Mexico's Balance of Payments Problem

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Mini Case for Chapter 3
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Mexico’s Balance-of-Payments Problem|

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Chapter 3 Mini-Case: Mexico’s Balance of Payments Problem
The term balance of payments refers to the accounting record of the country’s monetary transaction with the rest of the world. These transactions include the exports and imports of goods and services of the country, financial capital and financial transfers. The balance of payment record is a way to allow countries to recognize potential business partners for trade and to evaluate a country’s performance in the global economic competition. . In this mini-case we will look into 4 key aspects such as Mexico’s key economic indicators, the causes of the country’s balance of payment problems, policies in which Mexico could have implemented in order to avoid the problems and the lessons in which developing countries can learn from this incident. Through these 4 key aspects, the reader would be able to gain a better understanding about Balance of Payments concepts. Trend in Mexico’s key economic indicators: balance of payments, exchange rate, and foreign reserve holdings. Yr| Balance

of Trade| Current
Account| Direct
Foreign
Investment| Portfolio
Investment| Gross
International
Reserves| Total
External
Debt| Public
Sector
External
Debt| Interest
Payments|
1994| -18.5| -29.7| 6.1| 8.2| 6.1| 142.2| 85.4| 11.8| 1995| 7.1| -1.6| 15.7| -9.7| 15.7| 169.9| 100.9| 13.6|

Mexico’s current account deficit was continuously increased from $5 billion to $25 billion during the period 1988 through mid-1994. In late 1994, it became $30 billion. Prior to 1994, Mexico experienced sharp rising trade deficits starting from 1989 and caused the current account to sink into deficit, ballooning from a deficit of US$4 billion in 1989 to US$29 billion in 1994. In the period between December 1988 and November 1993 the government of Mexico reported that cumulative foreign investments was US$ 34 billion, which was outperformed government’s original target by 40%. In the 7 years from 1986 to 1993 the United States direct investment in Mexico more than doubled to US$23 billion and United State-based multinationals had invested for than 60% of the foreign direct investments in Mexico at the end of 1992. The foreign investments in Mexico were huge as 29 per cent of Mexican stocks and 74 per cent of bonds were held by foreign investors. Nonetheless, there was a dramatic improvement in Mexico's trade balance between 1994 and 1995 which enabled the current-account deficit to fall to US$654 million in 1995 and to be nearly eliminated by early 1996. This development increased the likelihood that the new peso would be strengthened by capital inflows, especially portfolio investment. We now shift our attention to the capital account during the period prior to 1994. In the period between December 1988 and November 1993 the government of Mexico reported that cumulative foreign investments was US$ 34 billion, which was outperformed government’s original target by 40%. Mexico's capital account registered a US$15 billion surplus in 1995, mainly because of the country's huge increase in borrowing. Overall, we could see a negative balance-of-payment in 1994 and it only improved to an amount slightly positive in 1995.

Furthermore, the value of the peso per 1 dollar is depreciated to 5.3 compared to 3.1 in 1993. In 1995, it became 7.9 per US dollar. Also, Mexico’s foreign debt was $140 billion in 1994 so that it caused depletion of foreign reserve holdings in Mexico. In addition, in 1994, unemployment rate of Mexico dramatically rose from 2.7 % (1991) to 6.4% due to the severe inflation and downsize of its GDP. Finally, we will look at the changes in the foreign reserve holdings. Between the periods from 1990 to 1993, the foreign reserve holdings were all in double digits of billions of amount. During the period of crisis, however, we could see that the gross international reserves...
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