Editor’s Note: Erika is one of our most dynamic speakers during our Focus on Mexico 8-day educational seminars. We asked her if she would write about the recent situation in the United States that has global implications.
Of course, the news headlines in the media over the last month have focused on the economic crisis that has affected the markets and economies around the world. Mexico, like many other nations around the world, has been affected, however, the effect and Mexico’s reaction has been different from some nations, and Mexico has been stronger than usual, historically, reacting to this new economic challenge.
All over the world, stock markets have plummeted in value and Mexico’s “Bolsa de Valores” has not been the exception. The IPC, which is the indicator of the Mexican Stock Market (like the Dow Jones Index of Wall Street), had dropped over 40% at one point, which is similar to the Dow Jones in the same period and not too different from the rest of the world markets. In the Mexican stock market, values have dropped primarily due to more emotional reasons rather than basic fundamentals. This obviously indicates that market values can recover when the emotional reactions are calmed. The basic fundamentals will help the market recover.
The primary factors of the market crisis that have affected the Mexican economy are the following…the price of oil has dropped, the balance of trade has changed, and inflation has increased:
- Over the last year, the price of oil has reached historically high prices. However, now the price has dropped to levels that have not been seen since early this year. Fortunately, many economic projections and planning have been based on levels lower than the historically high prices.
- The balance of trade has been affected in many ways, which is primarily due to changes in the U.S economy. However, over the last decade Mexico has connected with other global markets in Europe, Asia and Canada, which has reduced its dependence on the trade with the USA only.
- Inflation rates have increased due to domestic increases and imported increases from other trading nations.
- The peso has lost value and the volatility continues due to capitals going out of the stock market and speculation.
Also like other markets in the world, with the prices decreasing, liquidity has become an issue as capital is drained from the market. This has put pressure on the interest rates increase as well.
But the bottom line after listing all the aforementioned problems is to ask, how is the Mexican economy going to get through this global economic crisis?
As to financial liquidity, the lessons learned from previous economic crises has caused Mexico’s Central Bank (BANXICO), to increase their reserves to over $80 billion dollars (USD). Like other central banks around the world, BANXICO has injected liquidity into the market to help balance the pressure on the exchange rate and the demand of liquidity in the markets. This pressure on the peso is not a weakness on the currency or the economy, but a result of low liquidity on the global markets and the selling spree in the stock markets, especially emerging markets like Mexico.
The fundamentals of the economy are strong and well organized: Financial markets are properly regulated, the public finances are healthy and the banks well capitalized; there is low fiscal deficit, no foreign debt pressures, oil revenues are still positive, remitances continue to come into the country and foreign direct investment flowing.
Therefore, Mexico stands in a better position to handle this global economic crisis, better than it has historically and better than some other economies in the world. The Mexican government has reacted and started actions to help deal with the different effects of this crisis.
Mexico is in the process of approving the structural reforms to help the economy meet its potential, avoid potential problems and benefit from the opportunities of the future. An example of these reforms affected energy policy and were approved during the last week of October 2008. The new energy reforms will help an industry, which was nationalized over 70 years ago. Some of the new reforms include the following:
- PEMEX, the national petroleum company will now be independent with autonomy to form its own budgets and long- term exploration plans, with corporate board and independent consultants.
- The creation of independent boards to ensure disclosure of information and better corporate transparency.
- The establishment of a National Energy Efficiency Commission, that will establish and enforce energy efficiency standards.
- Establishment of incentive programs for service contracts, designed to improve efficiency of the private companies and help reduce costs.
Mexico also continues to have other strong indicators that the country will be able to weather this global crisis better than many nations. The GDP (Gross Domestic Product) even though it is not growing as fast as it was, continues to increase. Employment rate is growing, but also the government keeps implementing programs to support small and new businesses to help create new job positions.
As we can see, Mexico is in much better position than previous crises and, fortunately, is making changes that improve Mexico’s economy now and into the future.
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