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Cash Management in Mexico Looks Like Heaven in the Region
by Florent Michel, Managing Partner, Latina Finance & Co.
Mexico is still in recovery from the 2008 crisis. The country is slowly registering signs of improvement in its industrial production, exports and level of employment, but as yet nothing compared to the Mexico of the early years of 2000. The financial authorities have continued to deploy strong fiscal policies in order to sustain the economy, lowering interest rates from 8% in January 2009 to 4.5% today. After a short rebound at the end of ‘09, the first quarter of 2010 still registered a negative GDP growth (-0.35%) with inflation at a level of around 4%.
As a very open economy Mexico was badly hurt by the crisis and has not yet recovered. Managing cash and treasury in this type of cycle is challenging but unlike many other countries in the region Mexico provides a very flexible and cash management friendly environment.
A very large proportion of payments, maybe close to 70%, are still made today by cheques by or cash.
A free trade economy with few restrictions in the area of treasury and cash management
Mexico is certainly only one of a few countries in the Latin American region such as Chile, Peru, Uruguay or some Central American countries, where managing treasury and cash management is relatively simple - nothing like Brazil, Argentina, Venezuela or Colombia for example. The strong trade ties with the US (85% of Mexican exports goes to the US) and participation in NAFTA (North America Free Trade Area) have dictated an early liberalisation of exchange controls and free movement of funds. Mexico does not have exchange controls: companies whether resident or non-resident can open current and savings accounts in both local currency and USD. Chequing accounts are interest bearing accounts and are taxed according to the location of the company: For resident companies interest payments are taxed at a rate of 0.5% on the capital from which the interest is derived. Mexican resident companies are allowed to have offshore accounts.
Payments and collections are moving towards electronic
Clearing is done by the Central Bank of Mexico which only clears Mexican pesos. Mexico has a very efficient single RGTS system which can deal with all payments with no limitation in value. The system is called SPEI and provides for same-day credit. A separate clearing house, SICAM, also controlled by the central bank, deals with cheques and some other forms of small electronic transfers. Cheques are cleared between 24 to 48 hours depending on the geography. A very large proportion of payments, maybe close to 70%, are still made today by cheques or cash. Given the poor reliability of the postal service, cheques need to be physically delivered and collected. This is a negative on the collection side in Mexico as the country cannot implement any form of lockbox. Some banks provide cheque collection services and cash can be collected by specialised security companies in Mexico, with cash remittance at the bank on D +1; however, the volume of electronic transfers is in constant growth and the country is slowly but surely moving towards electronic payments.
SwiftNet is not yet used extensively. Mexico does not appear in the 2009 top 25 country users of Swift in terms of volume. Thirteen banks are members of Swift and 39 institutions connected, but volumes would remain very small even if they increased by 5% in 2009.