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 Business News | October 2007 
Mexico's Economy Braced for Contagion
 The Economist
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More resilient but still exposed
Time was when the Mexican economy moved to the rhythm of the oil price. But since the signing of the North American Free-Trade Agreement in 1992, it is the pace of industrial production in the United States that sets the beat south of the border (see chart). When the American economy slowed in 2001, Mexico suffered two years of stagnation. As fears of an American recession deepen, will it be different for Mexico this time?
More than 70% of Mexico's exports go to the United States. Manufacturing in its northern states is bound to slow in line with its American counterpart. But many economists see grounds for hoping that the country can ride out a shallow recession across the border more successfully than it did in 2001.
Mexican consumers are spending more than they did in the past. And this time policymakers may not have to rein them in. Indeed, the government is better placed to stimulate the economy if that is needed. The government's finances are close to balance; most government debt is now long-term and denominated in pesos, rather than dollars. Mexico's still modest credit market has continued growing; bank lending rose by 26% in the year to July. Housebuilding, backed by government programmes, remains robust. Mexico's president, Felipe Calderón, this month gained approval for a tax reform which should pay for extra public investment in roads and other infrastructure.
Recently, much foreign direct investment has gone to services rather than manufacturing. That should continue, and would help to cover any current-account deficit. Officials think that tourism revenues will not drop much even if the American economy slows. Guillermo Güémez García, a deputy governor of the central bank, argues that although some Americans may stay at home, others will choose Mexico instead of more expensive and distant destinations. He also notes that because the peso has tracked the dollar, Mexican exporters may gain market share across the border at the expense of rivals battling with stronger currencies.
The finance ministry still reckons that Mexico's economy will grow by 3.7% in 2008. Héctor Chávez of Banco Santander, a Spanish-owned bank, says that if the American economy grows at 2%, Mexico can manage 3%. But the latest economic data from the United States make all these figures look optimistic. A sharper slowdown will strengthen the government's case that Mexico's state-owned oil industry, whose output is falling, needs reform and liberalisation. For once, a crisis—if it proves to be one—really could be an opportunity. |
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