Volume 5, Number 21, Page 5

Not All Emerging Markets Are the Same

The globalization of the world economy is a fact. Progress in communications and transportation has made the world smaller. Borders are more open to trade, information exchange and financial flows. The financial collapse of Russia and the East Asian tigers, as well as the decline in international prices of oil and other commodities, have exacerbated volatility in emerging markets all over the world. And yet, for all of the changes taking place in the world, financial and currency markets are capable of reacting immediately to changing conditions.

While the Mexican currency and stock market have lost some ground this year, over-all Mexico is weathering the storm. Mexico is better positioned to meet the challenges of today’s financial uncertainty by sticking to strong economic fundamentals.

Mexico has policies designed to preserve stability, yet provide enough flexibility for the economy to respond quickly to international changes. They include:

Fiscal Discipline

Mexico is committed to a budget deficit cap of 1.25 percent of its GDP. Already this year, the government has cut spending three times to enforce the budget deficit cap.

Managed Debt Profile

In 1998, $11 billion worth of debt will have to be paid. Of this, only 40 percent is market, while the rest is non-market. As a result of sound public finances, public debt as a percentage of GDP dropped from 40 per-cent at the end of 1995 to 27 percent at the close of 1997.

Flexible Exchange Rate

The Central Bank allows foreign exchange markets to determine the value of the peso. While indiscriminate panic over emerging markets investment has pushed the currency down over 20 percent in the last several months, the kind of sudden and massive devaluations seen in other parts of the world have been avoided.

Increased Domestic Savings

Over the last three years, Mexico has taken steps to increase domestic savings. Through the reform of its pension system, a greater share of salaries are making a large quantity of capital available for investment.

The domestic savings rate has increased from 14.8 percent of GDP in 1994 to 24.6 percent of GDP in 1998. In addition to domestic policies that help Mexico face the challenges of the world economy, its growing net-work of free trade agreements, including NAFTA, has been a powerful instrument for economic growth. Even during this year of global economic turmoil, the Mexican economy grew 5.4 percent in the first half, and is expected to finish the year with a 4.5 percent growth rate. At the same time that Mexico has achieved this record growth, inflation has been reigned in substantially. In 1995, inflation crested at 52 percent. Today, it has been held to 10.3 percent.

Exports have been one of the main sources of GDP growth. By the end of 1997 exports accounted for around 50 percent of GDP, compared with 17 percent in 1994. NAFTA has been a cornerstone for that growth. Between January and July 1998, U.S.-Mexico trade reached $98.6 billion, which is close to total bilateral trade in 1994. Mexico’s close trade relationship with the United States has been a vital source of stability for both countries amid the current global instability. Merrill Lynch’s chief Latin American strategist agrees that Mexico “is a safe haven in Latin America, largely because of NAFTA.”

Globalization represents challenges and opportunities. To continue growing, Mexico must maintain the policies it has adopted: sound public finances, a responsible and consistent monetary policy, increased domestic savings, a stronger banking and financial system, controlled inflation levels and a manageable debt profile. Mexico’s reforms and growth by no means ensure complete shelter from the difficult financial pressures of the future. But, Mexico has experienced such challenges before and adopted measures that help lessen the impact of such forces on its economy. Even as the global market changes, Mexico will position itself to face the economic challenges of the future — and continue to provide new opportunities for those who want to do business with an open economy.

The SECOFI-NAFTA office is the representative branch of the Mexican Department of Commerce and Industrial Development (SECOFI), at the Embassy of Mexico, in Washington, D.C.