The Mexican Economy: Following Closely in Its Neighbor's Footsteps
The pessimistic economic forecasts about Mexico have proven to be right. Day by day, the Latin American nation is increasingly affected by the global economic crisis. Its GDP for the first quarter of 2009 fell 8.2% from last year, according to INEGI, the National Institute of Statistics and Geography. Agustin Carstens, Mexico’s finance minister, recently declared that the government has adjusted its expectations for 2009. It now predicts that GDP will contract by 5.5%, compared with the previous estimate of 4%.

This is the worst slide in the Mexican economy since 1995, when the GDP collapsed by 9.2% amid the “tequila crisis.” That crisis was set off at the end of 1994, when the Mexican government made the decision to devalue its currency, leading to capital flight and the virtual suspension of voluntary external financing. The United States then made $20 billion in funding available to Mexico, and by the end of 1995, the situation had already normalized.

According to Wharton management professor Mauro Guillén, “Mexico’s problem is its overdependence on the North American market. Almost 90% of its exports are sent to the [United States].” Nevertheless, he adds, “although the situation is very delicate, at least the banks don’t have problems. This is the big difference from 1994-1995.” Juan Carlos Martínez Lázaro, a professor at the IE Business School, notes that the swine flu outbreak has aggravated a decline that was already going to be very significant. “There are some studies estimating that the fall [in GDP] will be closer to 7%,” he says. “There is going to be a very strong contraction in the Mexican economy.”

However, Martínez Lázaro adds that there is one upside to Mexico’s co-dependent relationship with the U.S.  “When the economy of the U.S. begins to recover, Mexico will be the first nation in Latin America to emerge from the crisis.”

Read more about Mexico’s economic travails in the current issue of Universia Knowledge at Wharton.