Moody’s Points to Uncertainty in the Financial System Following Judicial Reform
12:44 14/09/2024 - PesoMXN.com
Moody’s has warned that as the secondary laws of the Judicial Reform, which have already been sent to the Executive Branch for publication in the Official Federal Diario (DOF), are established, there will be an atmosphere of uncertainty for credit financial institutions, especially non-bank entities.
According to the rating agency, banks will be less affected by this lack of legal certainty compared to other credit entities, thanks to the diversification in their portfolios and the fact that most of their lending focuses on consumer credit and high-quality loans for businesses (22% and 47% of the total, respectively). In contrast, the portfolios of Small and Medium Enterprises (SMEs) and mortgages could face more repercussions, as they rely on strong legal certainty to ensure judicial recovery of assets in the event of non-payment, the institution noted. For this reason, these portfolios will likely encounter a reduction in the granting of new loans. Furthermore, Moody’s highlighted that banks will reduce their exposure to Non-Bank Financial Institutions (NBFIs), which are often the means many SMEs use to access alternative financing. “A good number of NBFIs in Mexico act as a last line of credit and support for financial inclusion. Banks, following prudent criteria, may also limit their exposure to those NBFIs engaged in pure or financial leasing and mortgage and SME loans,” Moody’s added. This increased legal uncertainty in the country raises costs and negatively impacts financing lines, which limits the growth of NBFIs that have suffered in recent years from defaults, bankruptcies, and corrections in their financial statements. A recent case is the default by Operadora de Servicios Mega, whose situation will likely intensify the financing conditions for most NBFIs in the country, adding more pressure to the already existing situation due to the judicial reform, the rating agency warned. In this context, the role of Development Banking will be crucial in alleviating the impact of the reduction of credit to SMEs, the mortgage sector, and NBFIs. Therefore, Moody’s emphasizes the urgent need to define how the guarantee programs of Development Banking will be carried out under the new administration of Claudia Sheinbaum.
As the economic context becomes more uncertain, it is essential for financial institutions and authorities to work together to ensure that credit flow to the most vulnerable sectors of the economy is maintained. Development Banking must take a proactive role in creating conditions that strengthen confidence in the system, as well as managing risks that will allow SMEs and other actors to access financing sustainably.
