By: Roberto Cano,
ITAM alumni

A frequently asked question is why the vast majority of individuals who have access to the Mexican financial system channel their savings to instruments or short-term vehicles that offer low yield savings options in the long term. Even though the habit of saving money exists, they do not opt for vehicles that allow them to achieve better medium or long-term goals.

To Rudiger Dornbusch, in the modern theory of consumption, income and savings, the latter plays a critical role in the life-cycle hypothesis, as individuals plan their consumption and savings for extended periods, with the intent to distribute their consumption throughout their lifetime. ¹ The life cycle theory links the habits of consumption and savings to demographic considerations, especially the age of the population. Individuals accumulate savings during the working stage of their lives and then, when their ability to earn an income starts to decline, they begin the stage of “dissaving” or “dis-accumulation,” in which they spend more than they earn and have to use their savings.

On the other hand, individuals are impatient and prefer to spend rather than save for the future. Under these conditions, they should set a goal on their desired level of wealth. The economist Christopher Carroll says that the goal or level of wealth is the point at which impatience is balanced with the motivation to save as a precaution. If wealth is below the target, the motivation for precautionary saving will be greater; if wealth is greater than the goal, impatience is stronger and the individual does not save.² Dornbusch also notes that interest rates or the returns on savings play a key role in the so-called substitution effects, from what follows is that as higher interest rates make future consumption more attractive, they end up generating a permanent increase in income and stimulating consumption.³

If we project this to Mexican savers, we see that allocating the available resources to more profitable and efficient vehicles would represent greater well being in the future, although in the present the amounts saved may be less. The endogenous growth theory, incorporating the variable of savings to the neoclassic theory, highlights several opportunities for the growth of physical capital and knowledge. The idea of increasing investment in knowledge is key to linking higher savings rates to higher rates of growth. In this model, savings are intended to increase capital reserves assuming that the population growth is constant and that capital does not depreciate. Therefore, the higher the savings rate, the higher the growth rate of output and per capita income, i.e., the economic welfare of each individual in the economic system.

Voluntary savings of individuals is concentrated in the financial system, mainly in the traditional banking vehicles, with interest rates that do not generate a real interest, that is, that do not exceed the levels of inflation. However, the penetration of investment companies or investment funds has grown significantly in recent years. These products have a high concentration in fixed income funds or very short-term debt with immediate enforceability, to levels that reach 70% of the total investment funds.

Why are these savings in long-term products not more diversified? It does not seem to make sense when compared to the results of having invested in an investment fund that mixes different alternatives between fixed and variable income. However, it is premature to draw this conclusion, as the reasons behind this behavior are very diverse, from the lack of knowledge or financial literacy, to the perception of risks, distrust or the fear of returning to cycles of economic crisis. Although they happened several years ago, these crises remain in people’s memory.  Individuals make their decisions based on available information, and it seems that a big task ahead is the promotion of financial literacy, which is not only the responsibility of the consumer of financial products, but also market participants and the authorities. Among market participants, entities that provide all these services fail to explain clearly and simply the benefits of investment funds in another asset class or long term, demonstrating that they have not deepened the customer’s knowledge. With regard to the authorities, they should direct their efforts to promoting financial literacy campaigns and training schemes of the most basic, which means including these items in the official educational programs.

In recent years, the country has made progress in the convergence of the main macroeconomic factors and it has been found that whoever made long-term decisions obtained returns that were higher than those who opted for traditional products.

In Mexico, the indicators of financial savings measured as a percentage of GDP show a positive evolution, although they are still far from those of similar economies. Compulsory savings channeled to the SIEFORES (Sociedades de Inversión Especializadas para el Retiro) managed by the AFORES (Administradores de Fondos para el Retiro) represents about 14% of GDP, while voluntary savings allocated in investment funds or investment companies amounts to almost 12% of the same indicator.

To understand the phenomenon of savings in inefficient vehicles in real terms and how it contributes to the generation of wealth of households and individuals, let us turn to macroeconomic theory.⁴ The value of financial savings channeled through the Mexican financial system can be defined as the balance between the financial assets and securities in the hands of individuals and of corporations (both residents and foreign) that are intermediated by regulated financial institutions in Mexico in order to be directed through financing to the private sector, the public sector or the external sector. The total financial savings is defined as the sum of the internal and external financial savings. The latter includes those securities issued in Mexico that are in the hands of non-residents, credit from abroad received by the Mexican public and private sectors, and the securities issued by these sectors in external markets.

