Banking On Mexico's Future.(Citigroup )(Brief Article)

Two weeks ago, while Washington was debating a nonexistent missile shield and worrying about the never-ending violence in the Middle East, something important happened in the here and now that slipped our attention. Citigroup, the mammoth American financial conglomerate, bought Mexico's best bank, Banacci. The momentous part is not the deal but the price--$12.5 billion. This one investment--the largest in Mexico's history--is equal to all foreign direct investment in Mexico last year. It is also the biggest financial-services transaction in any emerging market. The market seems to be separating Mexico from the pack.

In fact Mexico is now the most impressive success story in Latin America today (excepting Chile, which has been in a league of its own for 10 years). After decades of economic crises Mexico now combines high growth rates--7 percent last year--with low inflation. Its current-account deficit is an admirable 3 percent of GDP. Last year Moody's, the credit-risk agency, gave Mexico an investment-grade rating for the first time in its history. This year Standard and Poor's is likely to follow suit. NAFTA is working. And most important, Mexico's transition to democracy, which began with Vicente Fox's election last December, is maturing. The Institutional Revolutionary Party (PRI), after 71 years in power, is peacefully handing over the reins of one institution after another. For Mexico, this change is almost as significant as the fall of the Berlin wall was in Europe.

Of course problems remain. Real wages in Mexico have not moved much. Tensions between the rich north and the poor (and populous) south are growing. Narcotics traffic is getting worse. Many of President Fox's ambitious reforms may not get implemented (which is why Standard and Poor's has so far withheld its

blessings). But with all these troubles, it is likely that 50 years from today historians will look back on these times and say, this is when Mexico turned the corner.

Citigroup's announcement has another interesting consequence: Mexico no longer has a nationally owned banking sector. Citigroup and two large Spanish firms now own most of the country's banks. Surprisingly this has not raised much of an outcry in a country that for decades thrived on nationalist outrage over foreign investment. It's a sign of a change in the public mood. Good thing, too. Foreign ownership of banks is one of the best things that can happen to countries like Mexico.

Bad banking systems have been the silent killer of emerging-market growth over the past two decades. As these ...