Mexico Feeling Effects of Slowing U.S. Economy

Signs of a Mexican economic slowdown--and of the U.S. deceleration’s impact on its southern neighbor--spread as Mexico’s December trade deficit hit its highest level since the days of the peso crisis.

The trade shortfall of $1.48 billion, according to preliminary estimates Monday, was the highest since December 1994, the month that a peso devaluation set off an economic shock wave--known as the “tequila effect”--that reverberated throughout the world’s emerging markets.

Along with evaporating foreign reserves and a mountain of short-term debt, the trade deficit was one of the principal reasons Mexico’s economy suffered a meltdown that only a U.S.-sponsored $50-billion rescue package could fix.

Mexico’s economy is now on much sounder footing, with short-term debt down, the peso floating freely and investors benefiting from greater transparency in government policy. But the big imbalance caused economists to warn that Mexico is now audibly coughing from its northerly neighbor’s economic flu.

Mexico’s economy is more dependent on the United States than ever. Its economic recovery and growth owes much to the boom in the U.S., where demand for Mexican-made products has created hundreds of thousands of Mexican jobs.

Mexico’s trade deficit for all of 2000 was $8.02 billion, 44% higher than in 1999, a figure inflated both by a year-end drop-off in oil revenue and a sharp decline in growth of exports to the U.S., including precipitous drops in auto parts exports.

Both DaimlerChrysler and Ford temporarily shut Mexican plants in response to declining demand in the U.S., where more than two-thirds of Mexico’s exports are shipped.

At the same time that Mexico’s exports to the United States are slowing markedly, Mexicans’ taste for imported goods is growing at an almost insatiable rate, said Alfredo Coutino, director of macroeconomic analysis at Ciemex-Wefa Inc., a Philadelphia-based research firm.

Domestic private consumption is growing at 10%, the highest rate in a decade and much faster than the economy’s growth rate of 7%. That imbalance means imports must feed the internal demand for goods, adding to the trade imbalance.

“If national companies cannot produce at the same velocity that workers demand goods, they need to import them from outside,” Coutino said.

Their appetite has been fed by a strong peso, but its value has weakened somewhat in recent weeks. Most economists expect to see the peso decline from 9.78 to the dollar, its close Tuesday, to as many as 11 to the dollar, by year-end, which reduces the purchasing power of Mexicans.

Until now, an immense tide of foreign investment in Mexico has provided the cash to finance its trade deficit, said Jonathan Heath, a Mexico City economist with LatinSource, a network of independent economists throughout Latin America.

But Heath and others worry that direct foreign investment in Mexico is expected to fall to $11 billion this year from $13 billion in 2000, another reflection of the U.S. slowdown. Growth in Mexican exports will slow to 8% or 9% from last year’s 15%, meaning another source of dollars is shrinking.

“You had sufficient capital flows to finance deficit, but that story will change this year,” Heath said.

After torrid 7% growth in 2000, Mexico’s economy will slow to a mere 3% to 4% pace in 2001, said Adalberto Gonzalez, a consulting partner at Gea, a Mexico City economics firm. Oil export revenue will decline to $14.4 billion this year from last year’s $16.6 billion because of lower oil prices, he predicted.

Mexico’s central bank has begun taking steps to slow domestic consumption--and thus demand for imports--by raising interest rates. The benchmark 28-day Treasury bill is now at 18.22%, compared with 12.9% in April.

Mexico’s most widely followed stock index closed at 6,377.94, up 1.7%, and has been climbing since late December, returning to its level of early November.