Monday, October 20, 2008

By Patrick Corcoran

Few countries are more reliant on the United States than Mexico. The United States is the consumer of Mexico’s exports, the home for its dollar-remitting migrants, and the main source of its foreign investment. Moreover, the northern neighbor’s Gibraltar-like stability has anchored Mexico’s economy for almost the entire decade and a half since the North American Free Trade Agreement, NAFTA, came into being.
 
So now that the famous rock has broken free from the coast and is sinking in the Mediterranean, why isn’t Mexico plummeting along with it? The United States’ financial catastrophe has provoked speculation that the end of American economic superpower status is nigh, but no one is predicting a corresponding decline from its southern neighbor. For Mexicans, the crisis will continue to cause intense spells of national worry, but thus far Mexico has remained largely resilient to the US’s financial maladies.
 
First, the ill effects that we have witnessed: the peso, whose stability over the last decade had been Mexico’s singular monetary accomplishment, recently suffered its largest one-day decline in value in fifteen years. The government has already exhausted 10 percent of its foreign reserves (some $9 billion) to maintain the currency’s stability. The weaker peso has led analysts to predict an increase in inflation, which, combined with lower American demand, will make Mexico a much less attractive place for investors.
 
The problems don’t end there: as has been the case elsewhere, the Mexican stock market has see-sawed wildly. Compounding matters, the basic social security retirement account (called an afore) provided to every Mexican with a formal job is invested in stocks, so drops in the market impact the future of millions of Mexicans. The list goes on: remittances from immigrants in the United States dropped 12 percent from last year. Slowed economic growth means that the labor market will also lose steam, which, combined with the return of erstwhile migrants fleeing the American recession, could lead to a sharp rise in unemployment. The crisis will also limit American consumption, which will hit export and tourist industries especially hard.

At the same time, no one is predicting a meltdown in Mexico. Its banks, torched in 1995 by a crisis not entirely unlike that presently occurring in the United States, remain safe. Rogelio Ramírez de la O, a prominent leftist economist, wrote in an otherwise gloomy column, “The Mexican banks don’t face a crisis of insolvency of Mexicans.”

Mauricio Cárdenas of the Brookings Institution told CNN en Español viewers, “I see the Latin American financial system as very strong.”

Economically, Mexico is better off as well. Most independent analysts are revising their growth projections downwards from 3 percent to 1 percent, but no one is yet predicting recession. The government’s budget projects 1.8 percent growth in 2009. That may prove overly optimistic, but thus far there is no fear of a prolonged recession in Mexico.

The bizarre world environment in North American economics is also evident in each country’s reaction. The US has been slammed for its absent president, the failed first pass on the $700 billion bailout, and the generally poor coordination of the response. In Mexico, President Felipe Calderón offered a stimulus package that quickly earned the approval of the entire political class as well as the International Monetary Fund. It cut the 2009 budget outlays by about $27 billion, shifted government spending into infrastructure projects, and freed up government credit for small businesses, all of which should soften the impact of the crisis both for the government and for individual Mexicans.

As Andrés Oppenheimer pointed out in a recent column, Mexico’s experience with its 1995 meltdown could now serve as a paradigm for the American recovery, both in the near- and long-term. While it wound up an easy target for leftist populists, Fobaproa (as their bailout became known) succeeded in resurrecting Mexico’s banking sector. It also forced greater financial regulations on the industry, which is why Mexico is much less exposed to today’s credit crisis than the United States.
 
That’s not to suggest that Mexico is free from worry, because it isn’t. The present crisis is more than a mere hiccup, and the problems could certainly worsen in Mexico. Thus far, perhaps the greatest consequence of the crisis has been the political opportunity cost. With so much attention focused on the economic fiasco invading from the North, Mexico is in danger of taking its eye off other vital issues. That’s why oil reform legislation lingers unapproved, and Mexico’s security problems seem to have fallen from the front of policy-makers minds. Such issues are likely to remain thorny for Mexico long after the present crisis has passed.

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Patrick Corcoran is a writer who resides in Torreón, Coahuila.  He blogs at Gancho.