As Mexico Recovers From Natural Disaster, Investors Look to the Banking Sector

Investors take notice as the unexpected dissolution of the political oppostion in Mexico clears the way for banking reform.
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A month ago, Mexico looked like something

Nostradamus

might have predicted for the turn of the century. Deadly floods and killer earthquakes wreaked physical havoc, while expectations the next presidential election would leave the country in political chaos raised concerns about economic turmoil.

Mexicans, however, are recovering quickly from the spate of natural disasters, and the unexpected dissolution of a potential powderkeg in the form of the opposition political alliance has cleared the way for the progression of much-needed reforms.

All that has made international investors, many of whom have been underweight Mexico, as well as other parts of the region, reappraise the country's allure as an investment destination. And within the economy, they're looking at the country's banking sector, which appears set to benefit from a series of proposed legislation that will force banks to be more rigorous. This legislation has become an election issue as Mexicans prepare to go to the polls next year.

"The banking system is something that everyone has grabbed onto as a political hostage

during a contentious election," says Lisa Riley, Latin American economist at

Lehman Brothers

.

Particularly important: the bankruptcy law and the credit guarantee laws.

The bankruptcy law, which has yet to be debated by

Congress

, will make it harder for banks to avoid payments by going bankrupt. The credit guarantee legislation, which is in Congress, will make it easier for banks to seize assets of defaulted loan customers. Investors, however, want to see this type of legal infrastructure in place before they return to a sector that has been tainted with bad loans.

Recent political developments have given them hope the laws will get through Mexico's Congress swiftly, particularly the credit guarantee which is expected to be enacted in the coming weeks. With last month's dissolution of the

National Action Party

and

Democratic Revolution Party

coalition, the ruling

Institutional Revolutionary Party

will find it easier to get legislation through the Congress and appears set to handily win presidential elections slated for June 2000.

Credit demand in Mexico remains stifled because of real interest rates above 20% and the general unwillingness of commercial banks to lend. While the two proposed laws may be the most contentious of the reforms on the block, establishing federal standards, lowering interest rates and the ability of banks to meet new capital adequacy requirements will also transform not just banking practices, but also sector players as larger banks survive the transitions.

Seeing great potential for the reform survivors, analysts like Riley and Raphael Bello, economist at

Morgan Stanley Dean Witter

, are recommending investors look at Mexican blue-chip financials.

Banorte

is touted because of its clean balance sheet and small niche franchise, as is

Bancomer

, the banking unit of

Grupo Financiero Bancomer

. Bello says the valuations of both have fallen to attractive levels.

Jose Garcia Cantera, Latin American equity research analyst at

Salomon Smith Barney

, is bullish on

Grupo Financiero Banacici

, the nation's largest financial conglomerate. He cites the company's balance sheet and its ability to fulfill capital adequacy requirements as reasons to expect growth in the coming year, in spite of potential political disruptions.

The allure of the financial sector hasn't been lost on Mexico-focused funds. The

Mexico Equity and Income Fund

(MXE) - Get Report

, which has 7% of its net assets in Bancomer, and the

Mexico Fund

(MXF) - Get Report

, have risen slightly over the past few weeks, after both dropping sharply this July.

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