Mexico Economic and Financial Policy Between 1995 and 1999

Despite the great variability of the economy and economic policy observed during the last decade of the 20th century., The trend of long-term economic development of the Mexico has not changed substantially (see. Tab.). Thus the GDP growth rate stood at 2 % over the period, just enough to offset the population increase, and per capita GDP therefore remained at the same levels as in 1980. The inflation rate rose sharply in 1995 and 1996 due to an economic and financial crisis, the most serious in recent Mexican history, which also manifested itself in a strongly negative balance of capital movements, traditionally flowing in abundance to Mexico due to the high profitability of investments. This deficit was partially offset by robust export growth, driven by the real devaluation of the exchange rate and depressed domestic demand.

The signs of vulnerability, evident for some years, exploded at the end of 1994 in the severe financial crisis, which took the form of a crisis of confidence of international investors in the Mexican monetary authorities, and which rapidly spread to numerous other countries in the region., prompting analysts to talk about a tequila effect. Consequently, the adoption of a drastic emergency and stabilization program, as well as the sharp contraction of capital flows from abroad and the persistence of a situation of great uncertainty, determined in 1995 an economic crisis unprecedented in the modern history of the country. GDP decreased by 6, 2 %, and GDP per capita as much as 7.8% in just one year.

The adjustment program adopted at the end of 1994 aimed to reduce the current account deficit in the balance of payments, to avoid the triggering of an inflationary spiral and to restore the conditions for the recovery of the economy in the shortest possible time. To this end, restrictive fiscal, monetary and wage policy measures were adopted; furthermore, on December 22, 1994 an exchange rate fluctuation policy was introduced, thus abandoning the controlled fluctuation system used since 1988as an inflation control tool. Fiscal policy essentially aimed at reducing spending and maintaining tax revenues in a constant proportion of GDP. The result was the increase in the primary surplus as a percentage by 2, 3 % in 1994 to 4, 5 % of GDP in 1995, while the overall fiscal balance was in deficit.

A necessary condition for the sustainability of this economic policy program were the loans granted by the International Monetary Fund (IMF) and the Bank for International Settlements for a total of 47. 800 million dollars. This financial aid allowed for the amortization of dollar-denominated short-term government debt securities worth close to $ 28. 000 millions of dollars. As usual, access to these resources was conditional on an agreement with the IMF which committed Mexico to achieving certain economic objectives in the context of a structural adjustment program for the economy. The program achieved satisfactory results in terms of inflation rates and a reduction in the current account deficit in the balance of payments but at the cost of a severe restriction of economic activity and a contraction in employment and real wages.

Unlike during the 1980s recessions, Mexico made it through the 1995 recession very quickly, mainly because the package of financial support from abroad avoided an otherwise necessary prolonged credit squeeze and because the size devaluation gave a strong boost to export competitiveness. The latter, now representing a growing share of GDP, have become the real engine of the recovery, offsetting the slow growth in domestic demand. For Mexico 2011, please check

Exports grew in 1996 at a rate close to 22 %, high but well below 40 % in 1995. In 1997 they continued to grow, but at even slower rates (approximately + 10 %). These growth rates were a reflection of the sharp increase in exports of manufactured goods, which now account for 84 % of the total, as well as exports produced under the maquila regime. This scheme provides financial relief for de facto concentrated foreign-capital assembly plants along the US border.

On the foreign debt front, over the last few years Mexico has provided for a continuous restructuring of the debt, in order to reduce the burden of the service and to extend its maturity over time. Using the financial resources obtained on the market at more advantageous conditions than in the period of the financial crisis of 1994, the Mexican government was able to repay part of the loans provided by the United States government in advance.

The recent normalization of financial markets and debt restructuring have produced a resumption of foreign capital inflows since 1996, as well as of portfolio investments from abroad, offsetting a slight reduction in productive direct investment from abroad. Finally, NAFTA continued to produce its effects in terms of deepening the economic integration of the North American continent. Currently there are very many companies that have made investments in more than one country in the area, and who consider the market of the three countries as a single market. This integration process has also seen Mexican companies investing in the United States, and companies from third countries, in particular from Europe and Japan,

The recovery that began after the 1995 crisis continued until the first half of 1998. Subsequently, the turbulence on the international financial markets and the fall in oil prices led to a worsening of the Mexican economic situation. Overall, however, GDP growth remained strong and inflation, which had already fallen significantly in 1997, then settled at around 15 %. In 1999, with the aim of continuing and consolidating the process of economic reforms, the Mexican government turned to the IMF and obtained a stand-by loan of approximately 3,100 million Special Drawing Rights for a period that runs until December, 2000.

Mexico Economic and Financial Policy