Mexico Gets the Wall Street Jitters

For many years there has been a saying in Mexico, "When the US sneezes Mexico catches pneumonia.

Fred

October 1, 2008

Economic News

Mexico Gets the Wall Street Jitters

After months of denials, a dose of reality is starting to sink in with
some Mexican government officials. While still insisting that the economic
fundamentals in Mexico are sound, Calderon administration officials are
beginning to join others in voicing concern about events north of the
border.

Monday's Wall Street plunge also sent the Mexican stock market into a
dive, with the Bolsa plummeting by more than 6 percent, though it quickly
regained ground the following day like its deeper-pocketed big brother in
the north.

Illustrating the close ties between the US and Mexican companies, several
Mexican-owned firms that trade on Wall Street were among the big losers
September 29, including cement giant Cemex, construction king ICA and
Homex, the popular developer of working and middle-class homes in Ciudad
Juarez and elsewhere in the country.

On a recent visit to Ciudad Juarez, Gustavo Enrique Madero, coordinator of
the conservative National Action Party (PAN) in the Mexican Senate,
admitted he was chilled by talk comparing the current economic scene with
1929.

"I believe the crisis in the US could favor Obama," Madero added.

Already, three key Mexican economic sectors are experiencing repercussions
from the crisis on Wall Street and on Main Street USA- tourism, export
manufacturing and migrant remittances.

Hosting few foreigners overflowing with wads of cash like in the good old
days, tourist communities have been feeling the pinch for some time now.
Important international flights have been cancelled because of high fuel
costs, and some development projects put on hold. Originally scheduled to
begin service this year, a Spanish-owned cruise ship, "The Ocean Dreamer,"
postponed sailing the Mexican Pacific Riviera until next year.

In the state of Chihuahua alone, more than 26,000 jobs were lost in the
export-for-assembly sector since the first of the year, while auto exports
to the US decreased 2.4 percent during the first 8 months of the year.

"We are in a complicated stage in that the US market is falling 16.6
percent and that affects all of us who export to that country," said
Eduardo Solis Sanchez, president of the Mexican Automobile Industry
Association.

Budget and Taxation Secretary Agustin Carstens predicted last week that
the economic malaise in El Norte means that remittances from Mexican
migrants will decrease between 7 and 8 percent this year, adversely
impacting hundreds of thousands of Mexican families which depend on
dollars sent by relatives. Remittances brought $25 billion in income to
Mexico in 2007, but were already slowing down compared with past years.

Ironically, the best news dollar recipients have received in a good while
came this week when the peso lost value to the dollar. For much of 2008,
the dollar has bought far fewer pesos than in previous years.

Agreeing that the remittance and export sectors faced tough times, Bank of
Mexico President Guillermo Martinez still maintained that his country's
financial system is well-capitalized and unlikely to be as affected as the
remittance and export sectors.

The question of credit availability, however, is beginning to stir anxiety
in Mexico. Most Mexican banks are owned by foreign corporations which
could turn off or tighten up the money spigot. For instance,
Citigroup-owned Banamex is estimated to control nearly 30 percent of
consumer credit in Mexico.

Early this week, it was announced that Citigroup is gobbling up the
troubled Wachovia bank in the US for two billion dollars.

"To the extent that Citigroup needs capital, all of its branches and
entities that are scattered across the globe could obtain this capital and
have a direct impact on lending," observed Luis Garcia Pena, director of
the Investra Inteligencia Patrimonal economic analysis firm.

A high Citigroup official, meanwhile, raised another red flag about bad
Mexican credit card debts. Although the number of bad credit card debts in
Mexico officially stands at 6.6 percent, studies attributed to Banamex
have identified the six main banks in Mexico as holding an overdue credit
card debt portfolio of 16.2 percent. Banamex's own percentage of such bad
loans sits at 8.2 percent.

"We are still in a good position to correct it," said Manuel Medina Mora,
president of Citigroup for Mexico and Latin America. "It does not benefit
anyone in the country that the level of debt of many of our families and
individuals is high and causing them credit problems…"

According to the Bank of Mexico, 26 million credit cards are circulating
in Mexico; the country's bad credit card debts increased 53 percent during
the past year.

Mexico confronts still another potential problem with its oil exports.
Until now, high prices have helped stave off some effects of the US
slowdown on the Mexican economy, but sliding prices for crude spell
trouble for a country dependent on petroleum exports for nearly half its
social services budget.

As in the US, economic issues are taking front and center on the
political stage. Speaking to a large Mexico City rally against the
privatization of the national Pemex oil company on September 28, former
2006 presidential candidate Andres Manuel Lopez Obrador proposed an
emergency 10-point program. Drawn partly from his Alternative Project of
the Nation, Lopez Obrador called for spending $40 billion on emergency
public sector jobs, pensions for all senior citizens and more grants for
students, among other measures. Also, he proposed building three new
refineries to cut down on gasoline imports and save money.

The left opposition leader said his economic stimulus package could be
financed by re-shaping spending priorities in the Calderon
administration's current budget.

"It is undeniable that the economic situation of the country is in genuine
deterioration and if the direction is not corrected, the situation is
going to get worse and it will be the poor people who will be the most
impacted." Lopez Obrador contended. "All of us will suffer, though,
because in a society the destinies of some are tied to the destinies of
others,"

In a departure from past statements that there would be zero negotiation
with the political right, Lopez Obrador invited all the nation's political
actors to come together around a common rescue package. The former Mexico
City mayor, however, conditioned an agreement on the non-privatization of
Pemex.

Asked about Lopez Obrador's proposal, PAN Senate leader Madero said he was
grateful for the initiative but not the preconditions.

"I would like to respectfully tell Mr. Andres Manuel Lopez thanks for the
proposals, but it is not necessary to put conditions," Madero said.
"Dialogue is constructed in a situation of debate, and not by impositions
and restrictions for the dialogue.

In Mexico's executive branch of government, officials reaffirmed they were
prepared to weather any economic storm. "I have been instructed that we
should be on top of the markets and give them punctual follow-up, so as to
take pertinent measures if necessary," said Calderon cabinet official
Agustin Carstens.


Sources: Univision, September 30, 2008. El Diario de Juarez/El Universal,
September 30, 2008. International Herald Tribune/Associated Press,
September 30, 2008. El Sur, September 29, 2008. Article by Xavier Rosado.
El Universal, September 29 and 30, 2008. Articles by Ricardo Gomez,
editorial staff and the Notimex news agency. Lapolaka.com, September 27,
2008. La Voz de Nuevo Mexico/Agencia Reforma, September 26, 2008. La
Jornada, September 25, 26, 28, 29, 2008. Articles by Victor Ballinas,
Andrea Becerril, AFP and Notimex. El Diario de Juarez/Agencia Reforma,
September 22, 2008.


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