LOADING

Type to search

Mexico: Iceberg Dead Ahead!

Share
A huge iceberg lies ahead in 2009, but it's too bad that very few Mexicans appreciate the calamity that lurks in the shadows.

BY WALTER T. MOLANO

An aroma of prosperity wafts through the sunny air of Mexico City. New buildings and hotels grace the skyline, the mayor is expanding the public transportation system and families are preparing for the year-end holidays.

Traffic is building, as parents embark on shopping sprees and attend the Posadas celebrations. However, the domestic bliss belies the economic storm that is raging on the northern bank of the Rio Grande, and the deep recession that lies ahead.

SEVERE CRISIS

Mexico is in for a severe crisis. Some of it is due to its unwillingness (or inability) to implement important economic reforms during the previous sexenio. However, much of it is due to factors that are outside its control.

The decline in oil prices will hit Mexico hard. With WTI projected to fall into the mid-30s, the Mexican government will soon face a gaping hole in the fiscal accounts. Oil represents about a third of government revenues.

Unfortunately, the decline in the valuation of crude coincides with a plunge in oil production. The consequences of the Fox Administration's inability to push through the energy reforms are now coming home to roost. At the same time, the drop in metal prices will weigh heavily on the mining regions, particularly in the north. All of this will overlap with a dramatic fall in remittances. The deepening recession in the U.S. is hitting many immigrants, as North American households trim back on services, such as yard care and restaurant dining. Construction companies are also reducing staff, forcing many immigrants to return home. Armed with their savings and new skills, they find it easier to survive in Mexico, where the cost of living is lower.

AUTO SECTOR

Last of all, the economic slowdown in the U.S., and the maelstrom in the automobile industry is forcing some Maquiladoras to close factories and furlough workers. These trends point to a severe economic downturn next year. We expect that Mexican GDP will fall 2.3 percent y/y in 2009, with a strong possibility of a deeper revision.

Unfortunately, the decline in domestic demand will not bring much relief to the external accounts. The current account gap may exceed $24 billion in 2009. This shortfall will be larger if remittances collapse. There is a good chance that they will fall by more than 50 percent, given the economic malaise north of the border. Unfortunately, the capital account will not provide any solace. Foreign direct investment will also decline, due to the downturn in manufacturing.

There is a chance that the portfolio flows will be negative, as investors flee the emerging markets. Surely, the government will try to tap the international capital markets. But, they will have to compete against the multitude of sovereigns that will be doing the same. This means that the peso will have to devalue. It is painful to say, but the Mexican currency could lose another 20 percent to 25 percent, which could put it above 17. No Mexican CFO is prepared for such a scenario, which could lead to despair on the corporate front. Hence, we could be in for a wave of unexpected defaults.

SOCIAL EXPLOSION

Mexico may be an oasis of relative prosperity, but the path ahead is strewn with icebergs. Failure to prepare for such a scenario and the disadvantages of being a small economy tied to the fate of the U.S. means that it will be faced with a severe downturn. Moreover, the social situation could become explosive. The lawlessness caused by the burgeoning drug trade undermined local institutions, such as the press, judiciary and law enforcement.

Emboldened by their impunity, the various gangs and cartels could take advantage of the crisis to seize more power through the use of terror and crime. This will occur at a moment in time when bilateral relations with the U.S. could sour. Both President-elect Obama and Secretary of State-nominee Clinton have a penchant to renegotiate the terms and conditions of the North American Free Trade Agreement (NAFTA), which will only add to Mexico's economic and social woes. Therefore, a huge iceberg lies ahead in 2009. It is too bad that very few Mexicans appreciate the calamity that lurks in the shadows.

Walter Molano is head of research at BCP Securities. 

 

 

To read this post, you must purchase a Latin Trade Business Intelligence Subscription.
Scroll to top of page