1

Mexico: Good Macro News;

Difficult External Conditions; Bad Micro News

The Trillion Dollar Club Gary C. Hufbauer and Barbara R. Kotschwar

March 10, 2009

2

Mexico in the Trillion Dollar Club: PPP GDP (in billions of international dollars)

0

200

400

600

800

1000

1200

1400

1600

bill

ion

s of

inte

rnat

ion

al $

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: IMF

3

Mexico: a decade of sound macro policy

20.6

6.5

-2.2

0.0

20081998 2000 2005

Non-financial public sector balance (% GDP)

-1.2 -1.1 -0.1

Current account balance(% GDP)

-3.8 -3.1 -0.7

Inflation (% change y/y) 18.6 9.9 3.3

External debt (% GDP) 38.2 28.3 20.4

Source: IMF

4

Mexico has accumulated foreign exchange reserves

0

10

20

30

40

50

60

70

80

90

100

billi

ons

US$

Ene2000

Jul-00

Ene2001

Jul-01

Ene2002

Jul-02

Ene2003

Jul-03

Ene2004

Jul-04

Ene2005

Jul-05

Ene2006

Jul-06

Ene2007

Jul-07

Ene2008

Jul-08

Ene2009

Source: Banco de México

5

Mexico’s potentially rosy economic picture is clouded by the external environment….

Source: OECD

Index of Industrial Production 1995-2008 (2000=100)

65

70

75

80

85

90

95

100

105

110

1995

1998

2001

2004

2007

MEX USA

Mexico is still closely tied to the US economy

6

Mexico’s potentially rosy economic picture is clouded by the external environment (cont.)

GDP growth (percent) : Mexico and United States 2000-2009

-3-2-1012345678

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

United States MexicoSource: IMF

We are being conservative with our growth projections: EIU estimates a contraction of 2.6%; Banxico of -0.8 to -1.8 percent growth

7

In late 2008 US imports of Mexican goods started

falling, as did Mexico’s purchases of US goods

US exports to and imports from Mexico 2000-2008 (monthly, in billions of $US)

0

5

10

15

20

25

J-200

0 M SJ-2

001 M S

J-200

2 M SJ-2

003 M S

J-200

4 M SJ-2

005 M S

J-200

6 M SJ-2

007 M S

J-200

8 M S$U

S b

illio

ns

exports imports

Oct 2008

Source: USITC

8

Mexico’s stock market plunged 42 percent in 2008

Bolsa Mexicana Closing price Index (base=1978): July 2008-Feb 2009

15000

17000

19000

21000

23000

25000

27000

29000

1/7/

2008

9/7/

2008

17/0

7/20

08

25/0

7/20

08

4/8/

2008

12/8

/200

8

20/0

8/20

08

28/0

8/20

08

5/9/

2008

15/0

9/20

08

24/0

9/20

08

2/10

/200

8

10/1

0/20

08

20/1

0/20

08

28/1

0/20

08

5/11

/200

8

13/1

1/20

08

24/1

1/20

08

2/12

/200

8

10/1

2/20

08

19/1

2/20

08

30/1

2/20

08

8/1/

2009

16/0

1/20

09

26/0

1/20

09

4/2/

2009

12/2

/200

9

20/0

2/20

09

2/3/

2009

inde

x

Source: Banco de México

Change = 42%

9

Foreign investment has not dried up, but slowed in 2008

Source: Banco de México

0

5

10

15

20

25

30

billi

ons

of $

US

2001 2002 2003 2004 2005 2006 2007 2008

FDI flows 2001-2008

10

Remittances have begun to decline…

Remittances (in billions of $US) 2003-2008

0

1

2

3

4

5

6

7

8

Ene-M

ar 20

03Abr

-Jun 2

003Ju

l-Sep

2003

Oct-Dic

2003

Ene-Mar

2004

Abr-Ju

n 2004

Jul-S

ep 20

04Oct-

Dic 200

4Ene-M

ar 20

05Abr

-Jun 2

005

Jul-S

ep 20

05Oct-

Dic 20

05Ene

-Mar

2006

Abr-Jun 2

006

Jul-S

ep 20

06Oct-D

ic 20

06Ene

-Mar 2

007

Abr-Ju

n 200

7Ju

l-Sep

2007

Oct-Dic

2007

Ene-M

ar 20

08Abr

-Jun 2

008

Jul-Sep 2

008

Oct-Dic

2008

Source: Banco de México

11

Remittances are most important to agricultural states. Border states have traditionally been economically strong enough to not send many migrants. This could be affected by the US economic slowdown in states like California, Texas, New York.

