Mexico's economic fears

Previous elections have led to economic crises

By BBC News Online's Steve Schifferes

On the surface, the Mexican economy is in a very healthy state.

The economy is growing at an annual rate of 7.9%, unemployment is at a 15-year low, and the inflation rate has dropped below 10% for the first time since 1994.

President Zedillo was forced to devalue in his first weeks in office

But many businessmen are nervous about what will happen after Mexico's presidential election.

In the past, the ruling PRI party has accelerated the economy too fast in order to gain re-election, often pushing the country into crisis when the voting was over.

"I believe that the current growth .. is not sustainable," said Alberto Fernandez Garza, head of the Mexican Employers Federation.

In 1994, the current president, Ernesto Zedillo, was forced to devalue the Mexican currency, the peso, shortly after taking office.

The floating peso promptly plunged on foreign currency markets, threatening to derail the Mexican economy.

Mexico was forced to turn to the United States and the IMF for a $50bn bail-out package.

A similar debt crisis in 1982 led to Mexico suspending its payments to foreign banks and another retrenchment.

According to most analysts, the income of the poor in Mexico is lower in real terms than it was before those crises.

Foreign investors wary

Now, foreign investors are getting nervous about Mexico's economic prospects, selling the peso and weakening it by about 10% in the past month to around 10 pesos to the dollar.

Foreigners have invested heavily in the Mexican stock market

Even the re-rating of the Mexican government debt has failed to reassure investors, who have billions of dollars invested in Mexican stocks.

Mexico's objective situation is far better than in 1994, with little short-term foreign debt and strong currency reserves of $34bn.

But investors know that a panic in financial markets can easily overwhelm any country's currency.

President Zedillo went to Wall Street earlier in the month to reassure investors and assert that stability and openness would continue whichever party won the election.

But even if Mexico gets through the immediate crisis, there are several longer term problems facing the economy.

OIl shock

Mexico's economy has been buoyed by two exceptional factors that cannot be counted on to continue forever.

In the first place, the recovery in the oil price from around $10 a barrel to $30 a barrel has given an enormous boost to the government's revenues.

Rural poverty and unrest remain despite the economic boom

The largely state-owned oil industry is Mexico's largest export, and provided much needed support for the hard-pressed budget. Government spending increased 15% in the first three months of the year.

However Mexico, although not a member of OPEC, has joined other oil-exporting countries in increasing output this summer in order to stabilise prices.

If oil prices were to fall again, the government would have to curb its spending or risk running a huge budget deficit.

"With oil prices running so high, Mexico should be running a surplus," said Walter Molano of BCP Securities. "They should be saving for when prices drop."

Dependence on US boom

Mexico "so far from God, so near to the United States" has always been closely been tied to the US economy.

Mexican exports mainly go the USA

But since it joined the North American Free Trade Area (NAFTA) that integration has accelerated.

Over 90% of Mexico's exports go to the United States, and any slowdown in the booming US economy would have serious repercussions for Mexico. Likewise, 60% of foreign investment comes from US investors.

With the US central bank, the Fed, having risen interest rate sharply in order to cool down US growth, a hard landing would severely impact Mexican exports, Mexican workers in the US, and US investment in Mexico.