Playing a New Role In Agricultural Finance:

Playing a New Role In Agricultural

Playing a New Role In Agricultural

Finance:

Finance:

--

FIRA

FIRA

’

’

s Experience

s Experience

-

-A typology of institutional

models: Some case studies

1.

1.

Introduction

Introduction

.

.

2.

New Business Model.

3.

Evolution to success.

4.

Final Remarks.

After three years of sluggish growth, macroeconomic performance has improved

Manufacturing GDP USA

(Annual Var. %) Mexico’s GDP growth rate

0.8

1.4

4.4

3.7 3.8

2002 2003 2004 2005 2006

Source: INEGI, Estimation: CAPEM.

0.95 0.69 0.61 0.39 0.16 0.10 1.10 0.72 0.57 0.37 0.16 2000 2001 2002* 2003** 2004** 2005 f Target Actual Fiscal Deficit % of GDP Source: SHCP

* Do not include Banrural liquidation and Financiera Rural creation ** Do not include government downsizing program

… domestic consumption is the main driver for growth

D F A J AOD F A J AOD F A J A OD F A J AOD F A J AOD F A J AOD F A J AOD F A J AOD F A J AOD F A J AOD

70 80 90 100 110 120 Consumption credit Retail Sales 320 350 380 410 440 470 500 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 Corporate credit Billion Pesos Retail Sales Index 19941995 1996 1997 1998 1999 2000 2001 20022003 2004 2005 19941995 1996 1997 1998 1999 2000 2001 20022003 2004 2005 Billion Pesos

*Seasonally adjusted series

Source: FIRA with INEGI and Banxico statistics

-4 -2 0 2 4 6 8 I 00 I 01 I 02 I 03 I 04 Employment GDP

Economic Activity & Employment

Annual Growth %, avg., GDP & Employment

Source: CAPEM

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

GDP determinats 2005

Agrifood exports Growth Index 1980 = 100 0 100 200 300 400 500 600 700 800 900 1 980 1 982 1 984 1 986 1 988 1 990 1 992 1 994 1 996 1 998 2 000 2 002 2 004 2 006 Primary Food processing

Source: FIRA based on INEGI's i f t i

Primary & Food processed GDP (Millon MXN 1993=100) 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 110,000 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 Primary Food processing

•

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

10.4% vs 6.4%).

Source: FIRA based on INEGI’s information

Mexican food & agribusiness sectors are growing mainly driven by international trade

Estimated

Estimated

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) Source: USDA 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 1993 1995 1997 1998 1999 2000 2001 2002 2003 2004 Bulk Ag total Intermediate Ag total Consumer-oriented Ag total 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 1993 1995 1997 1998 1999 2000 2001 2002 2003 2004 Bulk Ag total Intermediate Ag total Consumer-oriented Ag total

Climatical advantages have pushed fruits & vegetables

exports which together with beverages explain export growth

This trend will continue in 2006

Mainly in added value products

Consumer-oriented preferences

Food & Agricultural exports (Millions of dollars 2005)

- 200 400 600 800 1,000 1,200 1,400

Chickpea Fresh strawberry

wheat Melon & water melon

Coffee grains

Other fresh fruits Tomatoes Fresh vegetables Honey Cattle Source: INEGI Agricultural exports Food exports • 0• 200• 400• 600• 800• 1000• 1200

Fresh sea food Fresh lobster Frozen strawberry Alcoholic syrup Grounded & roasted Coffee Shrimp Vegetables & coked fruits Tequila & Other wines Beer

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

•

Debt markets have developed, thus enhanced funding is not an answer

% of population living in such municipalities 0 10 20 30 40 50

Mexico South & Southeast

Center Center * Center-west Northwest Northeast Dec-95 Jun-01 Municipalities without bank branches (%) 0 20 40 60 80 100

Mexico South &

Southeast

Center Center * Center-west

NorthwestNortheast

Dec-95 Jun-01 Source: Mexico´s CNBV, INEGI

But there are also new opportunities

models: Some case studies

•

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

1.

Introduction.

2.

2.

New

New

Business

Business

Model

Model

.

.

3.

Evolution to success.

4.

Final Remarks.

• 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

)

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. • 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

• From development banking

to banking development

1954 – Early 1990

Early 1990 - 1998

1999 - Today

Restructuring and a turnaround strategy were needed in order to survive in a new environment

Value-added

products

Client-driven

Evolution in focus

Agriculture Food system

From market players to market

makers

Investment banking

Corporate governance realignment

•Downsizing

•Process-driven design

•Performance-based reward

•Internal control fostering

•Staff professionalization

Subsidy-based

operation

Product-driven

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

process-oriented organization

•

Corporate Governance &

Internal Control

strengthening

•

Performance-based

employee rewards

•

Cost-cutting strategy

1.