Source: Quirk, Matthew. 2007. “The Mexican Connection. The Atlantic. April.

Remittances depend on the economic health of a few key US states

12

Like nearly all emerging markets, the spread on Mexican debt has risen sharply; good fundamentals were no salvation

Source: Dallas Fed

13

Mexico is absorbing the external shock by allowing the peso to drop

Source: Banco de México

Peso/dollar exchange rate: October 2008-March 2009

10

11

12

13

14

15

16

1/10/2008 19/10/2008 6/11/2008 24/11/2008 12/12/2008 30/12/2008 17/01/2009 4/2/2009 22/02/2009

peso

/$U

S

40 percent devaluation of peso since October 2008; nearly 50 percent since January 2008

14

Mexico has fallen in its ranking on Transparency International’s Corruption Perceptions index from 51st place in 2001 to 72nd place in 2008In the World Economic Forum Global Competitiveness Report Mexico ranked 102 in Public Institutions, behind PakistanMexico fell from 42nd in the 2008 Doing Business ranking to 56th in 2009Mexico fell from 16th in 2005 to 19th place in 2007-8 in AT Kearney’s FDI confidence index

Meanwhile, the microeconomic challenges are getting more severe

15

Chihuahua1725

Baja California741

Sinaloa989

Michoacan454

Guerrero509

Mexico461

Durango391

Nuevo Leon182 Tamaulipas

198

Sonora262

Drug War Related Deaths: January 2007 – December 2008

Source: LA Times, based on data from the University of San Diego Trans-border Institute

Between January 1, 2007 and December 19 2008 there were 7,337 drug war deaths in Mexico. The circles portray areas where more than 100

deaths were reported.

… drug violence plagues Mexican cities, especially in the north

16

Whither US policy towards Mexico?Plan Colombia Merida Initiative

Timing 2000-2006; succeeded by follow-on policies

Fiscal year 2008 through fiscal year 2010

Policy targets Insurgency (FARC; ELN); self-defense organizations; drug crop eradication; criminal justice system; economic development

Counter-drug; counter-terror; border security; public security & law enforcement; institution-building & rule of law

US financial commitment

US$4.5B; $1.6B for follow-on through 2008

US$1.5 B announced; about 10% of total program costs allocated in2008.

US domestic commitment

Reduce drug demand Reduce drug demand; halt: weapons trafficking, precursor chemicals, money laundering

Source: CRS (2008); Bailey (2009)

17

Retail price of a gram of Cocaine in the United States: 1990-2007 (in 2006 $US)

0

50

100

150

200

250

300

infl

atio

n a

dju

sted

200

6 $U

S

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: ONDCP

18

Mexico: resilient so farDespite violence, tourism picked up in 2008

While overall tourism was up, certain regions, such as Guerrero, show a falling off in travel both from domestic and international travelers

FDI has continued to flow in, even to regions associated with violenceRemittances have dropped off but not dried upThese are statistics to watch in 2009

19

Mexico: international tourists 2004-2007 (monthly totals)

0

500

1000

1500

2000

2500

2004

2005

2006

2007

2008

visi

tors

Border otherSource: Secretaría de Turismo

20

Mexico: US FDI flows into northern border states 2004-2008 (flows by trimester)

-100

100

300

500

700

900

1100

1300

1500

mill

ions

$U

S

01 -2004

02 -2004

03 -2004

04 -2004

01 -2005

02 -2005

03 -2005

04 -2005

01 -2006

02 -2006

03 -2006

04 -2006

01 -2007

02 -2007

03 -2007

04 -2007

01 -2008

02 -2008

03 -2008

04 -2008

Source: Secretaría de Economía

21

Mexico’s response to the crisisMonetary response: Banco de México has intervened to mitigate peso volatilityFiscal stimulus:

Oct 2008: Growth and Employment Stimulus Program (PICE) of $6.9B, about 1% of GDP – largely for use on infrastructure spending

In 2008 Mexico hedged oil price at $70/barrelFiscal reform measures of 2007 should see increased tax collection

Jan 2009: National Agreement on Family Economy and Employment: $150m to freeze gas prices, lower electricity prices, boost unemployment benefits and increase spending on infrastructure

12

Like nearly all emerging markets, the spread on Mexican debt has risen sharply; good fundamentals were no salvation

