The bank's CEO Jose Marcos Ramirez Miguel sees less risk now from revising the regional trade deal, even a "very positive impact" on Mexico's economy.

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Global Finance: What is your view on the main economic trends at international level for this year and next?

Banorte CEO Jose Marcos Ramirez Miguel

Jose Marcos Ramirez Miguel: We have a positive outlook for the global economy in the coming years. Projected global growth rates for 2017–18, is around 3.3 percent, above the 2016 economic growth, but below pre-crisis averages, especially for most advanced economies and for commodity-exporting emerging and developing economies. While risks around the global growth forecast appear broadly balanced in the near term, they remain skewed to the downside over the medium term. On the upside, the cyclical rebound could be stronger and more sustained in Europe, where political risk has diminished. On the downside, rich market valuations and very low volatility in an environment of high policy uncertainty raise the likelihood of a market correction, which could dampen growth and confidence. Monetary policy normalization in some advanced economies, notably the United States, could trigger a faster-than-anticipated tightening in global financial conditions. And other risks including geopolitical risks, remain salient.

GF: What are the most promising countries and industries in the Latam region? And the main challenges?

Ramirez Miguel: The most promising countries, apart from Mexico, are Peru, Colombia, Panama and to a lesser extent Chile. In terms of industries, infrastructure is among the sectors with larger potential along with commodities and technology.

Latam faces important challenges in the coming years like reducing its exposure to commodity price cycles, increase regional integration efforts, infrastructure development and structural reforms in some countries.

GF: Earlier this year Mexico’s Central Bank reviewed its 2017 GDP growth expectations upwards and so did Banorte in the best proof that concerns for the current U.S. administrations were too dark and that the impact of any measure that Mr. Trump can adopt is going to be limited for Mexico. What do you expect from the remaining 3 years of his administration in term of measures that can impact Mexican’s economy?

Ramirez Miguel: The backdrop for the Mexican economy in the past 9 months was really difficult with high levels of uncertainty generated by the stance of current U.S. administration towards our country. Such stance made confidence levels to erode significantly at the beginning of the year translating into lower expectations for economic growth. Nevertheless, this uncertainty ebbed away rapidly amid the resilience observed in economic activity, sound macroeconomic fundamentals and the willingness of the Mexican government to continue with fiscal consolidation.

Moreover, concerns on NAFTA renegotiation also faded away after the U.S. government, announced (i) that they intended to renegotiate the agreement not withdraw from it, at least at this point; and (ii) they published that they did not intend to include in the negotiation issues regarding market access (i.e. tariffs, quotas, etc.). These reduced the risks of a disruptive scenario for Mexico’s exporting sector and investment flow in general.

In fact, rating agencies (S&P and Fitch) recognized both government’s fiscal efforts along with the reduced risks coming from the renegotiation of NAFTA by changing the outlook for the Mexican sovereign rating from ‘negative’ to ‘stable’.

We expect current administration -that has now a little over a year to end-, to continue the efforts to implement structural reforms. Moreover, we expect the next president to continue enhancing the macroeconomic framework through prudent fiscal and monetary policies, the continuing implementation of reforms already passed and, if necessary, promoting other changes in the regulatory framework.

GF: Can you share your view of the medium-long term outlook of the Mexican economy regarding potential growth and productivity? What sectors of the economy—global or national—hold the most promise?

Ramirez Miguel: In Banorte we are certain that recent structural reforms–which included significant reforms in the labor and financial markets, as well as in the telecommunication and energy sectors–, will eventually translate into a higher labor productivity, which consequently will be reflected in a significantly higher potential growth rate. Our estimation is that structural reforms may increase Mexico’s potential growth to 4% starting in 2020.

We have already seen significant developments result of the implementation of Mexico’s structural reforms. Telecommunication prices have edged down in the last two years (-16.2%) and there has been a higher incorporation of workers to the formal economy. In addition, the energy sector has benefitted from the efforts made by the government to allow private-sector investments into full-blown oil-related projects. The bidding process for the oil rounds has had an average allocation of 70%, while the last two rounds have allocated 70% (Round 2.2) and 100% (Round 2.3) respectively. It should be remembered that round 1.3, like the 2.3 have been the most successful, having assigned 100% of the blocks.

GF: How important is the revision of the NAFTA agreement for Mexico? What can go wrong?

Miguel: We believe that NAFTA’s revision will have a very positive impact on economic activity in Mexico. The objectives set forth by each of the three governments are feasible and it is highly probable that they reach an agreement on each of them. In particular, we believe that the revision of rules of origin will eventually entail higher levels of foreign direct investment in Mexico. Moreover, the introduction of sectors that were not included in the original agreement will also represent new market opportunities for the country.

What it is important here is that negotiators favor an approach based on increasing the welfare of the region vs. a zero-sum game approach like the one that the US administration seems to prefer. We believe that this is one of the main risks of the negotiation.

GF: What are the key financial issues that Mexico faces as a nation? 

Ramirez Miguel: Mexico has a sound financial system with well-capitalized banks and enough liquidity to face possible shocks. In the short-term, the financial system has to face the possibility of renewed waves of volatility both in domestic and international markets, amid a backdrop in which central banks around the world are tightening monetary policy.

In the long-term, one of the Mexican economy main challenges is to increase bank penetration, which is one of the lowest among Latin American countries. Nevertheless, as a result of the structural reforms (financial and labor, among others), banking penetration has already starting to improve. Banking penetration to the private non-financial sector in 2010 was 12.6% of Mexico’s GDP. Now it has increased to 17.8%. In addition the non-performing loan ratio has decreased substantially, while private credit growth is three times higher than Mexico’s GDP. It is a reality that Mexico has a long way to go to praise itself as a country with a high financial inclusion. However, it is rapidly converging towards that target.

GF: How do you see the future expansion of Banorte?

Ramirez Miguel: In order to address Grupo Finaciero Banorte's future we shall consider the path we have gone through. GFNorte started its operations in the 19th century as a small regional bank in northern Mexico and through organic and inorganic growth it has turned into one of the most important Mexican financial groups, and is the only, among the six largest institutions, that is managed by a Mexican executive team. Its decisions are taken locally without the influence of international headquarters, which has proven to be an advantage.

Since 1995 and until 2013 GFNorte diversified its business base by acquiring and merging with institutions not only in the banking sector across the nation but also in the wealth management, insurance, pensions and annuities sectors.

Later on, GFNorte has focused on consolidating the synergies from inorganic growth and in 2013 implemented the transformation program “Sumando” which involves a series of projects on business intelligence, client interaction, industrialization, risk management, next best action/offer and multichannel sales, which are already providing a new and enhanced experience for clients.

For the years to come, we are committed to become the best financial group in Mexico for our investors, customers and employees; therefore in 2015 we announced our medium-term strategic plan Perfect Vision 2020 which aims to double profits and boost the Return on equity (ROE) to 20%. Primarily, by increasing the cross-sales ratio from 1.8x to 2.2x with the help of analytics tools already in place. We feel very confident ad as during this year and a half we have had strong achievements in each of the established metrics, fulfilling satisfactorily each of the goals set for the period and laying solid foundations to grow sustainably in the future.