The Mexican Sources of Isolation from the International Financial Turmoil

The Mexican economic performance is linked to US Economy given its economic integration. In fact, the last US economic slowdowns have affected the economic growth prospects of Mexico. This is the reason why we should be worry about it. However, according to the government the effect of this disorder this time will be limited; the treasury secretary Agustin Carstens said: “Mexico is not involved in the current crisis in the United States; in addition to that, given the fiscal and monetary policy in Mexico, our country does not depend on external financing”.

Recent data supports the government lecture. The probability of grater monetary astringency has fallen because less inflationary pressures principally by the downtrend of house rents, low prices in vegetables, and less pressures form international commodity prices. The aggregate demand has not weakened; the retail sales show stable levels. On the supply side, the coincident indexes of service and agricultural sectors have shown stable variations (IGAE). In financial sector; the mortgage, private, and consumer credit interest rates keep its historically low levels; and in the case of the principal organization that provide mortgage credits (INFONAVIT) keep its peace to provide half million mortgages credits in 2008 (the highest level). The follow graph, based upon the most current of data, shows a set of indicators to see the recent evolution in aggregate demand, credit supply, output and prices dynamics.

Macroeconomic Indicators in Mexico
(Annual percentage rate)
	2007		2008
	June	July	June	July
Real Wages Increases	0.8	0.3	-0.7	n.d.
Home Rents	2.9	2.9	2.9	2.8
Retail Sales	3.7	4.1	1.5	2.8
Industrial Activity	0.4	3.2	-0.4	-0.2
Services Activity	3.7	5.6	1.8	4.2
Agricultural Activity	9	7.2	1.1	9.7
Mortgage Rate 1/	14.9	14.7	14.1	14.2
Private Credit Rate 1/	7.5	7.5	7.9	8.3
With Data of August
	July	Aug	July	August
Non-oil exports	13.3	9.8	15.9	-2.7
Total private financing	32.07	34.4	21.6	18.7

1/ Interest rate

Sources: INEGI (www.inegi.gob.mx ), Bank of Mexico (www.banxico.org.mx ), Department of Labor and Social Welfare (http://www.stps.gob.mx/).

According with this information, we are no longer seeing the typical sensibility to US business cycle. The industrial activity will be the most affected; however this time the Mexican economy has automatic stabilizers such as fiscal discipline; monetary policy room; relatively low levels of inflation; savings, private and public debt in local currency; an adequate pension system; less prices pressures from international markets; healthy financial organizations; and a dynamic services sector.

At the end, the weak US economic activity and the squeezed of international credit will have an important effect over the Mexican economic outlook. However, Mexico is more suitable to deal with this short of financial crisis and avoid the recession. And a set of economic reforms would supported and minimize its impact and the probability of recession; the kind of reforms to give alternative sources of economic growth could reached through improving the competition legal framework, giving more flexibility to labor market, encouraging better banking practices and competition, giving financial access to uncovered sectors, promoting infrastructure investments, improving the implementation of monetary policy and using appropriately the public expenditures.

Is important take in consideration that the institutional economic reforms materialized in the Washington consensus, have provide economic flexibility no only to Mexico but many countries in the world (particularly developing countries). This time internal forces in these countries will be the main factor to avoid a world recession. More importantly, in these countries there leeway to compensate the weak economic conditions that developed countries will face in the following years. 

The Likelihood of Succeed in US Financial Rescue

The Mexican Financial Crisis in 1994 had more negative characteristics than the US Financial Crisis have now; therefore, the likelihood of succeed of an eventual US financial rescue is high (The Mexican recovery was a relatively successful experience).

Mexican crisis was not only a banking system crisis, it was also a exchange rate crisis, a fiscal crisis, private sector crisis and central bank confidence crisis. Mexico find its way to overcome the recession (as conventionally is known), trough out adjustments in the way how the economic agents get financial credit, creating a productive sector more focused in external demand, and changing the financial architecture to recovery the financial health. The process was painful principally because the inflation eased very slowly.

In 1994, the bank system suffered by exchange rate policy failures, affecting all the credit flow toward the economy. The total loan bank portfolio showed a downtrend for ten years after the crisis; from 42% in proportion of GDP in 1994 to 9.8% in 2003. This drove our economy to asymmetric and inequality growth; the prosperity reigned among corporation dedicated to export, and high levels of inflation, benefiting those who were hedging instruments against inflation and affected the purchasing power of the working population. However, the net effect was positive; GDP growth 5% in average in the period 1996-2003 and the levels of employment growth too.

The US economy outlook show differences. The exchange rate pass-trough toward core inflation is not important, the debt levels is not increased exponentially as happened in México (the reference interest rate in México skyrocketed from its lowest point in February 1994 in 9.4% to its peak in November 1995 in 53%); the corporation debt has been well handle and not liked to other curries and they have been succeeded in the incursion of international markets.

What we will see in US economy is changes in the credit behavior of its economic agents; enterprises will use more interfirm credit (as usual in Mexico) and the consumers will adjust the way how they finance their purchases; the financial sector will become more small; and an important source of growth will be exportations (as the last quarters). At the end US economy will recovery and it will show sustainable growth rates in line with an adequate growth in all its sectors; including high levels of employment.

As Tomato price; Corn “crazy” price exists

Tomato price shows more volatility than other commodities. In fact, central banks in the short run don’t affect its behavior as supply conditions do, and in México, it eventually threat the central bank’s inflation target (due its high weigh in the consumer prices index; the estimator of inflation); phenomenon named as supply price shocks, very usual in prices of vegetal products.

Even though tomatoes market doesn’t have a future market as other markets have, it shows the kind of volatility as grain markets with different timing and regularity given its characteristics such as yield variability, meteorological sensibility, logistics circumstances and size of the market. In the world, Tomato market is not an unique integrate market. Its perishability imposes market constraints; it’s not easy export Mexican tomatoes to Argentina or Europe because it only exists weeks after its production. Therefore in the world we see a set of markets with its own behavior. For instance, a single test to measure the long-run relationship between tomatoes prices in Mexico and Chile (co-integration) resulted that there are not relationship (for results of Johansen co integration test, feel free to ask me for the information).

The prices of Tomates in México have also a seasonal behavior. The harvesting period in Mexico is during the second half of the year, between August and December, so the output is concentrated mainly in the period February-August (the season of low prices). However it has a stochastic seasonal behavior, because the output is conditioned principally to the degree of goodness of the weather, previous price, and price behavior of productive substitutes.

The cyclical behavior showed by grain market is similar to tomato markets but more ample. It is because its ability to be stocked, low costs of transportation and negative crops that can be compensated by positive crops in many parts of the world. In fact, in the last decades we have observed complete cycles of prices; with a dynamic pattern similar to business cycle.

We are not well accustomed to high prices phases, as we are not accustomed to recession phases. High prices in commodities could stay for long time given that its fundamentals had changed (higher energy and labor prices –the agricultural activity intensive in both economic factors), and the prospects of eased demand has not changed yet (even with financial turbulence the prospects of food demand for developing countries is high). We can’t blame financial markets as principal factor behind high prices, there are fundamental reasons. For example: oil reserves located in regions with geopolitics tensions and extracted by government companies with non market behavior; and agricultural prices controls, affecting the prices as prime incentive in any economy.

Graph Annexes