In the midst of the depreciation and the fall of the petrol prices, the inability on behalf of the government overshadows any growth perspective: the plan in three phases by the Ministry of Finance and Public Credit (SHCP) and the Bank of Mexico (Banxico) provokes the recessive wave.


In the point of view of many capitalists, the global economy started off with the wrong foot in 2016: The International Monetary Fund (IMF) announced a new budget cut of 2 tenths under the estimated Gross Domestic Product (GDP) growth level of the world economy, that fell from 3.6 per cent to 3.4 percent. According to the IMF, the risks have been going down as a result of the global adjustments in progress: the perspectives of a progressive rise of the interest rates of the United States, the rebalancing of the Chinese economy, and the fall of the prices of the commodities. “Definitively there is much uncertainty in the air, and I believe that this contributes to the volatility”, affirmed Maurice Obstfeld, economic advisor and Director of Studies of the IMF.

Fact is that 8 years after of the bankruptcy of Lehman Brothers, the industrialized countries still haven’t recovered the levels of productivity and employment of before the crisis. Nevertheless the institutions such as the IMF, the World Bank and the Organization for Economic Co-operation and Development (OECD) insist that the perspectives of recovery are not entirely negative for the global economy, there are those who sustain that in the contrary the situation has become more chaotic: the market euphoria is fading away while the downfall of the commodities prices deepens further on one side, and the fall of the profitability of companies linked to the energy sector. On the other hand the likelihood that the low inflation of the industrialized countries raised transforms into deflation (fall of the prices).

“The economic recovery started in 2009 failed to sustain itself. The general framework of the global economy is characterized halfway by a productive stalemate, the new forms of financial bubbles and the strengthening of new deflationary tendencies”, explains Arturo Guillén, professor and researcher at the Economy Department of the Autonomous Metropolitan University, Iztapalapa Campus (UAM-1).

The recessive tendencies do not weight equally on every region of the world. The economic cycle decreasing does not have the same strength of industrialized countries (the United States, the Eurozone, the United Kingdom, Japan) than in the emerging ones (Latin America and the Caribbean, Africa, Middle East, Asia-Pacific). Concerning the first ones it is evident that the governments of the industrialized nations fear to fall back into recession.

Yet despite having launched a big variety of fiscal and monetary stimuli in the last years, they have not achieved the growth rate of their GDP to expand further than 3 per cent, neither have they managed to scare away the ghost of the deflation (fall of prices). Now the panorama has become even dimmer. As it seems in the last days the actions of the big investment banks (Goldman Sachs, JP Morgan Chase, Deutsche Bank, etc.) have collapsed, unleashing panic among the investors that operate in the stock exchanges, and hence have spread the fear that the new world crisis will burst in colossal proportions.

banxico-03On the other hand after being known that the economy of the United States presents again signs of weakness (deceleration of the manufacturing activity and the successive drops of the stock exchange of New York), the system of the Federal Reserve (Fed) of the United States not only left untouched the federal funds rates in the past month of January, but also that its president Janet Yellen declared recently that the Federal Open Market Committee (FOMC) is even exploring the possibility of bring the referential interest rates to the negative ground (following the example of the European Central Bank, the Central Bank of Sweden and the Bank of Japan), which is to punish the banks that insist to maintain the treasured money through the collection of an interest rate, a measure that would aim to compel them to release the granting of credits to the productive activity.

The emerging countries on their side, have been the most hit along these last 2 years and a half by the monetary restriction policies of the Fed, especially in the region of Latin America and the Caribbean. While last year the GDP of the Latin-American region declined by 0.4 per cent, for this year an expansion of barely 0.2 per cent is expected, according to the estimates of the Economic Commission for Latin America and the Caribbean (ECLAC). Equally the stock exchanges of the region have lost all impulse, while the currencies also have lost strength before the dollar. Since 2009 the central banks of the industrialized countries started to overflow the world with cheap credit.

The Fed, the European Central Bank, the Bank of Japan, the Bank of England, among others have injected around 15 billion dollars of monetary liquidity (according to the estimates of the investment funds Elliot Management, directed by Paul Singer), hence they produced great distortions in the prices of financial assets of equities (assets, real estate, commodities, etc.). This process was possible with the rise of the prices of raw materials (commodities), the appreciation of the exchange rates, as well as the market euphoria in most of the countries of Latin America and the Caribbean.

However the “non-conventional” monetary policy (simultaneous purchases of US Treasury Bonds and mortgage-backed real estate assets) applied by the former president of the Fed, Ben Bernanke, has reached an end. Hence the money started to come back home, to the hands of their true owners. “Since the Fed announced in May 2014 the end of its quantitative easing program, and as a result the normalization of the monetary policy, a reorientation of the external flows of capital has been registered: these started to retreat off the emerging countries to transfer them to safer markets, overwhelmingly to the United States”, claims Arturo Guillén, author of La crisis global en su laberinto (The global crisis in its labyrinth), a book recently released in a co-edition by UAM-1 and Biblioteca Nueva Publisher, based in Madrid. It happens that the capital exit off emerging countries resulted worse than expected. According to the estimates of the International Institute of Finance (IFF), during 2015 the net outflow of capital off the emerging economies reached a record of 735 billion dollars, way above the first estimate of October of 540 billion dollars. It is the most dramatic outflow since the Asian crisis of the late 1990’s. “This is really an unprecedented event, that we have been watching the flight of emerging markets in this scale”, states Charles Collyns, managing Director and chief economist of the IIF.

