Mexico Braces for Economic Blow; Immigration Adds to Complexity of the Issue

By Diego Cevallos, IPS News. Posted October 13, 2008.

MEXICO CITY, Oct 10 (IPS) - The Mexican government has taken emergency financial measures to withstand the winds of crisis from the United States, which this country is heavily dependent on as shown by their daily bilateral trade volume of one billion dollars on average. However, the measures will not completely ward off the impact, say analysts.

The difficulties faced by Mexican migrant workers will also complicate the government's strategy. Remittances from Mexicans living in the United States, the country's second largest source of foreign exchange after oil exports, have already shrunk, and experts predict that they will continue to fall.

Some observers even forecast a massive return of migrants, which would put further pressure on an already stretched job market.

With the backing of the business community and most political sectors, including part of the left-wing opposition that has been harshly critical of the conservative administration of Felipe Calderón, the government has drawn on the country's nearly 90 billion dollars in foreign reserves to sell 8.9 billion dollars since Wednesday to prop up the peso, which has declined against the dollar by more than 10 percent in the last two weeks, the sharpest drop since the 1995 "tequila crisis."

The government also announced 4.4 billion dollars in emergency spending -- a strategy made possible thanks to savings programs, a stabilization fund created over a decade ago, and strict balanced-budget requirements. The plan is to build and repair infrastructure, from roads and schools to prisons, build a new oil refinery, and provide support for small and medium businesses.

The aim, said Calderón, is to "strengthen the motors of our economy," generate employment and put in place investments with an eye to future benefits.

Nevertheless, forecasts for Mexico's economic growth have been corrected downwards, from 3.5 percent at the beginning of the year to 2.0 percent or less, for 2008, and to 1.3 percent or lower for 2009.

The measures taken by Mexico, which are "the right ones, and are what it is possible to do in the current scenario," should curb the impact of the international crisis, "although effects are inevitable, particularly given the extreme level of dependence on the U.S. economy," Jorge Mattar, head of the subregional headquarters of the Economic Commission for Latin America and the Caribbean (ECLAC) in Mexico, told IPS.

The majority of Mexico's exports and imports are tied to the United States, and U.S. consumption and demand directly fuel a large part of the country's manufacturing sector and jobs.

Mexico's exports to the United States stand at over 272 billion dollars a year, with manufacturing (largely involving for-export assembly plants) accounting for 81 percent, oil and minerals for 16 percent, and agriculture for most of the rest.

As Calderón said in a nationally televised address Thursday evening, "unlike in the past, when a lack of dollars led us into terrible crises," today Mexico has international reserves, it is covering its debt servicing requirements, its public finances are sound, and the banking sector is free of troubles.

"All of this, which we have built with a huge effort, little by little, means that by contrast with the past, when there was no other option than to cut spending and call on Mexicans to make greater sacrifices, the government now has sufficient maneuvering room to confront the problem," he said.

However, there is no room for complacency, warned Mattar. So far the effects of the crisis have been felt in the financial system -- the currency and stock markets -- "but they will hit the real economy later," said the ECLAC official.

All Mexico can do now under the present circumstances is confront the crisis, said Mattar, who said the financial turbulence sweeping the world "will not be short-term in nature."

He also expressed concern about the additional impact on the Mexican economy from the decline in remittances sent home by the roughly seven million Mexican migrants living in the United States, many of whom are among those who are feeling the brunt of the crisis there.

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