As US economy struggles, Mexico feels the pressure

The US recession and the swine flu outbreak have delivered a one-two punch to Mexico's sources of revenue, threatening gains against poverty made in the past two decades.

It has been nearly a month since Alonso Salvador Aguirre brought home a paycheck. A cook at a Mexico City restaurant, Mr. Aguirre was one of thousands left jobless after eateries and bars were closed – some for good – with the outbreak of swine flu.

He is looking for a new job, but has found only minimum-wage opportunities that pay about $4.16 a day. Credit-card charges are piling up, he says. “It’s difficult, because a lot of companies are closing down restaurants,” says Aguirre.

Late last year, many economists agreed that the impact from the US crisis would be relatively mild in Mexico, which has received high marks on its economic policies over the past decade and is considered a model for emerging markets.

But a series of external shocks threaten to undo key gains on poverty. In January, the Finance Ministry predicted gross domestic product for 2009 would be flat. In late May, it was downgraded to a 5.5 percent dip.

Oil, remittances, and tourism are Mexico’s top sources of foreign revenue. All have been battered. Factory workers, idled by a dampened US demand, are being fired. Unemployment jumped in April to a 13-year high, 5.25 percent.

“Mexico has not grown like gangbusters in the last decade,” says Stephen Haber, a senior fellow at the Hoover Institution at Stanford University in California. But, he says, smart fiscal and monetary policies and a commitment to trade and investment have slowly built a middle class, many of whom will be hit first. “They are having a doozy of a recession. They are not going to recover until we do,” he says.

Mexico feels the pain from US recession

Of all the countries in Latin America, Mexico is among the hardest hit by woes in the United States. While other major economies, such as Brazil, are more diversified, more than 80 percent of Mexican exports head north. Mexican industrial output fell 9.9 percent in the first quarter of 2009, with automakers and factories laying off thousands. Exports account for close to one-quarter of GDP.

Joost Draaisma, senior economist for Mexico at the World Bank, says Mexico lost 400,000 jobs in the first quarter, mostly due to manufacturing layoffs. “We would think that at current levels of contraction, that could easily rise to a million [fewer] jobs toward the end of the year,” he says.

More job losses are imminent as Mexico recovers from swine flu fallout. The government estimates that the forced closures of schools, restaurants, gyms, and theaters, as well as lost tourism dollars, will shave $2.2 billion off the nation’s GDP this year.

‘We have to pick ourselves up’

Enrique Burgos Piña, a father of three, has worked for 30 years taking tourists to archaeological sites and colonial towns in Mexico’s heartland. But he hasn’t worked in a month. “I have a wife and children and I have to provide for them,” he says. “They’re worried, but we know we have a strong country. It may take a while, but we have to pick ourselves up.”

He might be more optimistic than most. After cruises and airliners canceled routes to Mexico, and tourists opted for other destinations, Tourism Minister Rodolfo Elizondo estimated revenue would fall by more than 40 percent in 2009. The government has launched a $90 million campaign to lure visitors – already deterred by gruesome drug violence – back to the beaches and ancient archaeological areas. “We are working together and feel optimistic,” says Noe Elizarraras Rios, president of the Mexican association of travel agencies.

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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