Thu, Jan 01, 2009 - Page 9 News List

Mexico’s fiscal prudence fails to avert a US-induced slowdown

By Elisabeth Malkin  /  NY TIMES NEWS SERVICE , 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 administration of former US president Bill Clinton arranged a US$50 billion Mexican bailout.

But this recession, it is the profligate US 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 US Treasury bills.

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

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

When the US economy was growing, successive governments in Mexico 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 US, 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 its highest 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 this year. In the worst case, the economy could contract as much as 1.7 percent, according to BBVA Bancomer, Mexico’s largest bank.

BAD NEWS

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 Garcma, 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 US$85 billion in reserves to defend the peso and room to bring down interest rates.

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