MEXICO IN GRIP OF DEEPEST RECESSION / THE FINANCIAL TIMES

Mexico in grip of deepest recession

By Ronald Buchanan in Mexico City

Published: August 9 2009 19:30

Before heading off to Guadalajara for talks on Monday with his two “amigos” from Canada and Mexico, President Barack Obama blamed the weakened states of their economies as the reason for his promised reworking of the North American Free Trade Agreement being taken off the table.

“In terms of refining some of our agreements, that is not where everyone’s focus is right now because we are in the middle of a very difficult economic situation,” Mr Obama said. Mexico is beset by its deepest recession of modern times.

Gross domestic product in the second quarter is expected to fall by 10.4 per cent year-on-year, following a first-quarter drop of 8.2 per cent, according to the finance ministry.

The International Monetary Fund predicts that, for the full year, the economy will fall by 7.3 per cent, the worst performance in Latin America – worse than in the 1995 “tequila crisis” or the debt crisis of 1982.

Claudio Loser, former head of the IMF’s western hemisphere department, and now a visiting senior fellow at the Washington-based Inter-American Dialogue, is so downbeat about the Mexican economy that he criticises last week’s decision by Moody’s, the rating agency, not to downgrade the country from its current Baa1 investment-grade status. “The economy has serious problems, and these are now not reflected in the current rating.”

One of those problems is Mexico’s dependence on the US economy for foreign trade. In spite of efforts to diversify, Mexico relies on the US for 80 per cent of its exports.

Most of the exports are goods, such as car parts, that feed into the traumatised manufacturing production sector in the US. Little wonder, then, that Mexico’s exports, which account for at least one-fifth of the country’s GDP, have been falling at rates higher than 30 per cent year-on-year.

Tensions hang over summit

North American leaders meet Monday in a summit overshadowed by Mexico’s battle with drug cartels, fears about swine flu and by trade tensions between all three nations, writes Daniel Dombey in Washington.

US president Barack Obama, who was scheduled to arrive in the Mexican city of Guadalajara last night, is meeting Stephen Harper, Canadian prime minister, and Felipe Calderón, Mexican president, in an annual summit that US officials say will focus on economic recovery, “citizen safety and security” and climate change.

The rubric of “safety and security” encompasses not just Mexico’s fight against drug cartels, but all three countries’ response to the H1N1 flu virus.

Last week Patrick Leahy, chairman of the powerful Senate subcommittee on foreign spending, said he was in effect blocking US aid worth up to $100m until Mexico answered human rights concerns about its police and military’s conduct in the drugs battle.

“The military strategy alone is not a solution in the long term nor is it yet clear what it can achieve in the short term,” he said.

During his election campaign, Felipe Calderón promised to set Mexico on the road to rapid economic growth by introducing sweeping fiscal, energy and labour reforms. Halfway through his six-year term as president, his only unquestioned success has been a radical change to state-sector pensions.

Timid fiscal and energy reforms have failed to raise the government’s tax take, the lowest in the Organisation for Economic Co-operation and Development, or halt a seemingly inexorable decline in oil output, which accounts for about one third of federal income.

The future of Mr Calderón’s reform agenda was cast in further doubt when his National Action party lost its majority in the lower house of Congress to the Institutional Revolutionary Party (PRI) in July’s mid-term elections.

With the presidency in its sights for 2012, the PRI is not expected to back fiscal reform and has ruled out private-sector participation in oil.

Yet when the year began, Mexico’s address to the World Economic Forum’s Davos meeting in January was entitled “Riders on the storm: Mexico overcoming the crisis.”

León Bendesky, a partner in the Mexico City-based Sirem economic consultancy, bemoans the absence of a clear plan to tackle the crisis: “You may or may not like what Mr Obama is doing, but at least he’s doing something.”

This recession is different, says Rogelio Ramírez de la O, head of Ecanal, a Mexican business consultancy. Inflation was rampant in previous crises, so wages were slashed in real terms but jobs were preserved under the old Mexican adage of “adding more water to the bean-pot”.

But with inflation now under control, that principle no longer applies, says Mr Ramírez. “I see about 2m jobs being lost between the beginning of 2008 and early next year,” he predicts. “This is something that Mexico has never experienced on this scale.”

Copyright The Financial Times Limited 2009.