Playing a New Role In Agricultural Finance: - FIRA s s Experience -
Agenda A typology of institutional 1. Introduction. 2. New Business Model. 3. Evolution to success. 4. Final Remarks.
After three years of sluggish growth, macroeconomic performance has improved Mexico s GDP growth rate 4.4 3.7 3.8 Inflation (Annual Rate %) 0.8 1.4 2002 2003 2004 2005 2006 Source: INEGI, Estimation: CAPEM. Source: SHCP 0.95 1.10 Fiscal Deficit % of GDP Target Manufacturing Exports & GDP Mexico vs Manufacturing GDP USA (Annual Var. %) 0.69 0.72 0.61 0.57 Actual 0.39 0.37 0.16 0.16 0.10 2000 2001 2002* 2003** 2004** 2005 f * Do not include Banrural liquidation and Financiera Rural creation ** Do not include government downsizing program Source: SHCP Source: CAPEM Manufacturing Exports Mexico Manufacturing GDP Mexico Manufacturing GDP USA
domestic consumption is the main driver for growth 190 165 Billion Pesos Consumption credit Retail Sales Retail Sales Index 120 110 Billion Pesos 500 470 440 Corporate credit 140 115 100 410 90 90 380 65 40 15 70 DF AJ AODFAJ AODFAJ AODFAJ AODFAJ AODFAJ AODFAJ AODFAJ AODFAJ AODF AJ AOD 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 *Seasonally adjusted series Source: FIRA with INEGI and Banxico statistics 80 350 320 D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D 19941995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 8 6 4 2 0-2 Economic Activity & Employment Annual Growth %, avg., GDP & Employment Employment GDP Source: CAPEM GDP determinats 2005 Participation Growth Contribution % % % GDP 100.0 3.7 Consumption 82.2 3.9 3.2 Investment 20.8 5.1 1.1 Exports 38.0 7.6 2.9 Imports -41.0 8.4-3.4-4 I 00 I 01 I 02 I 03 I 04 Source: CAPEM
Mexican food & agribusiness sectors are growing mainly driven by international trade 110,000 100,000 90,000 80,000 Average primary sector GDP annual growth rate is 2.2% for 1995-2004; food processing sector has grown 3.3 % annually in the same period For the next three years, average primary sector GDP annual growth rate is estimated 3.0% and for food processing sector will be 2.9% in the same period Food processing sector exports have been growing faster than primary exports (AAGR 91-04 10.4% vs 6.4%). Primary & Food processed GDP (Millon MXN 1993=100) Primary Food processing Estimated 900 800 700 600 500 Agrifood exports Growth Index 1980 = 100 Primary Food processing Estimated 70,000 400 60,000 300 50,000 40,000 30,000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 200 100 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: FIRA based on INEGI s information Source: FIRA based on INEGI's i f ti
So far, Mexico has been able to capture the benefits from free trade (NAFTA) by boosting its exports mainly to US Imports from the United States (Million dollars) Exports to the United States (Million dollars) 7,000 6,000 Bulk Ag total Intermediate Ag total 7,000 6,000 Bulk Ag total Intermediate Ag total 5,000 Consumer-oriented Ag total 5,000 Consumer-oriented Ag total 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 1993 1995 1997 1998 1999 2000 2001 2002 2003 2004 0 1993 1995 1997 1998 1999 2000 2001 2002 2003 2004 Source: USDA
Climatical advantages have pushed fruits & vegetables exports which together with beverages explain export growth A typology of institutional Food & Agricultural exports (Millions of dollars 2005) Food exports Agricultural exports Beer Tequila & Other wines Vegetables & coked fruits Shrimp Grounded & roasted Coffee Alcoholic syrup Frozen strawberry Fresh lobster Fresh sea food Source: INEGI 0 200 400 600 800 1000 1200 Fresh vegetables Tomatoes Other fresh fruits Cattle Coffee grains Melon & water melon wheat Fresh strawberry Chickpea Honey This trend will continue in 2006 Mainly in added value products Consumer-oriented preferences - 200 400 600 800 1,000 1,200 1,400
Banking liberalization, NAFTA and tequila crisis posed new challenges to FIRA, while ag sector still underserved FIRA s products were not attractive to banks and therefore its lending fell 70% between 1994 and 1998 Traditional commodities agriculture was challenged by trade liberalization, thus risk perception about the sector was increased Less than 10% of banking system loans go to agriculture Large percentage of rural population without access to banking system 100 80 60 40 20 0 Debt markets have developed, thus enhanced funding is not an answer Mexico South & Southeast Municipalities without bank branches (%) Center Center * Centerwest NorthwestNortheast 50 40 30 20 10 0 Mexico % of population living in such municipalities South & Southeast Center Center * Centerwest Dec-95 Jun-01 Dec-95 Jun-01 Source: Mexico s CNBV, INEGI Northwest Northeast
