Troubling article in NY Times

Discussion in 'Living in Cancun' started by mixz1, Dec 29, 2008.

  1. mixz1

    mixz1 Guest

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    http://www.nytimes.com/2008/12/30/b...&hp&adxnnlx=1230610771-jZZ5nPtJ3rCS2VjRDBC3WQ

    Mexico’s Fiscal Prudence Fails to Avert a Slowdown

    MEXICO CITY — Twice in the last three decades, Mexico has demonstrated that one country’s profligacy and mismanagement can spell economic catastrophe beyond its borders.

    In 1982, the country defaulted on its foreign debt and set off a Latin American debt crisis that led to a decade of anemic growth across the region. In 1994, the peso collapsed and halted capital flows to emerging markets around the world, until the Clinton administration arranged a $50 billion Mexican bailout.

    But this recession, it is the profligate United States pulling down fiscally disciplined Mexico.

    Like a host of middle-class countries, from South Africa to Brazil, Mexico is credited by economists with prudent economic policies that reduced debt and tamed inflation, but that has not saved any of them from the pain of a global recession. Billions of dollars have been pulled from emerging markets as investors seek the safest haven, which is still considered to be United States Treasury bills.

    When the American economy began to spiral downward, officials here argued that Mexico’s hard-won macroeconomic stability would protect it.

    Now, as each week brings more bad news from the United States, those forecasts seem quaintly optimistic. The North American Free Trade Agreement, or Nafta, which so tightly bound Mexico and the United States and turns 15 on Thursday, is helping drag Mexico down with the United States just as it helped bolster it when times were good north of the border.

    When the American economy was growing, successive governments here counted on foreign investment and exports to generate growth. Exports account for almost a third of Mexico’s gross domestic product. But more than 80 percent of them go to the United States, and when American consumers stop buying, there is no market for Mexican-made big-screen televisions, auto parts or expensive winter fruit.

    “In the face of the most serious contraction in decades, it is hard to imagine that Mexico will avoid recession too,” said Gray Newman, Latin American economist for Morgan Stanley in New York.

    The effect on Mexico is becoming clear. Unemployment is at the highest level in eight years. The peso has fallen 25 percent, leading to a spike in the price of imports, hurting consumers and businesses that reply on imported goods. Exports, industrial production and retail sales have all fallen in the last few months.

    Although the government has yet to change its growth forecast of 1.8 percent for next year, private analysts say Mexico’s economy will not grow at all in 2009. In the worst case, the economy could contract as much as 1.7 percent, according to BBVA Bancomer, Mexico’s largest bank.

    Bad economic news dominates the media. Every morning for the last few weeks, the influential radio journalist Carlos Puig has invited business owners to call in and describe their troubles. “The last thing we Mexicans lose is hope,” said one caller, Faustina García, manager of a small building supplies company, Bester Mexicana, before beginning a passionate plea for government aid.

    After a decade of sound economic management, Mexico’s government does have some room to maneuver. Next year the government will run its first budget deficit in five years as it increases spending to give the economy a push. It is also taking on new loans from the World Bank and the Inter-American Development Bank to support social and environmental projects. The central bank has almost $85 billion in reserves to defend the peso and room to bring down interest rates.

    On top of that, the finance ministry has dealt with the economy’s most glaring vulnerability — the dependence on oil export revenue to finance almost 40 percent of the country’s budget.

    When Mexican crude was selling at $130 a barrel last summer, officials began selling Mexico’s future 2009 exports at $70 a barrel, a price that seemed wildly conservative in those heady days. In the fall, the congress estimated a $70 price for its 2009 budget projections. The government usually locks in the price of its future production by buying options to sell oil at a certain price. When the market price rises above the option price, the government loses money. When the price falls, as it has, the government makes a profit.

    Buying the options cost the government $1.5 billion last summer, but at the current price, now below $30, Mexico would stand to earn more than $10 billion. That money would go to job creation plans in infrastructure, tourism and small business.

    Mexico’s caution is a contrast to the policies of Latin America’s other main oil exporter, Venezuela. Under President Hugo Chávez, the Venezuelan economy has become more dependent on oil revenue to finance his social programs.

    Analysts say that the Mexican government has taken the right steps but warn that more may be needed in the next couple of months.

    “At the moment they have done what they can do to face the crisis,” said Jorge Máttar, the representative in Mexico for the Economic Commission for Latin America and the Caribbean, or Eclac. But the effect of the recession in the United States is so large that the measures so far will only be a palliative, he said. In essence, there is only so much the government can do if exports plunge and factories close.

    There are other worries. Even though the oil price Mexico will get is locked in at $70, the amount of crude Mexico can pump is not. On Dec. 22, the state oil monopoly Pemex announced that production had fallen 9.3 percent for the year though November. Exports dropped 17.3 percent.

    If the economy contracts, tax revenue will most likely fall. And even though Mexico’s finances are sound enough that it could borrow more to finance further spending increases, Mr. Newman of Morgan Stanley argues there will not be many buyers for emerging market debt.

    The government will face particular pressure to continue to increase its social programs as the recession hits the poor hardest — and midterm elections approach in July.

    Over the last few years, Mexico and Latin America have finally managed to achieve some success in reducing poverty. Eclac estimates that the percentage of poor in the region has dropped to 33 percent, from 44 percent, since 2002. Extreme poverty has also fallen, to 13 percent, from about 19 percent.

    In Mexico, a government program that provides payments to five million families to keep their children in school and take them to clinics regularly has been responsible for much of the improvement in extreme poverty.

    Remittances from relatives working in the United States have also helped reduce poverty in many regions, but those have dropped nearly 2 percent this year.

    “There have been substantial gains by the main Latin American countries from the mid-1990s to 2006,” said Santiago Levy, a vice president at the Inter-American Development Bank in Washington, who started the Mexican program 11 years ago. “It would be very, very sad if this was lost.”

    He recommends that governments shift their spending over to infrastructure projects that create jobs, like building much-needed rural roads. Governments should subsidize employers not to lay off workers and offer temporary scholarships to poor families so that they do not pull their children out of school, he said.

    But Mr. Levy warns against any Temptation to loosen the disciplined fiscal policies that Mexico and other developing countries have kept over the last years.

    “Those gains were very hard to get,” he said. “We know how to preserve them. And we know how to avoid falling back.”
     
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