Mexico Down, but Looking Up

Carin Zissis
February 10, 2009

Mexican President Felipe Calderón. (AP Photo)

Like most of the planet, Mexico’s economy took a beating in recent months as a result of global market volatility. Other problems—ranging from a drop in remittances to raging drug war violence—serve as other weights on the country’s economy. The fact that, on January 30, the Mexican peso dropped to its lowest level ever against the dollar did little to allay fears and forced the country’s Central Bank to buy $1.1 billion of pesos to boost the currency. The bank also predicted last week that the economy may contract between 0.8 and 1.8 percent in 2009 and could lose as many as 340,000 jobs. The recession in the United States, which buys 80 percent of Mexican goods, hurts as well. But some reports find that, in the midst of global financial turmoil, Mexico shows crucial signs of financial strength.

The seemingly unstoppable rise of remittances to Mexico stands among the casualties of the U.S. economic downturn. In 2008, for the first time since Mexico’s Central Bank began tracking the flow of emigrant money some 13 years ago, Mexicans sent less cash home than in the previous year. The Christian Science Monitor reported that this translated to a decrease of $1 billion, or a decline of 3.6 percent. As AS/COA Online reported in December, the Hispanic unemployment rate in the United States outpaces the national average, affecting dependent families in Mexico. Although remittances only represent 4 percent of Mexico’s GDP, they serve as the country’s second-largest source of foreign income behind oil and fund low-income families in Mexico.

On the topic of energy, Mexico also faces woes in that area as well. Oil & Gas Journal reports that Cantarell, the country’s biggest oil field, will experience a continuous decline in production. With oil revenues accounting for 40 percent of state revenues, Mexican officials may find themselves forced to consider deepening last year’s constitutional reforms that open up their oil sector to foreign investment, suggests the Wall Street Journal’s Environmental Capital blog.

Moreover, the wave of violent crime plays an economic role as well. Despite a stepped-up military presence in the country’s northern states, the murder rate related to drug smuggling doubled in 2008 over 2007, and the number of murders in the city of Juarez tripled in January compared to January 2008. International attention on the mounting violence pushed President Felipe Calderón last month to dispute charges that Mexico could become a failed state.

In September, Mexican Finance Minister Agustin Carstens said crime had cut economic growth by 1 percent and that some businesses saw their costs increase by 10 percent as a result of the need for additional security. The budget submitted to Mexico’s Congress in the fall included a 30 percent increase in security-related expenses. A recent San Francisco Chronicle article explores how perceptions about the crime wave may affect tourism to Mexico.

Yet, despite such gloomy reports, Mexico’s economy shows positive signs of strength, say some analysts. Louis Navaer points out in an article for New America Media that, despite the 23 percent fall of Mexico’s stock market last year, this decline pales in comparison to the 38 percent drop in U.S. markets and the 70 percent drop in Russian markets. Navaer credits fiscal restraint shown by Calderón’s administration and followed under Presidents Ernesto Zedillo and Vicente Fox with lowering foreign debt and praises Mexico’s savings of oil windfalls when crude prices jumped during the summer of 2008.

Furthermore, Mexico saw inflation rates drop last month, giving the Central Bank room to cut interest rates. A recent Economist analysis examines how the country plans to gird itself to weather the storm, saying that, “for the first time, Mexico’s government is in a position to lean against the economic cycle with expansionary fiscal and monetary policies,” which include stimulus measures and counter-cyclical moves. And, even as crime scares may keep some tourists away, a weakened peso draws others.

A December 2008 AS/COA program emphasized the opportunities Mexico affords to U.S. businesses as a result of geographic proximity, membership in the North American Free Trade Agreement, and its growing IT sector.

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