But there are also new opportunities A typology of institutional Free trade agreement with EU offers export opportunities not yet fully exploited New free trade pact with Japan opens a new market for fruits, but particularly for beef, pork and other animal protein. Japan perceives Mexico as having a higher sanitary status (BSE free) than the US Network of free trade agreements makes Mexico a gateway to the world Rapid consolidation in the agribusiness industry will enable certain sectors to compete Mid-size farmers will face the greatest challenges; their ability to integrate to the value chain, as well as investments in technology will be critical for their development Greater access to capital and financing are necessary for capturing these opportunities; this in turn will depend on the speed of structural reforms, including better enforcement of property rights at a local level as well as consolidation of land use, among others
Agenda A typology of institutional 1. Introduction. 2. New Business Model. 3. Evolution to success. 4. Final Remarks.
1954 Early 1990 FIRA is a second-tier trust fund created by the Mexican government within the Central Bank 50 years ago Bank Privatization Financial Market Liberalization Market Oriented Policies in Ag. A typology of institutional FIRA s loan portfolio was heavily subsidized Original assumption was that enhanced funding would encourage an increase in credit to farming Loans were concentrated in the primary sector (commodities) Tequila crisis Lending to productive sector practically disappeared FIRA s products not attractive to banks Agricultural commodities challenged by trade liberalization, thus risk perception increased Early 1990-1998 From development banking to banking development 1999 - Today
Restructuring and a turnaround strategy were needed in order to survive in a new environment Product-driven Client-driven Evolution in focus Agriculture Food system From market players to market makers Investment banking Corporate governance realignment Downsizing Process-driven design Internal control fostering Staff professionalization Performance-based reward Subsidy-based operation Value-added products
A comprehensive approach was used for implementing the new model Products Channels Organization Elimination of red-tape Value added for clients (users & distribution network) Improved targeting of market-friendly subsidies Smart subsidies Markets development Banking diversification New intermediaries Strategic alliances Reorganization to eliminate conflicts of interest Adoption of a processoriented organization Corporate Governance & Internal Control strengthening Performance-based employee rewards Cost-cutting strategy
Agenda A typology of institutional 1. Introduction. 2. New Business Model. 3. Evolution to success. 4. Final Remarks.
With our new approach, FIRA has achieved higher private sector engagement (double digit growth for six consecutive years) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Commercial banking Lending and Lending to low income producers 2,928 2,185 1,800 CAGR 17% 1998-2004 CAGR 16.7% 1998-2004 1,632 541 1,848 599 2,265 791 824 2,234 2,649 846 3,327 1,018 4,124 1,385 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Change in credit stock by commercial banks using FIRA s funds 800 600 400 200 0-200 -400-600 -164,0-486,0 20,0 112,0 324,0 588,0 638,0 1998 1999 2000 2001 2002 2003 2004 Interest rate subsidies Million USD 2001 2002 2003 2004 Santander Serfin 7% Loan Portfolio Composition (Percentage) Scotiabank Inverlat 7% Other Banks 20% Subsidies 82 83 54 50 As a % of subsidized loan portfolio 5.4 4.8 2.7 2.3 Bajío 14% NBFI 3% As a % of total loan portfolio 3.5 3.2 1.9 1.4 Source: FIRA. All figures in million usd HSBC 14% BBVA 16% Banorte 19% 12 non bank banks 4 Factoring companies 6 Leasing companies 1 Warehouse
FIRA offers very competitive rates by bundling the fixed interest rate credit demand in batches A typology of institutional Informative weekly rate proposal Farmer s requests Cash flow grouping Interest rate swap closing C.F. Bundling = More Volume = Attractive Interest Rates 9,000 Outstanding Book Value in Mx. Ps. (nov 2005) Fixed interest rate credit disbursement 8,500 8,000 7,500 7,000 6,500 6,000 Credit access to low income farmers 5,500 millones de pesos 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 Demand for the product has soared 1,000 500 0 30-Jun-00 30-Nov-00 30-Abr-01 30-Sep-01 28-Feb-02 31-Jul-02 31-Dic-02 31-May-03 31-Oct-03 31-Mar-04 31-Ago-04 31-Ene-05 Source: FIRA
