“Mexico’s Balance-of-Payments Problem”
Mini Case “Mexico’s Balance-of-Payments Problem”
In December of 1994 Mexico entered its second major financial crisis in as many decades, requiring painful economic adjustment similar to the debt crisis of 1982.
After nearly a decade of stagnant economic activity and high inflation in Mexico, the Mexican government liberalized the trade sector in 1985, adopted an economic stabilization plan at the end of 1987, and gradually introduced market-oriented institutions. Those reforms led to the resumption of economic growth, which averaged 3.1 percent per year between 1989 and 1994.
In 1993 inflation was brought down to single-digit levels for the first time in more than two decades. As its economic reforms advanced, Mexico began to attract more foreign investment, a development helped by the absence of major restrictions on capital inflows, especially in the context of low U.S. interest rates. Indeed, large capital inflows began in 1990, when a successful foreign- debt renegotiation was formalized. The devaluation of the peso in December 1994 put an abrupt end to these capital inflows and precipitated the financial crisis. • Development of the Crisis
In February of 1994, the reserves of Mexico were of 29.000 million dollars, but for December of that same year they were reduced to 6.000 million dollars and at the time of making the decision to devaluate (20 of December of 1994) they only ascended to 3.500 million dollars. To this the deficit in the current account is due to add that in 1994 reached, approximately, 25.500 million dollars that are equivalent to 8% of the Mexican GDP. In December of 1994 Ernesto Zedillo arrived as the president of Mexico, finding very complicated economic and political a situation, which was generating a speculative process between the national and foreign Investment.
Once in the power Ernesto Zedillo, and before the economic situation of the country, the Mexican government decided to make a steep devaluation of the weight. Zedillo
In December of 1994 Mexico entered its second major financial crisis in as many decades, requiring painful economic adjustment similar to the debt crisis of 1982.
After nearly a decade of stagnant economic activity and high inflation in Mexico, the Mexican government liberalized the trade sector in 1985, adopted an economic stabilization plan at the end of 1987, and gradually introduced market-oriented institutions. Those reforms led to the resumption of economic growth, which averaged 3.1 percent per year between 1989 and 1994.
In 1993 inflation was brought down to single-digit levels for the first time in more than two decades. As its economic reforms advanced, Mexico began to attract more foreign investment, a development helped by the absence of major restrictions on capital inflows, especially in the context of low U.S. interest rates. Indeed, large capital inflows began in 1990, when a successful foreign- debt renegotiation was formalized. The devaluation of the peso in December 1994 put an abrupt end to these capital inflows and precipitated the financial crisis. • Development of the Crisis
In February of 1994, the reserves of Mexico were of 29.000 million dollars, but for December of that same year they were reduced to 6.000 million dollars and at the time of making the decision to devaluate (20 of December of 1994) they only ascended to 3.500 million dollars. To this the deficit in the current account is due to add that in 1994 reached, approximately, 25.500 million dollars that are equivalent to 8% of the Mexican GDP. In December of 1994 Ernesto Zedillo arrived as the president of Mexico, finding very complicated economic and political a situation, which was generating a speculative process between the national and foreign Investment.
Once in the power Ernesto Zedillo, and before the economic situation of the country, the Mexican government decided to make a steep devaluation of the weight. Zedillo