Monday, June 23, 2008

Consumer Credit Card Debt Chilling the Mexican Economy

Frontera NorteSur

In repeated statements during the last few months, high-ranking members of the Felipe Calderon administration, including the president himself, have assured the public that Mexico is well-positioned to resist the economic storm that's lashing the United States. But different factors, ranging from steep commodity price hikes to some lay-offs in the maquiladora export sector, are putting chinks in the armor.

A serious trouble zone is emerging in the consumer credit sector, which has helped drive the Mexican economy during the last four to five years.

New numbers from the federal government's National Commission for the Protection and Defense of Financial Services Users (Condusef) report that the percentage of bank issued credit card debts in arrears reached 7.6 percent in April of this year. The figure follows a steady rise in bad credit card debts from June 2005, when only 3 percent of such loans were overdue.

Mexican officials have issued mixed messages about the slide of many consumers into unmanageable debt. In 2007, Condusef President Luis Pazos predicted bad credit card debts would reach the 7.1 percent threshold in June 2008, a number that was surpassed two months ago. Speaking last year, Pazos warned that a 7.1 percent bad debt load would be dangerous to the health of the Mexican banking system.

In an interview with Frontera NorteSur earlier this year, Jorge Aceves, assistant director for Condusef in the state of Guerrero, said the credit card debt load was still not a major problem. "It's not at a critical stage," Aceves affirmed. Commercial banks, he said, were working with credit card holders to restructure debts.

Still, the percentage of all consumer bank loans considered nonpaying grew from 6 percent in 2006 to 10 percent by March 2008.

In another warning sign, Condusef has reported that 60 percent of bank-issued credit card holders make only the minimum payment due every month. The consumer information and conflict resolution service cautioned that account owners who have the habit of making the smallest possible payment will wind up paying astronomical sums for purchases.

To illustrate its point, Condusef gave the example of a $1,000 refrigerator purchased with a credit card. In Mexico, the credit card transaction entails forking out an annual commission fee of $36 plus the 15 percent value-added tax, making a minimum payment of 3 percent of the total debt and paying the current annual interest rate of 28 percent in 240 monthly payments. At the end of 20 years, Condusef calculated that the interest-driven cost of the refrigerator would be more than $7,500 – a very high price for an appliance likely to stop functioning even before it is paid off in full. Worse yet, consumers would still have a $1,000 nominal charge to pay for the ancient fridge.

Javier Taja, president of the Guerrero branch of the National Union “El Barzon,” an organization of bank debtor advocates, contended that interest rates charged by financial institutions like Citigroup's Banamex reek of usury.

The increase in bad credit card debts is "worrisome" for the Mexican economy, Taja told Frontera NorteSur. "We could have a generation of Mexicans that isn't eligible for credit and is listed with the Credit Bureau," Taja said. "This means that a Mexican can't get a car or a house later on, and we could have an economic contraction."

Mexican banks, virtually all of which are owned by foreigners, have embarked on an aggressive credit card promotion campaign during the last several years. According to Condusef and the Bank of Mexico [Mexico’s central bank], an estimated 10 percent of approximately 13 million individual credit card holders have eight or more credit cards; the average line of credit for each account is pegged at $2,800.

"The problem is not with the number of cards, but with the way they are used," said Luis Fabre, Condusef technical vice-president. "Each credit card owner has an average of 1.4 cards, but we all have experiences, perhaps in our own families, of people who like the Americans, flash their billfold of cards and possibly have 13, 15 or 17 cards."

Bad debts notwithstanding, Mexican banks remain very profitable. According to the Bank of Mexico, in-country banks average a 23.8 percent rate of profit on available capital. The Mexican profit margin compares with 13.4 percent for the United States and 19.2 percent for Chile.

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Additional Sources: El Diario de Juarez, June 13, 2008. La Jornada, June 12 and 13, 2008. Articles by Juan Antonio Zuniga and Roberto Gonzalez Amador.

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Frontera NorteSur (FNS)
Center for Latin American and Border Studies
New Mexico State University
Las Cruces, New Mexico

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Reprinted with authorization from Frontera NorteSur, a free, on-line, U.S.-Mexico border news source.

Translation FNS