MEXICO ECONOMY FOLLOWS U.S. INTO DITCH

by Diego Cevallos

(IPS) MEXICO CITY -- Mexico's economy is wobbling because of the financial problems in its northern neighbor, with which it is closely interlinked. Unemployment is up, companies have put their plans on ice, the government has stopped putting out tenders, remittances from migrants are down, and exports have shrunk.

Observers say that Mexico is already in trouble, but more and greater difficulties may be on the horizon while uncertainty about the future of the U.S. financial system lasts. However, local problems are not expected to reach the seriousness of the crisis of 1994 and 1995, when the country's banking system collapsed.

Projections of economic growth in Mexico have been sliding downwards in recent weeks. At the beginning of the year, gross domestic product (GDP) was forecast to grow by 3.5 percent in 2008, but now the figure has been corrected downwards to two percent or less. Growth as low as 1.3 percent is predicted for 2009, one of the lowest rates in Latin America.

But the government's economic authorities say there is nothing to worry about. Referring to the country's well-ordered public finances and macroeconomic variables, including one of the lowest inflation rates in Latin America, they repeat over and over again that the Mexican economy will hold up.

"I understand the government has to keep calm and show optimism, but let us not be na•ve. Mexico is heavily dependent on the U.S. economy, more so than any other Latin American country," Angel Vega, a university professor and business consultant, told IPS.

Approximately 90 percent of Mexico's foreign trade is tied to the U.S. market. The North American Free Trade Agreement (NAFTA), in force since 1994, links Mexico to the United States and Canada.

The private Mexican Institute of Finance Executives (IMEF) has exhorted the administration of conservative President Felipe Calderon to behave with "realism" and review its expenditure and investment plans for 2009, arguing that the U.S. crisis will have long-term effects.

Meanwhile, the Employers' Confederation, to which the major companies belong, has urged the authorities to put into effect an "anti-cyclical" plan that has already been designed, which would involve large amounts of public spending on infrastructure development, especially roads. The plan envisages spending $250 billion over a six-year period.

When Calderon took office in December 2006, he promised to expand the economy and pursue annual growth rates of five percent, which have not been achieved, nor will be until at least 2010.

"It must be borne in mind that at the moment, Mexico does not have the maneuvring room to temper the effects of a major economic crisis in the United States," said Jorge Mattar, head of the subregional office of the Economic Commission for Latin America and the Caribbean (ECLAC) in Mexico City.

Strategies drawn up last year by the Calderon administration to weather the economic slowdown in the United States were based on the premise that the U.S. would emerge from its economic troubles in 2009, under the new government to be elected this November. But that prospect "is becoming more and more remote, so some of the plans need to be adjusted," Vega said.

The problems Mexico is suffering because of the U.S. crisis are already reflected by a number of statistics.

Last week, the National Institute of Statistics reported that in August, exports of manufactured goods, most of which go to the United States, declined by 3.8 percent -- the first fall in that sector since 2003. Hardest hit was the automobile industry, which experienced a 16.4 percent drop in exports.

In July, the Bank of Mexico (the central bank) recorded a 6.9 percent drop in remittances sent home by migrants, mainly from the United States -- the largest fall since 2000.

For the first seven months of 2008, remittances totalled just over $13.6 billion, $409 million less than in the same period in 2007.

Money sent home by Mexican nationals living abroad is this country's second largest source of foreign exchange, surpassed only by oil exports. The reduction in remittances is expected to have negative effects on consumption and housing construction and, in turn, on employment.

According to Raul Feliz of the Center for Economics Research and Teaching (CIDE), the drop in remittances is due to the slowdown in the U.S. economy, particularly in the construction industry.

As well as the intensive trade relations between the two countries, which share a 3,200-kilometre border, and the interconnection of their productive sectors, the United States is also the chief source of foreign investment in Mexico.

Furthermore, the United States is an escape valve for the 500,000 or so Mexicans who emigrate there each year, reducing the pressure on local jobs.

Mexico's official unemployment rate reached a 42-month high of 4.15 percent in July, which observers blame on the general slowdown of the economy. (The official rate does not take into account underemployment, which would include the millions of part-time or informal sector workers).

In today's rarefied climate, spokespersons for several private banks that provide mortgages have said they will tighten up their requirements for borrowers, so the prediction is that housing sales will also drop.

The Transport Ministry acknowledged that it has had to postpone various projects that it was putting out to tender, including highways, ports and an airport near the Caribbean coast.

The tender documents are ready, but have not been released "because right now, the situation in the financial markets calls for prudence," said Transport Minister Luis Tellez.

In the last few days, at least four Mexican companies have postponed plans for an initial public offering of their shares on the stock exchange.

"Mexico will certainly not face a crisis like the 1994-1995 debacle, but times are difficult, and will carry on that way as long as the problems continue in the United States," Vega said.

According to Enrique Quintana, who writes an economics column for the newspaper Reforma, whatever shape the rescue of the financial system in the United States takes "will pull Mexico along behind it."

"The problem is not what has gone before, but what might still be to come," Quintana warned.