MEXICAN PESO CRISIS

Mexico- Background

In area, is the 13th largest nation in the world

A key geographical attribute is its shared 1,760 Mile border with the US.

Spanish-speaking country in the world.

Proposal to reduce trade barriers with Mexico’s largest trade partner,

the United States, through the North American Free Trade Agreement(NAFTA).

World Bank

Mexico has a free-market economy with a mixture of modern and outmoded industry and agriculture, increasingly dominated by the private sector.

 Recent administrations have expanded competition.

Mexico has opened its markets to free trade.

However more than 85% of the trade is still done with the United States.

MEXICAN ECONOMY

The First Major Crisis Of The 21st Century

‘The Mexican Peso Crisis’

Peso is the currency of Mexico.

  Mexican peso crisis happened in December 1994.

The crisis is also known in Spanish as el error december — The December Mistake.

IMF Managing Director described this crisis as 'the first major crisis of the 21st century'

It was caused by sudden devaluation of Peso.

The effect of this crisis on southern cone and Brazil is called Tequila effect.

THE ORIGIN OF MEXICO’S 1994 FINANCIAL CRISIS THE ORIGIN OF MEXICO’S 1994

FINANCIAL CRISIS

After nearly a decade, the Mexican government liberalized the trade sector in 1985.Adopted an economic stabilization plan at the end of 1987’ and gradually introduced market orientated institution.Resumption in economic growth.(1989-1994)Inflation was brought down to single digit level for the first time -1993.Large capital inflows.Attract more foreign investment.The devaluation of the peso-1994.End to capital inflows.

Cause of the crises : Governments policy errors.

Rising US interest rate.

over-valued exchange rate of peso

large scale of the current account deficit, which had reached almost 8% of GDP in 1993 and 1994

The combined effect of all this led to……

In 1994 Mexican Peso crisis occur due to devaluation of Mexican peso against US dollar by 14 %.

US Dollar v/s MEXICAN peso exchange rate (nov/94 - jan/95)

Mexican Economy Since the Crisis Interest rate

•Interest rates near 8%, down from 90% since crisis.

Interest rates near 8%, down from 90% since crisis.

Percent inflation

•Inflation decreased drastically to 4%. Down from 100% since the crisis.

Inflation decreased drastically to 3%. Down from 100% since the crisis.

Unemployment rate

Unemployment at all time low, less than 2%

Steps Taken To Stabilize Currency

Government increased the fixed rate band to 15 percent (up to 4 pesos per US dollar).

The dollar stabilized at the rate of 6 pesos per dollar.United States intervened rapidly, first by buying pesos in the open market, and then by granting assistance in the form of $50 billion in loan guarantees.

By 1996, the economy was growing.

In 1997, Mexico repaid, ahead of schedule, all US Treasury loans.

Peaked at 7% growth in 1999.

Mexico 10 Years after the Crisis (2004)

Mexico 10 Years after the Crisis (2004)

Budget deficit has fallen steadily – 0.2% of GDP in 2004.

Corporate bond market raised $12B by private investors in 2004. Government is building 700,000 houses each year to 2010 to accommodate its people.

Almost all banks are privatized. Consumer lending rose 45% in 2004 while corporate lending increased by 20%.

Moody’s, Standard & Poor’s, gave Mexico an investment grade credit rating.

ConclusionMexico learned to not get itself that position again with a current account deficit.

They learned not to overvalue their currency for fear of another great devaluation and start floating exchange rate policy.

But, whether the recovery of growth and employment will be sustained, or whether it will be a statistical blip.