The Mexican financial system has undergone a series of changes over the past 15 years which, together with the changes in the macroeconomic order, have laid the foundations for generating vehicles and sources of savings that constitute a long-term solid base of funding for the needs of the various sectors of the economy and that improve the welfare conditions of individuals. According to the most recent indicators, the evolution of financial savings has been favorable. This trend highlights the vehicles called SIEFORES, which are a compulsory contribution, and the societies or investment funds, which sell various market entities. The annual compound rate of growth in real terms of these two vehicles is 16% and 15%, so they are the fastest growing instruments in the last decade. In 2000, these vehicles accounted for just 2% of the total financial savings and are now at 14% and 12%, respectively.

While the penetration rate of financial savings to GDP is lower compared with other countries (Brazil, 78%, Chile, 94%), this indicator has increased in recent years. Among the factors that have led to this improvement are macroeconomic, structural and public policy changes, such as the following:

• Macroeconomic convergence

• Convergence toward the inflationary target set by the Bank of Mexico
• Stability of nominal interest rates
• Exchange rate stability

• AFORES (1997)
• Investment companies) (2001)

Macroeconomic convergence is based on three major closely related variables: the level of inflation, interest rates and the exchange rate, which have brought stability to the population. However, on the other hand, this change has been rapid and a large part of the population has not changed their savings habits. In previous decades, especially the 1970s, 1980s and 1990s, most of the individuals involved in the financial system placed their savings in traditional banking vehicles, all very short term, given the economic circumstances of the country. In other words, the same fragility of the system did not allow the opening of a longer-term horizon. However, although the economy stabilized after the crisis of 1994-1995, individuals still allocate their resources in short-term investments with immediate availability or high liquidity.

The structure of interest rates is used as a reference to indicate this radical change in their conditions and levels in the last 10 or 12 years, because in the late 1990s the one-year CETES were the longest fixed rate instrument of the system. In the years following 2000, there was a significant drop in benchmark rates and inflation, which led to an offer of government securities for periods of three, five, ten, twenty and thirty years, which had the effect of widening the market for debt instruments generated by the demand of the nascent private pension system and by the emergence and the widespread growth of voluntary savings through vehicles such as investment funds.

The changes to the Investment Companies Act, approved in 2001, have helped to modernize and adapt these vehicles, which have advantages over other alternatives such as voluntary savings collectors. Thus, we have seen that even new figures emerge in the distribution and services to the saving public. In addition to transparency and clarity, one of the most important changes in the law is the generation of new products (different classes or series of shares in each fund) and the new possibility to acquire other types of securities or assets, as in international markets.

There has been important and profound progress, and the groundwork has been laid so that savings vehicles, other than the traditional banking channels, become part of the alternatives. However, there are pending issues that should be included in the government programs that encourage the development of these long-term instruments so that households and individuals generate wealth in real terms. Among the factors to be considered include the following:

Education and financial diffusion

The benefits should be part of frequent and mass communication programs by the government in its capacity as the regulator of the financial institutions that serve the Mexican market. Participants must assume their responsibility of expanding the coverage of the supply of products according to the needs of the market.  It seems that this offer is directed at only certain segments and certain interests. How many times have we seen an advertising campaign aimed at long-term savings and its benefits?

Long-term tax benefits

A pending task in economic policy is the granting of long-term tax benefits that are clear and with legal certainty.  For example, the solution to the problem of the low tax base of the Mexican economy could be linked to a program that fosters long-term savings.

Footnotes

¹ Rudiger Dornbusch, Stanley Fischer y Richard Startz, Macroeconomía, México, McGraw-Hill, 10a ed., 2009, p. 321.

² Ibíd., p. 329.

³ Ibíd., pp. 78-84.

⁴ Robert J. Barro, Macroeconomics, Hoboken, John Wiley & Sons, 1984, pp. 151-173.

Bibliography

Dornbusch, Rudiger, Stanley Fischer and Richard Startz, Macroeconomía, Mexico, McGraw-Hill, 10a. ed., 2009.

Barro, Robert J., Macroeconomics, Hoboken, John Wiley & Sons, 1984.

“Ahorro financiero y su intermediación en México 2000-2010″, Notas Técnicas de la CNBV (NT/01/2010), Dirección General de Estudios Económicos-CNBV.

“Información estadística del mercado de sociedades de inversión”, Series AMIB (Asociación Mexicana de Intermediarios Bursátiles), consulted at www.amib.com.mx

“Información estadística”, Carpeta de Sociedades de Inversión CNBV-Portafolio de Información, consulted at www.cnbv.gob.mx