Mexico : Back to the mid-90s ?

EcoTV: The expertise of the economic research department of BNP Paribas.

Sibylle Dehesdin: And now Sylvain Bellefontaine is here with us to mention the consequences of the current crisis over Mexican economy.

To what extent is the Mexican economy affected by current the crisis?


Sylvain Bellefontaine: like most emerging countries, Mexico has suffered from general risk aversion on the liquidity crisis triggered in September 2008. In fact, the reversal in peso trend occurred in the wake of the decline in oil prices observed since July 2008 while the real economy started to feel the impact of the US downturn, this coupled with the significant capital out loads from non residents and the unwinding of FX derivatives positions taken by local companies are the main reasons behind the sharp depreciation of the peso against the US dollar by 36%, the 30% drop in the stock exchange and widen spread

Sibylle Dehesdin : what about the real economy ?

Sylvain Bellefontaine: in fact Mexico economy is already in recession as real GDP has declined since the third quarter of 2008, the US have sold 80% of Mexican export and export volume declined by 9% year on year in the fourth quarter of 2008. Industrial production fail by 11% year on year in January for the seventh consecutive drop and the whole sector has continue his inexorable decline. In the meantime, the sharp fall in retail sales and imports as well as the contraction in the services sectors reflect the lower remittances from emigrant workers, restricted credit to access to credit and rising unemployment which have taken a toll on domestic demand.

Sibylle Dehesdin: and what about the authorities response to this downturn?

Sylvain Bellefontaine: Banxico the central bank has intervened vigorously in the FX market. It sold roughly 20 billion dollar from its reserves for 6 months but the depletion in reserve has been moderate thanks to transfers from PeMex, the Stat- owned oil company and the Treasury. FX reserve stands at 80 billion dollar The central bank also relaxed rules for accessing the repo window by widening the range of collateral. In parallel Banxico and the Minister of Finance implemented a strategy to improve the functioning of the local financial markets. Despite the pass-through between the exchange rate and inflation, the policy rate was cut by 150% in three steps to 6.75%. And the Government unveiled 2 fiscal stimulus packages in order to stimulate and t support economic activity and employment.


Sibylle Dehesdin: according to Mexican President Felipe Calderon, the current crisis is less severe than the one the country went through in the years of 1994 and 1995. How is that?

Sylvain Bellefontaine: Basically, the Tequila crisis was largely the consequence of endogenous weaknesses within the Mexican economy, whereas the current crisis appears to be exogenous and could therefore be less severe. Given the magnitude of the external shacks and the correlation between Mexico and the US economic cycle, our base case scenario calls for a 3% contraction in real GDP this year compared with -6.2% in 1995. However, we believe the current recession is likely to be longer, with the Mexican economy recovering very mildly in 2010.

Sibylle Dehesdin:but for what reasons?

Sylvain Bellefontaine: First, owing to depressed global demand, Mexican exports are unlikely to reactivate rapidly. Second, the counter-cyclical impact of fiscal policy should be of limited scope.

Sibylle Dehesdin: Nevertheless, the countrys macro fundamentals appear to be stronger to withstand the crisis:

Sylvain Bellefontaine: yes, the quality of the Mexican corporate is a source of concern but systemic credit risk is mitigated by the relative stability of the banking system. All in all, the measures unveiled by the government so far have not included any assistance to the banking system, unlike in 1995, when its fragility only exacerbated the crisis.

Sibylle Dehesdin: yes and moreover the public finance situation has considerably over the last years.

Sylvain Bellefontaine: yes, obviously the public sector will turn into a deficit this year but the public sectors liquidity is not at stake at least in the short-term, thanks to a still relatively easy access to the international and local bond market and to multilateral creditors as well as a amount of FX reserve. In addition, the Government bought a hedge against the fall in oil prices in July 2008. And finally, a balance of payments crisis with a free fall of the currency is also unlikely, as the current account deficit is manageable and, in case of extreme emergency, Mexico can rely on 30 billion dollar swap line from the Fed and a 25 billion dollar credit line from the IMF.

Category:

News & Politics

Tags:

• Mexico
• economy
• crisis
• emerging countries
• bank
• finance
• Felipe Calderon
• Tequila crisis

[eviltwilightkid]

OMG! I just noticed the text format of the interview. Thank you so much! I was having a hard time understanding the guy's French accent; it was hard for me to keep up with him.

[fodonga]

french

[sinister60804]

Calderon is crazy to think that way, Mexico is going bankrupt just like the USA, governments are bad for the people.

[UlisesZ1986]

That girl is cute

[fh1mahfanzai]

... the guy is just mumbling. what english accent is that?