The sky darkens over Mexico

The news from our southern neighbor grows worse.  At the end are links to previous posts warning about Mexico.

  1. Mexico remittances plunge in worst drop on record“, BusinessWeek, 1 July 2009
  2. Analysts More Pessimistic About Mexican Economy“, Latin America Herald Tribune, 2 July 2009
  3. Opposition Wins Majority in Mexican Vote“, New York Times, 5 July 2009

Here is one expert’s view on Mexico’s overall situation, comparing the current crisis with past events:  “The Coming Tequila Crisis“, By John R. Taylor, Jr. (Chief Investment Officer), FX Concepts, 9 July 2009 — Excerpt”

The recent elections in Mexico are the final nail in the coffin for the Mexican economy and the peso, and could lead to the unraveling of the country’s social fabric. The victory of the PRI over President Calderon’s PAN party in the mid-term elections has put the lower house in the opposition’s hands. We feel this will effectively paralyze the government, tying its fiscal hands, as the economic and social situation in Mexico continues to deteriorate. Although the commentaries we have seen even after the election have tended toward the positive and even the Pollyanna, our experience with Mexico over the past 36 years tells us that we all should fear for the worst.

Mexico is economically bound to the United States and, in the past, when the US came down with a mild cold, a year or two later Mexico’s cold became a bad case of pneumonia. Now, the United States has pneumonia and we wonder what Mexico will get.

Just in case you think that I am being melodramatic, let’s take a quick tour of the history of the dollar/peso exchange rate during the post- Bretton Woods period. The Mexican peso had been fixed to the dollar for several decades when the US went into a serious recession in 1974; although the recession soon spread south of the border, the peso did not budge until late August 1976, more than a year after the US recession had ended.

The reasons behind the lag are interesting. Fixed exchange rates were still ingrained in the Mexican mind and capital flows in and out of Mexico were small as there was only one international bank in Mexico, Citibank, and only one tradable market, the IMM. (It took Citibank months to hedge just a fraction of its capital position.) Because remittances from workers in the US suffer with American unemployment, which continues rising even after the recession ends, the pressure on the Mexican international position has always lagged the US recession.

In 1974, the US recession saw an aggressive real estate collapse, and since many Mexicans work in construction trades this was a negative for the peso. However, the price of oil had sky-rocketed at this time and Mexico was becoming a big oil exporter and this was positive for the peso. Nevertheless the peso devalued by 45% in August 1976 and many companies went bankrupt.

The next US recession began in early 1980, with the price of oil at all time highs, and it continued to the end of 1982. As oil began to decline the Mexican international position became untenable and the peso began to decline sharply in February 1982, continuing down each month thereafter, and collapsing in November as the US was beginning its recovery. The next few years were terrible ones for Mexico as the price of oil declined sharply, reaching a low in 1986. In the six years between the start of 1982 and the end of 1987, the peso had lost almost 99% of its value. As oil rallied and Mexico created a new peso out of 1000 old ones, the peso stabilized in the late 1980s.

The next US recession began in 1990 and its effects dragged on to the end of 1992, but the peso did not start getting into trouble until February 1994. The crisis, dubbed the Tequila Crisis, got hot in December and the new peso went from 3.4 to over 7 per dollar by 1996 – a devaluation of slightly over 50%. The US recession of 2001 had less impact as construction activity boomed and oil prices rose, but still the peso weakened, beginning its decline in March 2002 and bottoming in May 2004.

The current American recession includes a sharp decline in construction employment and drop in imports from Mexico. The price of oil has declined from its high of last year and our cycles say it will go lower in the months ahead, and – critically – Mexico’s oil exports are dropping sharply. We have seen forecasts that Mexico will be a net importer of oil within ten years. With GDP projected down at least 8% this year and the US recession far from over, dollar/peso could easily reach 25 next year.

Afterword

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Other reports about Mexico

  1. Mexico: On the Road to a Failed State?“, George Friedman, Stratfor, 13 May 2008
  2. Mexico: Examining Cartel War Violence Through a Protective Intelligence Lens“, Stratfor, 14 May 2008
  3. Crime and Punishment in Mexico: The big picture beyond drug cartel violence“, posted at Grits for Breakfast, 18 May 2008
  4. State of Siege: Mexico’s Criminal Insurgency“, John P. Sullivan and Adam Elkus, Small Wars Journal, 19 August 2008
  5. After Action Report – Vistit Mexico“, General Barry R McCaffrey USA (Ret), 29 December 2008
  6. Mexico Security Memo – Year-end Wrap-up“, Stratfor, 5 January 2009
  7. The Long Arm of the Lawless“, Fred Burton and Scott Stewart, Stratfor, 25 February 2009

For more information from the FM site

Posts about Mexico:

  1. Is Mexico unraveling?, 28 April 2008 — summary of Stratfor’s warnings about Mexico.
  2. “High Stakes South of the Border”, 13 May 2008
  3. Stratfor: the Mexican cartels stike at Phoenix, AZ, 6 July 2008
  4. “Drug cartels ‘threaten’ Mexican democracy”, 24 July 2008
  5. Stratfor reports on Mexico, news ignored by our mainstream media, 19 August 2008
  6. Nonsense from StrategyPage: Iraq is safer than Mexico, 17 December 2008
  7. New reports about Mexico, the failing state on our border, 9 January 2009
  8. Stratfor writes about “the third war” in Mexico, 15 April 2009
  9. Stratfor: “When the Mexican Drug Trade Hits the Border”, 20 April 2009
  10. One of America’s few wise men tells us about Mexico, 6 May 2009

2 thoughts on “The sky darkens over Mexico

  1. FM, Have you considered the possibility that all these drug cartels in Mexico and elsewhere in South America , plus the ones in Afghanistan operate under the blessings and guidance of all-powerful, supreme, cartel above them – The American Central Intellgence Agency. The CIA’s main business is to profit from tremendous rents they extract from the drug cartels, in exchange for not doing much anti-drugs enforcement activity. What’s your opinion of the reported fact that drug production in Afghanistan increased eight fold post the US invasion there, though the Taliban regime had cracked down and made drug production a miniscule portion of its former level. One side has it that the Taliban is financing itself with the increased drug money. Another side has it that the CIA and the American Kabul regime is profiteering from the drugs.
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    Fabius Maximus replies: Perhaps the drug cartels are all run by aliens! Or elves! See today’s post for more about this urban legend. No comments about this on this thread, unlike directly relevant to Mexico.

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