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Gloria M. Grandolini

MEXICO - Economy

Be Prepared

Country Director, Mexico and Colombia, the World Bank


Since joining the World Bank in 1990, Gloria M. Grandolini has held several positions, including Director of the Banking and Debt Management Department of the Treasury. She was also the Senior Advisor to the Executive Director representing Italy, Portugal, Albania, Greece, Malta, and San Marino on the Board of the World Bank Group. She has also worked as a Country Economist for El Salvador and as Senior Financial Economist for the Latin America and the Caribbean region.

Three risks that might increase the odds of another global economic crisis need to be monitored closely: the unresolved euro zone sovereign debt crisis, the weak economic outlook of advanced […]

Three risks that might increase the odds of another global economic crisis need to be monitored closely: the unresolved euro zone sovereign debt crisis, the weak economic outlook of advanced economies, and the uncertainty over China’s growth sustainability. These translate into lower volumes of trade, risk aversion from investors, and low commodity prices. One exception to the downward risk in commodity prices could come from oil prices rising as a result of tensions in the Middle East.

With that in mind, Mexico confronts two distinct types of vulnerabilities: those caused by outside developments and those emerging from its own internal circumstances.

From the outside, Mexico is exposed to fluctuations in the US economy due to trade relations and remittances. If a crisis spreads to its next-door neighbor to the north, Mexico’s trade is affected due to the fact that the US accounts for 80% of its exports. As most Mexican migrants live in the US, it could also lead to lower remittances, a multi-billion year flow that tends to benefit some of the poorer and more vulnerable sectors of Mexican society.

A global crisis could also prompt oil prices to decline, dramatically affecting Mexico’s public revenues, a third of which depend on oil revenues. On the other hand, the effects on Mexico’s trade balance would be moderate because oil exports only represent 13% of total exports and about 1.5% of GDP.

In the event of another global crisis, external and domestic financing conditions could tighten. Currency depreciation could intensify as flight-to-safety would lead to a reversal in net capital flows. Financial market dislocations could cause strain on investments such as pension funds, or niche banks reliant on wholesale funding. Moreover, foreign-owned banks could curtail credit to allocate capital to the parent bank. Finally, the effect of a new external shock could be amplified through the expectations channel. Heightened uncertainty about the financial and sovereign crisis in Europe could worsen business and consumer sentiment, thus depressing domestic demand. Despite these factors, Mexico is well prepared to respond to external shocks owing to four key reasons. For one, external financing needs are manageable. This is due to a moderate current account deficit, healthy levels of international reserves, a Flexible Credit Line with the IMF, and prudent public debt management. Secondly, inflation remains moderate at below 4%. Nominal policy rates are at 4.5%—lower than their pre-Lehman levels, which stand at 7.5%. However, there is still some scope to reduce real interest rates if needed. A third reason is that the flexible exchange rate is a good shock absorber. It allows the currency to adjust rapidly and helps soften the impact of a reversal in net capital flows. Finally, the banking system is sound. Foreign banks’ subsidiaries enjoy strong capitalization and liquidity ratios, and recent tests performed by the World Bank and the IMF found the system to be resilient to a variety of shocks. Internally, however, Mexico is moderately vulnerable on both the fiscal and social fronts. While public debt is low and the country has embarked in recent fiscal consolidation efforts, the fiscal position has deteriorated since 2007. The primary fiscal deficit in 2011 is estimated at 0.3% of GDP in 2011 (compared to a surplus of 1.5% of GDP in 2007). A weaker fiscal position limits the potential for an active fiscal stimulus program and commodity dependence adds fiscal pressures. These risks are mitigated by oil stabilization funds and leveraged by oil price hedges, which could be drawn in the event of a sharp decline in oil prices. Still, fiscal dependence on oil revenues and export dependence on the US market reiterate the need to diversify.

On the social front, poverty and unemployment have not yet returned to pre-2008 crisis levels and are highly sensitive to economic shocks. Social safety nets are broadly adequate to support the chronic poor. However, the transient poor—the vulnerable households easily driven back into poverty when a crisis hits—may need more social programs to protect them.



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