A New Stability In Mexico's Economy

After a small recession and the political turmoil of the past year, Mexico is ready to launch a solid recovery. The opening of its financial markets will bring in much needed funds. And the new government, under President-elect Ernesto Zedillo Ponce de Leon, assures continued moves in the direction of stabilizing the economy.

Mexico's fundamentals are improving: Productivity is rising, government finances remain near balance, and inflation is the lowest in 21 years. After showing almost no growth in 1993, the country's gross domestic product rose at a 2.2% annual rate in the first half of 1994, with better growth expected into 1995. That will create sorely needed jobs.

To help the economy, the government is systematically devaluing the peso against the dollar. This "crawling peg" depreciation has reined in inflation and boosted exports, especially to the U.S. Mexican goods exports have soared 17% in the first eight months of this year. Exports to the U.S. are up 24.1%.

Imports, however, are rising even faster, with imported goods up 20% so far this year. As a result, the merchandise trade deficit, $1.73 billion in August, is widening sharply (chart). Mexico's current account deficit stands at a hefty 61/2% of GDP. Moreover, the deficit may worsen as exports soften in response to the U.S. slowdown.

Increased domestic output and investment would offset fewer exports. To that end, Mexico's high real interest rates must come down. Despite this year's 5% inflation, the rate on 28-day Treasury bills is 13.33%. The Banco de Mexico has enough foreign reserves to hold short-term rates steady. And the entry of foreign banks into Mexico will cut the cost of long-term borrowing.

Equally important is the fact that Zedillo's upcoming inauguration on Dec. 1 has not caused a run on reserves or a capital flight. It has been nearly 20 years since a Mexican president took power in such a stable economic environment.