The mayor outflow of capitals among emerging countries took place in China, where it reached an amount of almost 60 billion dollars. As it seems a huge number of operators are discarding of their investments in yuan. Also some tycoons of the finance such as George Soros suspect that the descend of the economy of China will be violent, after publishing the data that in the past year the GDP had barely expanded by 6.9 per cent, the lowest growth rate in the last 25 years.

The war of investors of Wall Street against the yuan seems to be limitless: just in January the People’s Bank of China used over 100 billion dollars of its international reserves to stabilize the exchange rate of the threats of the speculators. The behavior of the Chinese economy has become the favorite target of the US-government to evade the own responsibility in the management of the crisis, and also in the main cause of the world financial turbulences, in the opinion of several members of the cabinet of Enrique Peña Nieto…

The Bank of Mexico warns of a new currency war

banxico-02The posture assumed by the Mexican government before the depreciation of the exchange rate has resulted above all contradictory. In a first moment the government argued that the downfall of the currency could be beneficial for the national economy. On the 15th of August 2015 after participating in the V Molino del Rey Race the president Enrique Peña Nieto not only underestimated the negative effects of the depreciation of the currency, but also stated that it had a positive side, as it increased the competitiveness of the exports (i.e. cars and manufactured products) in the world market, as well as allowing to attract more tourists (as a result of the rise of the purchase power of the dollar).

However in a second moment just as the depreciation of the exchange rate sharpened at the beginning of the year, the tone of the governmental discourse changed. Luis Videgaray, head of the Secretariat of Finance and Public Credit (SHCP), alerted in the first week of January that the turbulences of the financial markets and the downfall of the Chinese currency (renminbi) could accelerate the new currency war.

“There is a real worry that before the deceleration of the Chinese economy the response of the public policy would be a round of competitive devaluations”, said Videgaray after participating in the XXVII Ambassadors and Consuls Meeting held at the Secretariat of Foreign Affairs.

In this same sense the Governor of Bank of Mexico, Agustín Carstens declared that it was not discarded that there would be a violent correction in the international financial markets, a situation that would hit even further the national currency, thus the stability of the prices could be called into question. For a better way to confront the volatility, Castens considered, the emerging countries could consider the viability of implementing a “non-conventional” monetary policy plan that would include the purchase of debt bonds on behalf of the central banks. The truth being that until now the Mexican government has not achieved to stop the depreciation of the peso.

As the Mexican productive apparatus is too closely integrated to the US economy, the exchange rate depends very much on the monetary policy followed by the Fed. Also the production of goods in Mexico requires a significant proportion of imported inputs. Before the increase in cost of the dollar, the fear persists among the population that sooner or later the effects of the depreciation of the exchange rate would be transferred to prices of products of first necessity, mainly food. Yet despite the downfall of the Mexican peso by 14 per cent before the US currency during 2015, one of the worst performances among the Latin-American currencies, the Mexican government insists that, at least for now, the situation is under control: there is no evidence of a generalized rise of prices in the short term.

The rise of prices are being followed with a magnifying glass

The depreciation of the peso implies the rise of cost of the goods labeled in dollars. If the national currency loses value before the dollar, the Mexican entrepreneurs will be compelled to raise the prices of goods. However one of the big paradoxes is that until now the drastic depreciation of the peso has not been reflected in a substantial increase in the level of prices estimated by the National Institute of Statistics and Geography (Inegi).

Nonetheless, both in the Monetary Policy Program for 2016, as well as the Announcement of monetary policy published on the 4th of February, the Bank of Mexico defended that at least for now the drop of the currency has not created an inflationary expectancy, partially because of the “ease” of the Mexican economy; still he recognized that there was a risk of the inflation of shooting up in case the depreciation of the currency could sharpen.

“The low inflation that has experimented Mexico in the last months is not a symptom of the financial strength, nor of the ‘sane foundations’, but it is rather a reflection of the accentuation of the deflationary tendencies in the world economy. If continued the depreciation of the peso, sooner or later would be transferred of the cost of importation of the internal prices, as it is already happening in the case of several goods”, affirms Arturo Guillén.

The data of the inflation of the Inegi has raised the suspicion that among vast sectors of the Mexican population, as week after week one can observe that the prices rise overwhelmingly in a broad range of goods of the basic basket. In the opinion of Arturo Ortiz Wadgymar, coordinator of Unit of World Economy of the Institute of Economic Investigations of the National Autonomous University of Mexico (Iiec-UNAM), “from January on the level of prices starts to sharpen especially in the imported sectors of inelastic demand, such as medicines, food and electronics, which means that the inflation is coming no matter how much they want to hide it, during 2016 there could be the possibility to have an inflation higher than 4 per cent”.

