Thoughts on the current debt situation

Victor F. Mercado

      The purpose of this analysis is to present how economic trends affect internal politics in Mexico.  The choice of studying the internal political economic workings of our neighbors to the south is based partly on its interdependence with the United States, but also because Mexico is an excellent case study to observe the neoliberal experiment in practice. Thus, this essay is inspired from the arguments proposed by Thomas Friedman and William Greider with regards to neoliberal economics.  I guess you could say that this analysis is set up to prove or reject some  a priori suggestions about current global economics.

Act I: Economic Indicators

Very recently (February 23, 2000) the Secretaría de Hacienda y Crédito Público (SHCP)-Mexico's Finance Secretariat, released its latest numbers with regards to Gross Domestic Product (GDP) growth in 1999.  The findings conclude that this previous year (1999), Mexico's GDP was reported at 3.7%, no surprise in part to a 5.2% high during fourth quarter earnings. For comparative purposes, Mexico expected an average growth of 3.0% for 1999-It closed the year 0.7% above expected.  According to Javier Murcio, an economist for Credit Suisse First Boston in Latin America, "most of the growth in the year had been in industrial production geared towards exports."  Deputy finance secretary Carlos Noriega Curtis boasts that the creation of 700,000 jobs in the formal economy was an important effect of this year's strong economic growth.  However, Noriega cautioned that "this does not mean that our problem is solved…It only means that a dynamic economy  revented our unemployment situation from worsening."

Although the Zedillo administration estimated a 1.25% fiscal deficit compared to GDP, the SHCP's numbers were .10% lower, reflecting 52.51 Billion pesos-equivalent to 1.15% of Mexico's GDP.  Annual inflation held at 12.3% for 1999-which was lower than expected-however the University of New Mexico's Latin American Institute's figures-which this essay is based on, does not provide (how low?) was Mexico's predicted annual inflation rate.  It is expected that for this fiscal year 2000, Mexico's annual inflation rate will drop from 12.3% to 10%, and 1999's fiscal deficit of 1.15% of GDP should look something more like 1.0% for 2000.

These numbers are not provided to amuse economic audiences, but rather to illustrate the following section that focuses on the role of international economic actors.

Act II:  All eyes on Moody's:

        In his book The Lexus and the Olive Tree, New York Times correspondent Thomas Friedman introduces what he calls the Electronic Herd as: "all the faceless stock, bond and currency traders sitting behind computer screens all over the globe, moving their money around with the click of a mouse…(also)…the big multinational corporations who now spread their factories around the world, constantly shifting them to the most efficient, low-cost producers…The Electronic Herd loves the Golden Straitjacket (Neoliberal model) because it embodies all the liberal, free-market rules the herd wants to see in a country…(those countries that participate)…are rewarded by the herd with investment capital to grow. Those that (don't)…are disciplined by the herd-either by the herd avoiding that country or withdrawing its money from that country" (Friedman, 90).

The Electronic Herd, argues Friedman makes its investment decisions in nations such as Mexico based on the ratings of Moody's Investors Service and Standard and Poor's.  Moody's Investors Service has as one of its functions, to monitor a country's economic performance to determine credit access.  During a 1995 visit to Canada (a NAFTA partner), the Moody's team advised the Canadian Finance Ministry and legislature that if their "deficit-to-GDP ratio" did not conform with international expectations, Canada's rating of "triple-A" would be downgraded: A financial blow that would compel Canada and Canadian companies to accept higher interest rates to borrow abroad (Friedman, 92).  After a recent February visit to Mexico, Moody's team changed its "stable" outlook to a "positive" one with regards to Mexico's "investment grade. Carlos Fritsch, an analyst of Casa de Bolsa Interacciones was quoted by saying that "it is too risky for Moody's to change its rating for Mexico until the new government is in place."

        At this point, it is safe to assume that the reader is probably asking him/herself-what is so important about a change in investment grade in Mexico? The answer: Elections, baby, elections. In July 2, millions of registered Mexican voters will determine the fate of the Partido Revolucionario Institucional (P.R.I.)-Mexico's ruling party for 71 years. If Moody's makes its decision prior to elections, then Francisco Labastida-the frontrunner for the P.R.I could cite the successful change of "investment grade" rating as a political "see what the P.R.I. has done for you" sound bite. However the contender from the Partido Acción Nacional's (P.A.N)--Vicente Fox should be at least concerned.  Mauro Leos, a sovereign-debt analyst at Moody's was quoted in saying that "(Moody's) could well decide to change its Mexico rating before the election, especially given the incident-free primary held by the governing Partidio Revolucionario Institucional (PRI) in November." In short, if Moody's decides to change its "investment grade" before elections, this "will help lower financing costs and give us greater access to credit" said a hopeful Finance Secretary, Jose Angel Gurria Trevino.  If the argument of economic growth equals prosperity holds true, then greater access to international credit would give Mexican entrepreneurs incentives to expand in an economy where commercial banks provide less that one-fourth of financing to the private sector. I can see Labastida's speechwriters now:  "thanks to the P.R.I's economic success managing our fiscal deficit, we were able to receive a higher international credit rating which allowed our Mexican businesses to invest, expand, and create more jobs for you, for our us, for Mexico!…(the crowd cheers)  …!Viva México!…¡Viva el P.R.I!…¡Que Viva Labastida!…!"

