Are Mexico’s international reserves at risk?

At the beginning of this month of December, the Senate of the Republic of Mexico (one of the two Chambers of the Mexican Parliament) approved a controversial reform to the Law of the Central Bank of this country. For the first time in history, the Bank of Mexico will be able to buy the surplus in dollars that circulates in the territory, in order to increase its international reserves.

However, this situation has worried various economists of the Aztec nation, since they consider that the autonomy of the Central Bank is being violated and international reserves are being put at risk. How many assets do international reserves have in the Latin American region? And how will this decision that will reach the Chamber of Deputies in February 2021 affect Mexico?

International reserves in Latin America

The central banks of our region have learned that it is important to maintain a large number of assets in dollars or other currencies to guarantee the stability of the local currency; This ensures that the economy does not fall disproportionately and maintains the value of Latin American currencies.

In this regional scenario, Mexico and Brazil are the countries with the largest international reserves in Latin America, since their assets are between 360,000 million and 180,000 million dollars; both are among the 15 countries with the largest reserves in the world, according to data from the Mexican Center for International Studies.

Colombia, Peru, Chile and Argentina are nations that have stable international reserves , since each one has between 75,000 and 40,000 million dollars; Guatemala remains between 25,000 and 15,000 million, while the rest of the countries of our region have reserves of less than 10,000 million dollars, with Belize being the country with the least international reserves (internal to one billion dollars).

A reform to the Mexican Central Bank.

Since the 1990s, Banco de México has been an autonomous body from the government. Its leaders and the Bank's governor enjoy freedom of management and decision-making in the nation's monetary policy; However, one of the most influential senators in the government of the new party in power (National Regeneration Movement) launched in November a proposal so that the Bank of Mexico can acquire the dollars that, due to their surplus presence, cannot be marketed in the territory.

Mexico is a country that annually receives millions of dollars from the United States, this because there are hundreds of thousands of Mexicans who work in the United States and send money to their relatives in American currency; On the other hand, since Mexico is a country with a lot of tourism, foreigners who enter the territory make purchases that represent a considerable cash flow that often does not even need to be changed.

Given this situation, it is very common for the Mexican market to see considerable amounts of dollars in cash; however, the situation becomes unsustainable due to money laundering by organized crime groups that use this currency to finance their illicit activities. With this, the surplus of dollars in the banks that operate in Mexico becomes a problem, because when trying to return the currency in question to the United States, the American banks limit the purchase of their own currency to a certain amount that is exceeded in our country.

For this reason, this new group of power in Mexico raises the possibility that the money seized in dollars, often coming from drug trafficking, is acquired by the central bank and goes directly to the country's international reserves. On the surface, this would help ensure certainty in the commercialization of the US dollar, diminish the black market for the currency and fight money laundering and terrorist financing.

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Fear in the markets

However, Mexican economists such as Gerardo Esquivel and Raúl Martínez-Ostos have expressed their concern in various media, since they consider that it is not the job of the Bank of Mexico to take surplus dollars from the national market, and they propose that banks should continue to operate normally.

Esquivel, deputy governor of the Bank of Mexico, assured in El País de España that "the purchase of dollars in cash by the Bank of Mexico can generate financial instability."

Assuming this task would be breaking the confidence in the autonomy of the Central Bank of Mexico, say these specialists, which could cause foreign investment to be depleted and in the long term threaten the stability of international reserves, which to date are one of the largest in the world.

This law reform has yet to go through the approval of the country's Chamber of Deputies in order for it to be enacted by the president; However, the left-wing government in Mexico has an absolute majority in both legislative chambers, which is why it is very likely that this law will be a reality at the beginning of February of the following year. 

It is premeditated to think that investors will flee the country because of this decision, which is why it cannot be said that the reserves of the Bank of Mexico are at risk; However, it is an excellent opportunity to rethink the type of currency that should be held in international reserves in Mexico and Latin America, since economists around the world agree that it is better for central bank reserves to be kept in currencies that are not are related to the country's currency.