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Mexico’s Financial Institutions Urged to Adopt Risk Management Strategies Amid Growing Fiscal Risks
The Mexican government has identified fiscal risks associated with macroeconomic shocks, financial sector crises, and natural disasters as major concerns. The World Bank has been supporting Mexico for over a decade in developing risk financing and management strategies.
Sources of Fiscal Risks
Fiscal risks stem from:
- Lower economic activity
- Oil price volatility
- Interest rate and exchange rate movements
Financial sector-related risks arise from:
- Contingent liabilities related to the rescue of financial institutions or systems
Natural disasters, such as earthquakes and hurricanes, also pose significant threats, particularly in urban areas where physical assets are concentrated.
World Bank Support for Risk Management Strategies
To address these risks, the World Bank has provided Mexico with a package of knowledge, financial, and convening services. These include:
- Supporting an integrated risk management approach
- Developing a financing and insurance strategy for disaster-related risks
- Transferring catastrophe risk to capital markets through cat bonds
Results and Achievements
The World Bank’s efforts have yielded significant results, including:
- Expansion of commercial agriculture insurance coverage from 2 million hectares in 2012 to 4 million hectares by 2015
- Stabilization of Mexico’s mortgage financing markets, helping 40,000 low-income families access housing finance during the global financial crisis
- Execution of interest rate fixings and local currency transactions totaling USD14.5 billion to help the government manage its interest rate and foreign exchange risks
- Development policy loan of USD300 million for fiscal risk management in 2012
Lessons Learned and Future Plans
Mexico’s experiences with implementing risk management programs have demonstrated the value of hedging budgetary exposures to specific risks and programs. The government is now considering developing an integrated risk management framework that maps: + Range of risks emanating from exogenous shocks + Current approaches + Recommended approaches + Gaps and inefficiencies
Conclusion
Efficient risk management will ensure that limited government resources are available to support the most affected groups in the population, including middle- and low-income households. The World Bank’s continued partnership with Mexico is expected to further enhance the country’s resilience to exogenous shocks and promote a more stable financial environment.