while industry represents more than one - third, and agriculture around 3 percent. competition through foreign trade has made many sectors, especially manufacturing, more efficient. in addition, thanks to foreign direct investment ( fdi ), companies operating in mexico have imported significant know - how and new technologies. total trade of goods and services amounts to almost two - thirds of gdp, and more than 80 percent of total merchandise exports are manufacturing products. making up a substantial fraction of the total, high - tech shipments, such as computers and telecom equipment, have seen the highest growth of all segments in the last two decades. mexico has gradually diversified its export destinations. for example, sales to the united states have been decreasing from

foreign counterparties. we didn ’ t know about these. they didn ’ t disclose these exposures to stockholders. it impacted the volatility of the foreign exchange markets. so we need more information on such positions. at this stage, that is all settled and the risk isn ’ t there anymore but we don ’ t want to risk a repetition of this. are there any concerns that you have about the structure of your financial industry? we have a very healthy banking system and i don ’ t have any concern about its structure. however, i ’ m quite concerned about the non - banks that are involved in the mortgage business. some of them tend to fund themselves in the market and so the maturity mismatch here is a concern. it only accounts for 2 – 3 % of gdp in terms of loans, but it is still worth looking at. that ’ s the most important factor. about 70 % of our banks are foreign owned but we have a very clear subsidiary scheme and so far our system has been thoroughly ring - fenced from the home countries so we ’ ve prevented contagion. we ’ ve also been able to prevent the foreign subsidiaries of mexican banks taking risks with the home banks ’ capital. so there ’ s not so much of a problem here. the macroprudential toolkit still appears to be in the very early stages of its development. people aren ’ t quite sure yet how the tools will take shape, or at least there ’ s no consensus on this. what are your thoughts on what tools there should be? it ’ s very much a work in progress for us too. what we want to strengthen first of all is our ability to monitor the financial system in a very precise way, find out what the vulnerabilities are, find out what the tail risks are, and then after that devise the tools. that may involve leaning against the wind, but we ’ re not at that stage yet. all options are on the table at the moment. what ’ s your view on basel iii? we ’ re broadly supportive. our banking system complies pretty much with it already so it ’ s appropriate for the rest to catch up! we have some concerns about the impact of the measures on systemically important financial institutions, however. why? because since we have local subsidiaries of systemically important financial institutions, we still don ’ t know how this will impact their mexican operations. we also want to avoid a form of taxation without