The gains that were glimpsed for the Bank of Mexico (Banxico) in April and still in September, linked to the accumulated depreciation recorded by the exchange rate, decreased at the end of 2020 and it is most likely that they will not be enough to transfer remnants to the federal government.
With information from Banxico, it can be seen that the US dollar continued to weaken at the end of the year, giving rise to a third consecutive month of gains for the Mexican peso, which left the price at 19.95 units per dollar on the last day of 2020.
The same head of the Public Credit Unit in the Treasury, José de Luna Martínez, warned since December 18 that they were not certain of receiving a remnant of operation from the Bank of Mexico and therefore did not consider it in the 2021 Annual Financing Plan .
And it is that the recovery of the Mexican currency in the last quarter partially reversed the losses achieved by the severity of the uncertainty when the shock of the pandemic erupted, the closure of the economies in March and April, the idiosyncratic factors, typical of an erratic strategy to face Covid-19 in Mexico and its impact on the economy, warned from Washington Alejandro Valerio, a strategist at the business consultancy Frontier View.
“The accounts they gave in April 2020 were in relation to the previous year (…) The complete performance had yet to be seen (…) It is not the same what would be estimated when the exchange rate was above 25 pesos per dollar, at its current level and even now we cannot talk about scenarios ”, stated the governor of the Bank of Mexico, Alejandro Díaz de León in the penultimate conference of the year, held on Wednesday 25 November. At that time, the dollar was trading at 19.9890 pesos.
Volatility in favor
Between September and December 2020 there was a rebound in financial markets, driven by the advance of the vaccine for Covid-19, the electoral result of the United States and its impact on the monetary and fiscal stimulus for that economy, factors that encouraged the appetite for risk, qualifying the depreciation of emerging currencies against the dollar, explained the director of the Monetary and Economic Department of the Bank for International Settlements (BIS, for its acronym in English), Claudio Borio.
A financial market rally that set off the alarms of international organizations such as the BIS, because as they explained in their quarterly report, released on December 7, “this context exaggerated asset prices”, and on the margin favored a depreciation accumulated Mexican peso in all of 2020 that fluctuated between 4.7%, according to the Bloomberg metric and 5.3%, according to the fund manager Franklin Templeton. This behavior led the dollar to trade at 19.95 pesos on the last day of the year, on December 31.
A behavior that, even in the case of the first annual exchange loss in the last four years, does not provide enough margin for the central bank, as established by law, to obtain sufficient profits to cover its losses and the creation of reserves.
Operations in detail
In 12 years only 4 times the central bank has delivered remnants
In the last 12 years, only on four occasions has a sufficient profit been generated in the operations of Banco de México (Banxico) so that it can transfer operating surpluses to the federal government, this in 2016, 2015, 2014 and 2008.
The closest precedent in which Banxico generated a profit that allowed it to reconstitute its reserves and transfer a surplus to the government was in 2017, for 321,653 million pesos, an amount that was generated in fiscal year 2016, when the exchange rate was depreciated 20 percent.
The previous year in which Banxico achieved a sufficient profit to transfer the remainder of the operation to the Ministry of Finance was in 2015, on that occasion the exchange rate depreciated 17% per year, the remainder transferred added up to 239,000 million dollars.
This depreciation exceeded that of 2014, when the exchange rate accumulated a 12-month slip of 12.4%, which resulted in a transfer of $ 31.449 million.
In 2008, the world crisis, the slide of the currency favored the generation of a profit for 95,000 million dollars that were transferred to the Ministry of Finance in compliance with the Bank of Mexico Law in Article 19.
With the law in hand
The destination of the remainder of Banxico’s operation is defined in the Bank of Mexico Law and the Federal Budget and Fiscal Responsibility Law. This extraordinary income should be used to strengthen the financial position of the federal government and guarantee the reduction of public debt.
According to the law, at least 70% of the transferred remainder must be used to repay the public debt of the government contracted in previous fiscal years or to reduce the amount of financing necessary to cover the budget deficit. While the remaining 30% is used to strengthen the Budgetary Income Stabilization Fund or to increase assets that strengthen the government’s financial position.
Banxico may have profits or losses, as it is not for profit, it is obliged to hand over to the government the amount of its operating remainder after establishing its reserves.