56301
Politics & Religion / stratfor
« on: October 20, 2008, 09:34:21 AM »
Mexico: Commercial Paper and a Tortured Budget
Stratfor Today » October 18, 2008 | 1555 GMT
ALFREDO ESTRELLA/AFP/Getty Images
Mexico’s 50-peso notesSummary
The security situation in Mexico has been dire for some time. Now the global financial crisis threatens to push the country into uncharted territory as the government struggles to prop up the economy while fighting a war against some of the wealthiest and most organized criminals in the world.
Analysis
The Mexican government issued $3.9 billion in guarantees for Mexican commercial paper Oct. 17, Reuters reported. The move follows failed attempts by the Mexican cement company Cemex and Mexican units of American automakers to issue some $76 million in bonds. These developments are a sign of troubled times as Mexico feels the effects of the global financial crisis. The Mexican government had already injected $8.3 billion into the markets to prop up the peso. Putting all this money forward will strain an already-tortured government budget that is dependent on a failing oil industry and must support a critical war against drug cartels.
The most vulnerable aspect of the Mexican economy is its exposure to the declining U.S. market — particularly in Mexico’s export sector. Over 80 percent of Mexico’s exports go to the United States, and the emerging U.S. recession is sure to throw this trade relationship into chaos.
Mexico is also heavily linked to the U.S. economy through remittances. Mexicans working in the United States send approximately $24.3 billion per year back home — or about 3 percent of the gross domestic product. Declines in reported remittance rates have already been reported throughout Central American states, which rely heavily on these wealth transfers. As the U.S. economy shrinks, and competition for low-wage positions increases, illegal immigrants will be pushed out of the job market, and remittances to Mexico will decline even further.
Finally, Mexico is highly exposed to the financial crisis because of the shrinking pool of global credit and the growing number of nervous investors. On the one hand, this has caused a rapid devaluation of the Mexican peso as investors rapidly pull capital from third-world markets and dump it into safer markets (i.e., the U.S. dollar). On the other hand, we have seen the results of a rapidly shrinking pool of international credit as wealth has disappeared, banks have stopped lending and investors have panicked.
This has manifested itself in Cemex’s inability to issue corporate paper, which has been a serious cause for concern in Mexican business circles. Mexico’s banks are particularly vulnerable to shrinking global capital. About 80 percent of its banking sector is controlled by foreign entities, which means that 80 percent of domestic credit is subject to the whims of the international credit pool. Any serious threat to such a large portion of the banking sector could cause a collapse of the banking system.
But the economic situation is not the only threat to Mexico’s stability. Mexico is deeply embroiled in a war against violent drug cartels that control substantial portions of the country. The death toll in 2008 alone has risen to over 3,100 and appears likely to hit 4,000 by the end of the year. And the war is not free. The government’s ability to respond effectively to an economic crisis while funding a massive military and law enforcement effort is low — and the scarcity of funds could loosen public support for the cartel war as people look to solve their basic economic needs.
Moreover, a downturn in the economy will only exacerbate the security situation in Mexico. As jobs in the United States become scarce, many of the illegal Mexican migrant laborers there will be left jobless. Many will return to Mexico, where employment opportunities are no better. There is already some anecdotal evidence that reverse illegal migration into Mexico has become much more noticeable. The return to Mexico of thousands of unemployed young workers will flood the Mexican labor market.
There is no question that increased poverty and unemployment will contribute to a worsening security situation in Mexico. Ordinary criminal activities such as theft will likely increase, which could boost organized crime. Options in the legitimate economy will be few, but the underground economy — in drugs or other inelastic commodities — could flourish during a downturn. Indeed, a declining economy will make the cartels the only game in town, and rising unemployment will provide them with an excellent recruiting opportunity.
Stratfor Today » October 18, 2008 | 1555 GMT
ALFREDO ESTRELLA/AFP/Getty Images
Mexico’s 50-peso notesSummary
The security situation in Mexico has been dire for some time. Now the global financial crisis threatens to push the country into uncharted territory as the government struggles to prop up the economy while fighting a war against some of the wealthiest and most organized criminals in the world.
Analysis
The Mexican government issued $3.9 billion in guarantees for Mexican commercial paper Oct. 17, Reuters reported. The move follows failed attempts by the Mexican cement company Cemex and Mexican units of American automakers to issue some $76 million in bonds. These developments are a sign of troubled times as Mexico feels the effects of the global financial crisis. The Mexican government had already injected $8.3 billion into the markets to prop up the peso. Putting all this money forward will strain an already-tortured government budget that is dependent on a failing oil industry and must support a critical war against drug cartels.
The most vulnerable aspect of the Mexican economy is its exposure to the declining U.S. market — particularly in Mexico’s export sector. Over 80 percent of Mexico’s exports go to the United States, and the emerging U.S. recession is sure to throw this trade relationship into chaos.
Mexico is also heavily linked to the U.S. economy through remittances. Mexicans working in the United States send approximately $24.3 billion per year back home — or about 3 percent of the gross domestic product. Declines in reported remittance rates have already been reported throughout Central American states, which rely heavily on these wealth transfers. As the U.S. economy shrinks, and competition for low-wage positions increases, illegal immigrants will be pushed out of the job market, and remittances to Mexico will decline even further.
Finally, Mexico is highly exposed to the financial crisis because of the shrinking pool of global credit and the growing number of nervous investors. On the one hand, this has caused a rapid devaluation of the Mexican peso as investors rapidly pull capital from third-world markets and dump it into safer markets (i.e., the U.S. dollar). On the other hand, we have seen the results of a rapidly shrinking pool of international credit as wealth has disappeared, banks have stopped lending and investors have panicked.
This has manifested itself in Cemex’s inability to issue corporate paper, which has been a serious cause for concern in Mexican business circles. Mexico’s banks are particularly vulnerable to shrinking global capital. About 80 percent of its banking sector is controlled by foreign entities, which means that 80 percent of domestic credit is subject to the whims of the international credit pool. Any serious threat to such a large portion of the banking sector could cause a collapse of the banking system.
But the economic situation is not the only threat to Mexico’s stability. Mexico is deeply embroiled in a war against violent drug cartels that control substantial portions of the country. The death toll in 2008 alone has risen to over 3,100 and appears likely to hit 4,000 by the end of the year. And the war is not free. The government’s ability to respond effectively to an economic crisis while funding a massive military and law enforcement effort is low — and the scarcity of funds could loosen public support for the cartel war as people look to solve their basic economic needs.
Moreover, a downturn in the economy will only exacerbate the security situation in Mexico. As jobs in the United States become scarce, many of the illegal Mexican migrant laborers there will be left jobless. Many will return to Mexico, where employment opportunities are no better. There is already some anecdotal evidence that reverse illegal migration into Mexico has become much more noticeable. The return to Mexico of thousands of unemployed young workers will flood the Mexican labor market.
There is no question that increased poverty and unemployment will contribute to a worsening security situation in Mexico. Ordinary criminal activities such as theft will likely increase, which could boost organized crime. Options in the legitimate economy will be few, but the underground economy — in drugs or other inelastic commodities — could flourish during a downturn. Indeed, a declining economy will make the cartels the only game in town, and rising unemployment will provide them with an excellent recruiting opportunity.