FIRA is making a transition from being a primarily funding institution to a mainly credit guarantee/ risk sharing entity A typology of institutional We offer plain-vanilla credit guarantees, as well as credit derivative We share the risk with financial institutions 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 490.8 524.7 Guaranteed credit (Million USD 2004) 816.4 1,087.5 1,843.7 1,105.1 1,452.9 1998 1999 2000 2001 2002 2003 2004 5.3 4.5 3.8 3.0 2.3 1.5 0.8 0.0 Expected loss in guaranteed portfolio (%) 4.65 3.42 99-02 00-03 - 40 30 20 10 27.2 Guaranteed credit / total portfolio (Percentage) 32.8 35.9 33.0 35.2 2000 2001 2002 2003 2004
Financial market outreach to low income rural entrepreneurs is being fostered with smart subsidies rather than interest rate subsidies A typology of institutional Covers screening and transaction costs associated with first time small borrowers Transaction costs subsidy Reduces discrimination by size of borrower Declining with 3-year-life Outreach subsidies Infrastructure Development subsidy Portable by borrower among different FIs Creates information (public good) Partially covers the cost of creating new human infrastructure to enter marginal markets Covenant by bank to net increases in lending to those marginal markets Allocated on a per annum basis and subject to auditing
FIRA is the leader in its investment banking practice for agribusiness in Mexico Off-balance sheet financing Creation of non-existing markets through financial innovation (ABS and structured finance): Accounts receivables (working capital loans) Commodity inventories finance Funding and enhancement Reduction in credit exposure and liquidity requirements Supply chain management Timely credit disbursement Development of new investment products with low VaR Enhancement of agribusiness credit analysis capabilities in the financial sector
An innovative approach to investment banking creates value for the food system and develops financial markets INVESTOR AGRIBUSINESS Debt issue Funding and partial enhancement PROCESSOR 1. Supply agmt. 2. Loan PRODUCER Transfer of rights SPV 1. Senior tranche 2. Junior tranche with sinking fund Value chain integration through better supply chain mgmt. Reduction of transaction costs and risk via portfolio approach No subsidies; fee-based structuring service First loss enhancement by industry, market making enhancement by FIRA at a premium Transactions account for 5% of loan portfolio and growing Gradual decline in FIRA s level of enhancement
Agenda A typology of institutional 1. Introduction. 2. New Business Model. 3. Evolution to success. 4. Final Remarks.
Traditional second-tier lending is of little use in more developed markets A more active approach to solving information, risk management and transaction costs problems is needed Interest rate subsidies have proved not only distorting but ineffective by FIRA s independent third party evaluations Transaction costs and infrastructure development/roll-out subsidies are transparent and measurable
FIRA s new aproach aims to solve market failures/imperfections with a market approach and a clear vision of financial market development FIRA evolved from a traditional development credit institution to a financial innovation entity that creates value for the agricultural sector and develops ag. financial markets Through a market development approach, the small producers are able to access sophisticated financial instruments, such as interest rate risk hedging FIRA s innovative approach has allowed it to growth at a doubledigit digit rate, which is significantly higher than agriculture GDP growth FIRA has contributed to increase the number of FI serving the agribusiness sector
FIRA s new activity is aimed at solving market failures with a market approach and a clear vision of financial market development F I R A Transaction costs reduction Asymmetric information solutions Market making Value creation
FIRA is considered around the globe as A typology of institutional "Formidable Organization January 2004 The World Bank An example of best practices in development financial institutions September 2004 Credit Bank for the Reconstruction Organization driven by financial innovation November 2004 Leading Business Magazine in Mexico Innovative Enterprise November 2004 Interamerican Development Bank Excellent business partner Leading Business School in Latin America Latin American Association of Development Financial Institutions Strong and Dynamic Organization The Best Partner in Business April 2004 May 2004
A typology of institutional www.fira.gob.mx 01 800 800 FIRA 3 4 7 2 Claudio García Salgó Director of Business Promotion csalgo@correo.fira.gob.mx