The response of the government: credit restriction and budget adjustment


Since the midst of 2014 the referred international prices of petrol have dropped beyond 50 per cent. In the case of the Mexican Mixed Crude, the price per barrel is close of the bottom of 20 dollars, the lowest price since the credit contracted in an international scale in spring 2009. It is beyond doubt that the exports of petrol of Mexico will keep in falling in the following months, and it is very unlikely that the non-petrol export volumes increase if the weakness of the external demand is taken into account.

Currently despite the “structural reforms” that were approved in the fiscal area during the administration of Peña Nieto, the public budget still depends greatly on the income derived from the sale of hydrocarbons. “The exports had percentages of negative variation during almost all 2015. In August the worst fall was registered, -6.73 per cent in inter-annual terms. It must be stated that the petrol exports show more significant downfalls (-47.8 per cent, August 2015), and out of these downfalls of the petrol exports had variations that exceed 40 per cent all along the year, while the non-petrol exports that also presented negative numbers, were lesser, with a downfall of -1.63 per cent (August 2015)”, points out Alicia Girón, professor and researcher at the Unit of Financial Economy of the IIEc-UNAM.

Until when will it be possible to avoid the fiscal disaster? The Mexican government has achieved to get along more or less forward of the temporary deflation thanks to the petrol coverage, that are negotiated contracts with several investment banks that works as an insurance for which a determined risk premium is being paid once acquired, and in the event that the price of the Mexican blend observed during the year is below the brokered price, a payment is granted to the government of the Republic that compensates partially the decrease of the budget income.

banxico-04What other measures could the government put forward to avoid the disaster? The options at sight are three. On one hand they could incur into more indebtedness. On the other they could opt for an increase of some taxes. However given the high levels of disapproval of Enrique Peña Nieto among the population, its administration has betted on reducing the public expenditure. On the 8th of February the SHCP made public that the produce of the joint work with the Bank of Mexico, aiming at using the best way possible the instruments of the economic policy, the decision had been taken to realize a preventive adjustment plan for 2017, given the high volatility in the environment of the international financial markets. This way the budget cut of 25 thousand employees of the public sector was firm (15 thousand in the federal government and 10 thousand more at Petróleos Mexicanos (Pemex)).

Additionally Luis Videgaray announced that the secretariat under his charge would realize in the following days a thorough evaluation that would allow them to determine in what other branches of the federal government these expenditure cuts would be made. “We are evaluating the preventive adjustment for 2017, that will have to be completed with the petrol coverage of this year”, affirmed Videgaray in an interview during the inauguration of the Cultural Center of the Federation of Trade Unions at the service of the State.

In an interview to Contralinea, the former Senator of the Revolutionary Institutional Party (PRI) David Penchyna, who was member of the Commission on Finance and Public Credit, pointed out that the Mexican economy, even if it is not exempted of the threats before the volatility of the international financial markets, the government of Enrique Peña Nieto is going the right way.

“The PRI-Party has said ‘no’ to more taxes, it said ‘no’ to more indebtedness, the PRI said ‘yes’ to the governmental adjustment, in which the government has to tighten the belt, and shall we not fall back to recipes of the past […]; we are betting into the correct thing, there are times where the drugs are more bitter [referring to the governmental adjustment], but these are the drugs that could give in the medium and long term to Mexico the stability and the growth we wish”, stated Penchyna.

In the midst of February the Bank of Mexico and the SHCP announced a plan with three measures to confront the world financial turbulences.

In the first place there will be an expenditure cut of over 130 billion pesos, made up by a reduction of the expenditures of the federal government for 2016 of 32 thousand 300 million pesos and an adjustment of 100 billion pesos to the budget of Pemex, the amount is equivalent to 0.70 per cent of the GDP. In the second place the Bank of Mexico will implement a raise in the referred interest rate that passed from 3.25 to 3.75 per cent, a decision that according to Agustín Carstens is aimed at lowering the risks of a drastic raise of prices that could derive in a depreciation of the peso. And thirdly the suspension of the dollar auction program to defend the national currency on behalf of the Exchange Commission, despite that it did not discard the possibility of intervening in a discretional way anytime.

As a conclusion, even when the Bank of Mexico as well as the Secretariat of Finance consider the measures of temporary character, i.e. that they do not pretend to keep on rising the referred interest rate, nor to apply further public expenditure cuts, it is impossible to foresee the behavior of the financial markets in the following weeks. However there is a great likeliness that these measures could ditch the optimism of Luis Videgaray, as moreover of having a “marginal” effect over the economic growth of the country, it could be the trigger of a new recessive wave.

Ariel Noyola Rodríguez*

*Graduate Economist of the National Autonomous University of Mexico

(Translated by: Axel Plasa)



Contralínea 479 / del 14 al 19 de Marzo, 2016



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