Miguel Mancera, the Governor of Mexico's Central Bank, argues
that the fall-out from the peso crash was not all bad news
Mexico suffered one of the greatest crises in its modern
history following the peso crash in December 1994. Much has been written
about this economic crisis, most of it highlighting its most negative aspects.
This has meant that many important features of the Mexican economy have
been overlooked or glossed over, despite the fact that many of these features
represent a solid foundation from which the country's economy can take off
in the not too distant future.
The depth and severity of the crisis, as well as the evident flexibility
and efficiency of the economy, are perhaps best reflected by the virtual
disappearance, in the space of a few weeks, of Mexico's external deficit.
Few countries in recent history have experienced such a marked turnaround
in the current account of their balance of payments - Mexico's, which in
1994 posted a deficit of nearly 8 per cent of GDP, was practically balanced
(with a deficit of US$654 million, less than 0.3 per cent of GDP) in 1995.
A salient feature of the restoration of equilibrium in the current account
is that it was brought about by a robust expansion of non-oil exports, rather
than by a collapse of imports. Notwithstanding the depth of the Mexican
recession, imports from the US during 1995 were above levels registered
in 1993, the last pre-NAFTA year. In fact, 90 per cent of the change in
the current account was down to improvements in the trade balance and close
to 70 per cent was derived from the growth of merchandise exports. In contrast
to past episodes of balance of payments difficulties in Mexico, the government
did not resort to protectionist methods in order to contain imports, but
held fast to its commitment to trade and capital account liberalisation.
Even when confronted with a major crisis, the Mexican government, far from
turning its back on liberal policies, has taken measures to strengthen these
policies. This underlines the permanence of the structural changes which
have been undertaken. The responsiveness of exports indicates both the appropriateness
of these policies, as well as Mexican firms' greater efficiency and increased
ability to compete in international markets.
In order to avoid an excessive dependence upon internal saving, the government
has established the promotion of domestic saving as one of its priorities.
In this regard, the reform of the Mexican Social Security Institute now
under way is an important step. The reform consists of three main elements:
fully-funded individual pension accounts; private management of investments
made with resources from pension funds; and the separation of the pension
system from the provision of social and health services.
The external sector is being supported by a clear commitment to a floating
exchange rate regime. Intervention by the Bank of Mexico in the foreign
exchange market has been sporadic and only designed to reduce unwarranted
volatility, not to interfere with the market's role in setting the fundamental
value of the peso.
An important role for the Bank of Mexico in the aftermath of the peso's
devaluation in December 1994 has been that of lender of last resort and
provider of liquidity to the banking system, both in pesos and in dollars.
The challenge has been to fulfil this role without affecting the monetary
programme at the heart of the stabilisation effort. In this regard, the
joint efforts of the Bank of Mexico, the Treasury and the National Banking
and Securities Commission have prevented the collapse of the banking system.
A series of programmes has been launched to provide liquidity to troubled
banks and to help them comply with their capitalisation ratios. Moreover,
the central bank has been able to grant support to the banking system without
producing an expansion of net domestic credit.
Mexico faced another daunting challenge in 1995: to pay off maturing short-term
dollar-denominated securities (known as Tesobonos) which amounted to US$30
billion at year-end 1994. Although Tesobonos were classified as
domestic debt, a good part of these public debt securities were held by
non-residents. In order to fully comply with its obligations, Mexico negotiated
an international financial support package with the US, Canada, the IMF,
BIS and other international finance organisations. A total of some US$50
billion was committed. Using only a portion of these funds, Mexico was able
to amortise the outstanding balance of Tesobonos and extend the maturities
of its external debt. It must be emphasised that Mexico's foreign currency-denominated
debt held by foreigners has not increased as a result of having used the
financial resources from the international support package to pay off maturing
Tesobonos. What has occurred is simply a substitution of external creditors.
Furthermore, as a percentage of GDP, Mexico's total net public debt, including
the accounts of the Central Bank, fell from 45.8 per cent in December 1994
to 43.4 per cent at the end of 1995.
An analysis of the historical trends of Mexico's debt shows that the prudent
external public debt management policy implemented over the last few years,
together with the excellent performance of exports, has reduced the overall
burden of servicing that debt. Interest payments on external public debt,
as a percentage of annual exports, declined from 20.7 per cent in 1987 to
7.9 per cent in 1995. Mexico's debt indicators compare favourably with those
of other Latin American countries and many OECD nations.
Another encouraging fact is that international capital markets have recognised
Mexico's strong adjustment policies. This has allowed the country to tap
the international capital markets once again. The Mexican government and
its agencies were able to secure fresh capital from these markets only five
months after the eruption of the crisis. After raising US$4.7 billion during
the second half of the year, the government began 1996 with about US$2 billion
in new placements.
To top
Despite the deep recession of 1995 and associated loss of revenue, fiscal
policy has remained tight and the budget posted a slight surplus. The government's
main objectives were to increase public savings in order to avoid exerting
pressure on domestic financial markets and to counteract the inflationary
effects of the devaluation. Public spending was redirected to helping those
sectors most severely hit by the crisis. The surplus in the primary balance
allowed the public sector to cover all its interest payments and the cost
of the Debtors' Support Programme for 1995 without relapsing into an overall
deficit. For 1996, Mexico's budget programme aims at a primary surplus equivalent
to 4 per cent of GDP and a balanced overall budget.
Mexico has continued with its liberalisation and privatisation programme,
extending it to traditionally excluded sectors such as transport, telecommunications
and energy. Significant progress was made in 1995 in preparing state-owned
enterprises for privatisation. The government focused on establishing the
legislative and regulatory framework for privatisation, and later awarded
the first concessions for port operations and long-distance communications.
Mexico's stabilisation policies have been successful in containing inflation
and producing a general downward trend in nominal interest rates. The Brady
Bond Market has responded positively to these policies, suggesting improved
investor confidence. Peso volatility has fallen, the stock market shows
positive trends and there are signs of an economic upturn. Undoubtedly,
some uncertainties remain. However, given the political will in Mexico to
persevere in the adjustment effort, I am confident that the Mexican economy
will emerge from this crisis stronger than before.
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©Kensington Publications 1996