As US economy struggles, Mexico feels the pressure

At the height of the swine flu crisis, centered in Mexico City, Mr. Elizarraras Rios says bookings plummeted by 95 percent, and only now are starting to recover. He estimated that 30,000 employees lost their jobs.

Remittances drop as US crisis grows

Low wages and unemployment have long been buffered by funds sent from Mexicans living abroad, but the US crisis is shrinking remittances. A recent study by the Inter-American Dialogue in Washington shows that, in 2009, immigrants from Latin America and the Caribbean will send $64 billion, down from $69 billion in 2008.

Perhaps no place will be more affected than Mexico, where remittances are the second-largest source of foreign income. Mexico’s central bank recently reported that money sent from abroad fell by 19 percent in April – compared with April 2008 – to $1.78 billion. The numbers of remittances have dropped, as has the average amount sent per transfer, from $354 to $324.

The devaluation of the peso, to 13 to the dollar, has made imports more costly. But Heliodoro Gil Corona, an economist at Michoacán’s School of Economics, says a bright note is that a fall in remittances has been, for now, offset by a stronger dollar.

Mr. Gil Corona points to stresses, too. According to the World Bank, about 5 percent of the population lived on less than $2 a day in 2006, a sharp drop from 17 percent nearly two decades ago. “The social fabric is at risk,” he says. “More are getting involved in the informal market, some even ... in things like prostitution.”

Most say Mexico is in better shape now than during its Tequila Crisis of 1994, when poorly regulated banks and bad debt caused deep recession and a currency slide.

Government spending limited as oil prices fall

President Felipe Calderón has responded with more infrastructure spending and business tax breaks and credits. This has boosted his popularity, but the economy is one reason that the opposition Revolutionary Institutional Party is ahead of Mr. Calderón’s National Action Party in upcoming midterm elections, says Mexico City pollster Jorge Buendia.

“The economy is certainly hurting the support for the incumbent party. The impact is not as big as we expected, given the sorry state of the economy,” he says. That, he adds, is because the federal government has set the agenda: “Everything is focused on the fight against drug dealers.”

Yet the government cannot maintain its spending without fiscal reforms. Mexico depends heavily on oil-tax revenue, which funds close to 40 percent of its budget. As oil prices have fallen, so has production.

A reform approved in 2007 may increase low levels of non-oil tax collection, but analysts say more must be done to ensure enough money for brisk spending on everything from antipoverty programs to education and infrastructure.

Jonathan Heath, head economist for Latin America and the Caribbean with HSBC, says Mexico’s low non-oil tax income “is eventually going to catch up to us.”

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