Source: Dallas Fed

13

Mexico is absorbing the external shock by allowing the peso to drop

Source: Banco de México

Peso/dollar exchange rate: October 2008-March 2009

10

11

12

13

14

15

16

1/10/2008 19/10/2008 6/11/2008 24/11/2008 12/12/2008 30/12/2008 17/01/2009 4/2/2009 22/02/2009

peso

/$U

S

40 percent devaluation of peso since October 2008; nearly 50 percent since January 2008

14

Mexico has fallen in its ranking on Transparency International’s Corruption Perceptions index from 51st place in 2001 to 72nd place in 2008In the World Economic Forum Global Competitiveness Report Mexico ranked 102 in Public Institutions, behind PakistanMexico fell from 42nd in the 2008 Doing Business ranking to 56th in 2009Mexico fell from 16th in 2005 to 19th place in 2007-8 in AT Kearney’s FDI confidence index

Meanwhile, the microeconomic challenges are getting more severe

15

Chihuahua1725

Baja California741

Sinaloa989

Michoacan454

Guerrero509

Mexico461

Durango391

Nuevo Leon182 Tamaulipas

198

Sonora262

Drug War Related Deaths: January 2007 – December 2008

Source: LA Times, based on data from the University of San Diego Trans-border Institute

Between January 1, 2007 and December 19, 2008, there were 7,337 drug war deaths in Mexico. The circles portray areas where more than 100

deaths were reported.

… drug violence plagues Mexican cities, especially in the north

16

Whither US policy towards Mexico?Plan Colombia Merida Initiative

Timing 2000-2006; succeeded by follow-on policies

Fiscal year 2008 through fiscal year 2010

Policy targets Insurgency (FARC; ELN); self-defense organizations; drug crop eradication; criminal justice system; economic development

Counter-drug; counter-terror; border security; public security & law enforcement; institution-building & rule of law

US financial commitment

US$4.5B; $1.6B for follow-on through 2008

US$1.5 B announced; about 10% of total (?) program costs voted in 2008; negotiations in Congress for 2009.

US domestic commitment

Reduce drug demand Reduce drug demand; halt: weapons trafficking, precursor chemicals, money laundering

Source: CRS (2008); Bailey (2009)

17

Retail price of a gram of Cocaine in the United States: 1990-2007 (in 2006 $US)

0

50

100

150

200

250

300

infl

atio

n a

dju

sted

200

6 $U

S

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: ONDCP

18

Mexico: resilient so farDespite violence, tourism picked up in 2008

While overall tourism was up, certain regions, such as Guerrero, show a falling off in travel both from domestic and international travelers

FDI has continued to flow in, even to regions associated with violenceRemittances have dropped off but not dried upThese are statistics to watch in 2009

19

Mexico: international tourists 2004-2007 (monthly totals)

0

500

1000

1500

2000

2500

2004

2005

2006

2007

2008

visi

tors

Border otherSource: Secretaría de Turismo

20

Mexico: US FDI flows into northern border states 2004-2008 (flows by trimester)

-100

100

300

500

700

900

1100

1300

1500

mill

ions

$U

S

01 -2004

02 -2004

03 -2004

04 -2004

01 -2005

02 -2005

03 -2005

04 -2005

01 -2006

02 -2006

03 -2006

04 -2006

01 -2007

02 -2007

03 -2007

04 -2007

01 -2008

02 -2008

03 -2008

04 -2008

Source: Secretaría de Economía

21

Mexico’s response to the crisisMonetary response: Banco de México has intervened to mitigate peso volatilityFiscal stimulus:

Oct 2008: Growth and Employment Stimulus Program (PICE) of $6.9B, about 1% of GDP – largely for use on infrastructure spending

In 2008 Mexico hedged oil price at $70/barrelFiscal reform measures of 2007 should see increased tax collection

Jan 2009: National Agreement on Family Economy and Employment: $150m to freeze gas prices, lower electricity prices, boost unemployment benefits and increase spending on infrastructure

22

Canada’s response to the crisisCanada has revised its GDP growth projection down to a contraction of 2.7 percent. Canada’s fiscal stimulus (Economic Action Plan) represents 1.9 percent of GDP for the next fiscal year; 1.4 percent for the following year. Projected budget deficit of $34 billion this year (2.0 percent GDP); $30 next (1.7 percent of GDP)

23

What has the US done to help Mexico cope with the financial crisis?

Federal Reserve: US$30 billion line of credit with the Banco de México, authorized through April 30, 2009, to support confidenceMérida Initiative NAFTA lives (but trucking still frozen; NADBank still small potatoes)Stimulus package: modest expenditure on border infrastructure