Mexico Financial Update: Post-Election Perspective
The results of Mexico’s July 5th congressional and state elections saw the once-dominant Institutional Revolutionary Party (PRI) stage a comeback and will now dominate the next Chamber of Deputies. In the final tally, the PRI party took 36.7 percent of the ballots cast compared with 28 percent for President Felipe Calderón’s center-right National Action Party (PAN). The PRI also captured five of the six gubernatorial races.
The timing of the elections came as the worst economic news in recent years was being released, a combination of global economic malaise and the specific impact of the cost of the swine flu outbreak on Mexico’s economy. The resulting loss of control of the Chamber means that Calderon will need opposition support to implement legislation to boost revenue and curb a widening budget deficit.
This year Mexico’s economy sank into its first recession in eight years as the slump in the U.S. curbed demand for exports and trimmed flows from remittances, foreign direct investment and tourism. In addition to the impact of the loss of exports to the U.S.—Mexico’s dominant trading partner, accounting for 80 percent of its export market—is the impact of the loss in tourism. Mexico suffered a massive drop in tourism in May amounting to $524 million dollars because of the swine flu, according to Tourism Minister Rodolfo Elizondo. Tourism is the country's third largest source of foreign income.
Mexican Health Minister Jose Angel Cordova Villalobos said the total losses caused by the new influenza virus were equivalent to four percentage points in the country's GDP, or more than 3 billion dollars. And, as tourism fell, about 4 per cent of jobs in the tourism industry were dropped. But Elizondo said Mexico was looking forward to "a faster-than-expected recovery."
Mexico’s Finance Minister Agustin Carstens has stated that Mexico’s economy will contract 5.5 percent this year—its first contraction in eight years. However Carstens has also stated that growth in the third and fourth quarters of 2009 should be a positive 3%, when compared with the previous quarters.
"The reality is that Mexico has a strong economy, no foreign debt and solid fiscal accounts," Carstens stated, at the Second Meeting of Finance Ministers of the Americas and the Caribbean, held in July. Carstens also said Mexico's economy has entered a recovery phase. "It appears that we have already touched bottom."
Signs that Mexico's recession is abating were present in June as measures of both factory and consumer sentiment jumped from a month earlier. Mexico's consumer confidence index MXCONC=ECI rose to 81.0 in June, the highest reading since January, after hitting a record low of 78.3 points in May.
Annual inflation declined to 5.74 percent in June, the lowest in nine months, and is predicted to continue slowing to as low as 4 percent by the end of the year.
Regarded among Mexico’s institutional strengths are the independence of its Central Bank, its inflation-targeting economic policy, a flexible exchange rate, and its Fiscal Responsibility Law. A prudent liability management strategy, flexibility of issuing long-term financing in the domestic debt markets, and a modest external debt burden are all factors that weigh in Mexico’s favor to be able to navigate through these challenging times. Moreover, Mexico has the availability of $47 billion of the International Monetary Fund's Flexible Credit Line and another $30 billion through the Fed swap, which provide financial resources to the Central Bank.
Overall Latin American countries, and specifically Mexico, are considered by analysts to have survived the crisis better, and are expected to emerge sooner and stronger, than much of the developed world. One reason is that its banks were more capitalized and less exposed to the credit losses experienced in the U.S. and Europe. Additionally, inflation in Mexico is expected to remain under control, based on the fiscal policy being exercised by its Central Bank.