From 2016 to 2019 the Mexican Peso had traded around 19 to US$1 but in 2020 it has fallen to 24 Pesos to US1$. Prior to the Tequila Crisis in 1995 the Peso was about 3 to US$1 but devalued by about 50% due to that crisis to about 6 to US$1. Since 1995 it has been devaluing steadily relative to the US$ mostly due to the inflation differential between Mexico and the US. The sharp devaluation in 2020 may be attributed to the uncertainty surronding the Covid 19 crisis and how it will impact on developing countries.

The Mexican economy has changed considerably since the Tequila Crisis in 1995. Up to the end of the 1970’s Mexico had followed policies of industrialisation though the substition of imports. That is, it exported agricultural and primary products and used the hard currency to import machinery and other imports required by industry. It’s industrial sector expanded continuously over several decades but then hit a wall due to the limits of the internal market and it’s output was not competitive internationally.

Rather than addressing the competitive issues facing it’s industry Mexico borrowed on international capital markets in the 1970’s until in 1982 it declared it’s inability to service it’s debts triggering the Latin American Debt Crisis of the 1980’s. The 1980’s were the lost decade in Mexico and throughout Latin America as Governments were forced into retrenchment and cutbacks. During this period the maquiladora industry started to develope along the US border under which companies took advantage of the differential in labour costs with the US to locate assembly plants in Mexico.

In 1990 President Salinas de Gortari started negotiations for a fully fledged Free Trade Agreement with the US and Canada and NAFTA came into force in January 1994. The Tequila Crisis of 1995 was mostly a liquidity crisis and the economy was growing again within the year. It was therefore fundamentally different from the 1982 crisis. Since NAFTA has come into force Mexican industry has been transformed. All sectors are exposed to competition from throughout the NAFTA area and this has had both positive and negative effects.

The motor industry used to produce out of date models (such as the VW Beatle) for the domestic market but now produces up to date models for sale throughout North America. In addition to the assembly of finished vehicles there has been widespread investment throughout the supply chain. Mexico is now one of the world’s major motor regions and output exceeds France and Italy combined.

On the other hand the agricultural sector has been exposed to competition from super efficient producers north of the border and this has resulted in many farming communities being driven out of business with peasants forced to migrate to the margins of the big cities.

Thus Mexico has evolved a type of dual economy with one part internationally competitive, and the other part in the domestic market outside of the formal economy. Informal employment still accounts for the majority of all employment in Mexico. That said there is also considerable progress in Mexico’s evolution and competence as a state over the same period. Whereas previously oil revenues had accounted for the majority of Government income there is now considerable diversification of revenue by source which makes the economy more resilient to shocks. The fiscal deficit and state indebtedness are manageable. The export sector has been completely transformed and, unique in Latin America, it’s profile ressembles that of an advanced country with a predominence of industrial exports.

There are numerous challenges in the domestic economy which include expanding the formal economy to include more workers and businesses. The number of workers in sured employment typically grows by about 700k a year. Another issue is replacing self- constructed dwellings with apartment construction in the cities. Then there is the expansion of universal healthcare (the seguro popular) and education programmes. There are a number of monopolies that need to be broken up and there is a degree of over-unionisation in the State sector.

The Covid 19 crisis poses considerable challenges for Mexico since it’s exports go overwhelmingly to the US and Canada and any lasting downturn there will be felt throughout the supply chains in Mexico.

Latin Report is not legally responsible for any decisions taken based on the views offered here or in our Reports.

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