Lessons from bank privatization in Mexico

The recently completed privatization of Mexican commercial banks may be one of the most successful financial operations in recent years. In 13 months, the Mexican authorities were able to sell 18 banks to private groups of Mexican investors for more than US$13 billion total - more than three times book value, and with a price/earnings ratio of 14.5.The author, Director General of the Development Planning Unit of the Ministry of Finance and a member of the Privatization Committee that supervised the program, sets out the preconditions, objectives, and main achievements of the privatization program. He summarizes the Mexican experience in nine lessons that may be relevant for developing countries considering similar exercises: The conditions suitable for privatization and the strength of the financial system are directly related to the economy's general performance. Macroeconomic stability is essential for bank privatization to succeed. Bank privatization must be complemented by the structural transformation of the economy, to improve efficiency and productivity. Financial reform must aim to strengthen competitive economic conditions and to enhance the efficiency of the financial sector. Bank privatization requires a new legal framework, especially designed for private institutions. Legal reform should lead to structures that encourage solid, efficient financial intermediation. To encourage ample participation and to ensure fairness, the privatization process must be trustworthy - with clear objectives, precise rules, and transparent procedures. The mechanics of privatization should be consistent with the legal framework and should be based on adequate, detailed preparation. The proceeds of privatization should be in cash, which should be used to permanently reduce government outlays. Common sense rules should be followed, such as selling the small banks first, ensuring economic certainty and confidence, centralizing management of the privatization program, and ensuring honesty and transparency in the process. The overall lesson of the Mexican experience is that bank privatization should not be rushed. Mexico waited until 1990, when inflation was less than 20 percent a year and the banks were strong (their numbers had been reduced and risky ventures restricted), while meticulous preparation set the ground rules for transparent and effective procedures.