Act III:  Moody's Deliberates:

        On March 8 Mexico received the news that Moody's Investor Service raised their credit rating to 'investment grade.' According to Henry Tricks of the Financial Times, London, the change "was encouraged by Mexico's lower foreign debt burden underpinned by a dynamic export sector as a result of NAFTA. It saw current account deficits as being financed principally through non-debt flows, such as direct  foreign investment."  Julia Preston of the New York Times paraphrased the decision in another way by saying "Moody's moved Mexico into the league of countries that present a very low risk of failing to pay their debts." Other commentators such as Andrea Mandel-Cambell of the Financial Times explained the decision prior to the July 2nd elections based on  "Mexico's economic ties to the US and its dynamic export sector." This was the news that the P.R.I was anxious to hear. The Financial Times had mentioned that Standard and Poor's (Moody's rival) was still unsure about Mexico's financial health. Six days later; however, Henry Tricks who wrote that "S&P does not share Moody's optimism", was probably surprised when S&P announced that it too changed Mexico's rating from BB to BB+.  I guess its safe to say that the opposition party's speechwriters had to find new inspiration. Citing the same article by Tricks, S & P's decision:
"said the upgrade reflected its belief that, whichever of the two leading candidates won the July 2 presidential election, they would maintain prudent macroeconomic policies. These included cautious fiscal and monetary policies, a manageable current account deficit financed mostly by foreign direct investment, and a falling foreign debt burden."

The a-political nature of the decision by Standard and Poor's was a savvy political statement, but also an important feature of centrist politics today.  Although the P.R.I. and the P.A.N have different ideological perspectives, a recent article by The Economist reveals that both Labastida and Fox promise 7% economic growth and 1.35 million jobs by relying on foreign investment and exports.  If you recall the introduction to this essay, it provided some economic indicators for the current administration that revealed GDP growth at 3.7% and job growth at 700,000 for 1999. As you can see, both candidates expressed the idea of 'doubling' the 1999 figures-given this economic ideological predictability-we see S & P's decision as rational.

Act IV: Mixed Blessings

        Good news for the economy could account for the recent merger of BBV-Probursa, the Mexican unit of Spain's BBVA bank, and Mexican Bancomer, just two days after Moody's announcement. James F. Smith of the L.A. Times believes that the merger, along with the increased role of foreign capital could spell good news for a nation with a long tradition of lack of credit, a condition that may  constrain faster growth. Also on March 25th, The Arizona Republic reported positive economic indicators for Mexico. Inflation was down as "Prices rose just 0.32 percent in the first half of March, or one-fifth less than economists forecast." The article cited a tripartite of economic good news as the economy was: Growing faster than expected, the trade deficit was shrinking, and consumer spending was on the rise. Also, Andrea Mandel-Campbell of the Financial Times reported four days earlier that not only were the European Union and Mexico on the verge of signing a trade agreement, but a "similar deal was reached with Israel while negotiations are in the works with various Central American countries and Brazil." It looks like Mexico is playing the globalization game with a degree of skill as foreign direct investment is predicted to rise 24% this year. Investments in telecommunications, automotives, electronics and energy industries to name a few are expected to contribute to the overall sum of 12.4 billion dollars.

        But international actors such as the Inter-American Development Bank is concerned that instead of focusing on foreign direct investment, policymakers in Latin America should consider  courting "portfolio investment and debt finance", reported the Financial Times on March 24th.

Arturo Porzecanski-chief economist at ING Barings, Latin America-is concerned "In public and in private, several government officials have been expressing their concerns over the ramifications of too much capital coming into Mexico" (Financial Times, March 8th). His concerns are shared by senior Latin American economist at Merrill Lynch in New York-Gray Newman. Newman reported to the L.A. Times that good news from Moody's would bring large inflows of cash to Mexico, thus resulting in "a rapid growth in consumption." James F. Smith, who wrote the piece in the Times, proposes that Mexico's balance-of-payments deficit situation could increase as a result of increasing imports.

Closing Remarks:

        The purpose of presenting these indicators is to lay out a foundation for the economic environment that Mexico faces as it comes closer to elections.  Although I've foreshadowed some of the political concerns to economic events, the next assignment will focus on the political responses by the ruling party and the opposition. Because this election may mean what I like to refer to as 'the changing of the guard' in Mexican politics, it will be interesting to see how political players respond to the recent changes of the dismal science.  This, is political economy baby.


The Financial Times, London:

The Arizona Republic, 3.21.2000

The L.A. Times, 3.10.2000

Freidman, Thomas L. The Lexus and the Olive Tree

The Economist, February 19, 2000.