Introduction.

2.

New Business Model.

3.

3.

Evolution

Evolution

to

to

success

success

.

.

4.

Final Remarks.

Loan Portfolio Composition (Percentage) NBFI 3% BBVA 16% HSBC 14% Bajío 14% Santander Serfin 7% Scotiabank Inverlat 7% Other Banks 20% Banorte 19%

12 non bank banks 4 Factoring companies 6 Leasing companies -486,0 588,0 638,0 324,0 112,0 20,0 -164,0 -600 -400 -200 0 200 400 600 800 1998 1999 2000 2001 2002 2003 2004 4,124 3,327 2,649 2,928 2,185 1,800 1,632 1,848 2,265 2,234 1,385 1,018 846 824 791 599 541 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

With our new approach, FIRA has achieved higher

private sector engagement (double digit growth for six consecutive years)

Commercial banking Lending and Lending to low income producers

CAGR 16.7% 1998-2004

CAGR 17% 1998-2004

Change in credit stock by commercial banks using FIRA´s funds

Interest rate subsidies Million USD 2001 2002 2003 2004 Subsidies 82 83 54 50 As a % of subsidized loan portfolio 5.4 4.8 2.7 2.3 As a % of total loan portfolio 3.5 3.2 1.9 1.4

Source: FIRA. All figures in million usd

the fixed interest rate credit demand in batches

C.F. Bundling

=

More Volume

=

Attractive Interest Rates

Informative weekly rate proposal Farmer’s requests Cash flow grouping Interest rate swap closing

Fixed interest rate credit disbursement

Source: FIRA

Outstanding Book Value in Mx. Ps. (nov 2005)

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000 8,500 9,000 30 -J un -00 30 -No v -0 0 30 -A br -01 30 -S ep -0 1 2 8-F eb-02 31 -J ul -02 31 -Di c -0 2 31 -M ay -0 3 31 -Oc t-03 31 -M a r-0 4 31 -A go -0 4 31 -E ne -0 5 m il lo n e s de pe so s

Credit access to low income farmers

Demand for

the product has

soared

FIRA is making a transition from being a primarily funding institution

to a mainly credit guarantee/ risk sharing entity

Guaranteed credit / total portfolio (Percentage) 35.2 33.0 35.9 32.8 27.2 -10 20 30 40 2000 2001 2002 2003 2004 Guaranteed credit (Million USD 2004) 490.8 524.7 816.4 1,087.5 1,105.1 1,452.9 1,843.7 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 1998 1999 2000 2001 2002 2003 2004

•

We offer plain-vanilla

credit

guarantees

, as well as

credit derivative

•

We share the

risk

with

financial institutions

Expected loss in guaranteed portfolio (%)

entrepreneurs is being fostered with “smart subsidies”

rather than interest rate subsidies

Outreach

Outreach

subsidies

subsidies

Transaction costs

subsidy

•

Covers screening and transaction costs associated

with first time small borrowers

•

Reduces discrimination by size of borrower

•

Declining with 3-year-life

•

Portable by borrower among different FIs

•

Creates information (public good)

Infrastructure

Development

subsidy

•

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

•

Creation of non-existing

markets through

financial innovation

(ABS and structured

finance):

–

Accounts

receivables (working

capital loans)

–

Commodity

inventories finance

•

Funding and

enhancement

•

Off-balance sheet financing

•

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

SPV

Transfer of

rights

Deb

t iss

ue

Funding and partial

enhancement

•

•

•

creates value for the food system and develops financial markets

PRODUCER

AGRIBUSINESS PROCESSOR

•

•

•

enhancement

1.

Introduction.

2.

New Business Model.

3.

Evolution to success.

4.

4.

Final

Final

Remarks

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

models: Some case studies

•

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

double-digit double-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

F I R A

Value creation

Value creation

Asymmetric

Asymmetric

information

information

solutions

solutions

Market making

Market making

Transaction

Transaction

costs

costs

reduction

reduction

Leading Business Magazine in Mexico

“Innovative Enterprise”

November 2004

Latin American Association of Development Financial Institutions

FIRA is considered around the globe as…

“The Best Partner in Business”

May 2004 Leading Business School in Latin America

“Strong and Dynamic Organization”

April 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

Interamerican Development Bank

“Excellent business partner” "Formidable Organization”

January 2004

www.fira.gob.mx

01 800 800 FIRA

3 4 7 2

Claudio García Salgó

Director of Business Promotion

csalgo@correo.fira.gob.mx