Mexico: Iceberg Dead Ahead!

An aroma of prosperity wafts through the sunny air of Mexico City. New buildings and hotels grace the skyline, the mayor is expanding the public transportation system and families are preparing for the year-end holidays.

Traffic is building, as parents embark on shopping sprees and attend the Posadas celebrations. However, the domestic bliss belies the economic storm that is raging on the northern bank of the Rio Grande, and the deep recession that lies ahead.

Mexico is in for a severe crisis. Some of it is due to its unwillingness (or inability) to implement important economic reforms during the previous sexenio. However, much of it is due to factors that are outside its control.

The decline in oil prices will hit Mexico hard. With WTI projected to fall into the mid-30s, the Mexican government will soon face a gaping hole in the fiscal accounts. Oil represents about a third of government revenues.

Unfortunately, the decline in the valuation of crude coincides with a plunge in oil production. The consequences of the Fox Administration’s inability to push through the energy reforms are now coming home to roost. At the same time, the drop in metal prices will weigh heavily on the mining regions, particularly in the north. All of this will overlap with a dramatic fall in remittances. The deepening recession in the U.S. is hitting many immigrants, as North American households trim back on services, such as yard care and restaurant dining. Construction companies are also reducing staff, forcing many immigrants to return home. Armed with their savings and new skills, they find it easier to survive in Mexico, where the cost of living is lower.

Last of all, the economic slowdown in the U.S., and the maelstrom in the automobile industry is forcing some Maquiladoras to close factories and furlough workers. These trends point to a severe economic downturn next year. We expect that Mexican GDP will fall 2.3% y/y in 2009, with a strong possibility of a deeper revision.

Unfortunately, the decline in domestic demand will not bring much relief to the external accounts. The current account gap may exceed $24 billion in 2009. This shortfall will be larger if remittances collapse. There is a good chance that they will fall by more than 50%, given the economic malaise north of the border. Unfortunately, the capital account will not provide any solace. Foreign direct investment will also decline, due to the downturn in manufacturing. There is a chance that the portfolio flows will be negative, as investors flee the emerging markets. Surely, the government will try to tap the international capital markets. But, they will have to compete against the multitude of sovereigns that will be doing the same. This means that the peso will have to devalue. It is painful to say, but the Mexican currency could lose another 20% to 25%, which could put it above 17. No Mexican CFO is prepared for such a scenario, which could lead to despair on the corporate front. Hence, we could be in for a wave of unexpected defaults.

Mexico may be an oasis of relative prosperity, but the path ahead is strewn with icebergs. Failure to prepare for such a scenario and the disadvantages of being a small economy tied to the fate of the U.S. means that it will be faced with a severe downturn. Moreover, the social situation could become explosive. The lawlessness caused by the burgeoning drug trade undermined local institutions, such as the press, judiciary and law enforcement.

Emboldened by their impunity, the various gangs and cartels could take advantage of the crisis to seize more power through the use of terror and crime. This will occur at a moment in time when bilateral relations with the U.S. could sour. Both President-elect Obama and Secretary of State-nominee Clinton have a penchant to renegotiate the terms and conditions of the North American Free Trade Agreement (NAFTA), which will only add to Mexico’s economic and social woes. Therefore, a huge iceberg lies ahead in 2009. It is too bad that very few Mexicans appreciate the calamity that lurks in the shadows.

12 Responses to "Mexico: Iceberg Dead Ahead!"

  1. Cliufford J. Wirth, Ph.D.   December 15, 2008 at 3:32 pm

    Icebergs ahead for all.Independent studies conclude that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:””By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame.”http://www.energywatchgroup.org/fileadmin/global/pdf/EWG_Press_Oilreport_22-10-2007.pdfWith increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: http://www.peakoilassociates.com/POAnalysis.htmlI used to live in NH-USA, but moved to a sustainable place. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil? Email: clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207. http://survivingpeakoil.blogspot.com/&&&&&&&&&&&&&&&&Gas prices will go back up.Global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time demand will increase 9%.We are facing the collapse of the highways that depend on diesel trucks for maintenance of bridges, cleaning culverts to avoid road washouts, snow plowing, roadbed and surface repair.Documented: http://www.peakoilassociates.com/POAnalysis.htmlAnyone interested in relocating to a nice, pretty, sustainable area ? Email: clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207. http://survivingpeakoil.blogspot.com/

  2. Anonymous   December 15, 2008 at 11:39 pm

    I live in San Francisco and the collapse of the Mexican government is something I worry about quite a bit. Within two or three years Mexico will become a net importer of oil. This at a time when their economy is slowing, the peso is falling and the central government is becoming weaker. I don’t know what will happen but it can’t be good.

  3. Moshe Levinger   December 16, 2008 at 7:09 am

    It’s all over. Mexican economy will collapse by Summer 2009. The point is that the real economy is pretty much dead, and Mexican Central Bank ruled by Guillermo Ortiz (known as “la Perica” by his cocaine adiction) is running out of dollars, which are being used to save largest industrial groups almost bankrupt, the rest are useless US bonds. The revenues from the USA are shorter day after day, and Felipe Calderón has no political control of the country.

  4. Guest   December 19, 2008 at 9:14 pm

    I am a Mexican living in Mexico… the situation is worrisome, some of use aren’t in denial and know very well what will happen in 2009… unfortunately, not only us will be living this… almost for sure, Mexican gangs will start operating in the US as long as the Mexican economy dries up… that means that criminality will go up in the southern part of the US.. it will be a complicate scenario… google secuestro + mexico (kidnap + mexico) and you’ll start to understand. Hope I’m wrong… yeah… denial.

    • Guest   December 20, 2008 at 11:27 am

      Do you think that Calderon will toughen up on the cartels?I don’t think he has much of choice if Mexico is to survive as a viable nation.BTW, the Mexican gangs are already here. Just take a look at the FBI/DEA “most wanted” listings.

      • Guest   December 20, 2008 at 12:43 pm

        The real problem with drug Cartels is that as long as there is a market, there will be merchandise… In just two years of this administration, the death toll related with drug Cartels is above 7,000. I honestly think that the “war against drugs” is a “lost war”. If you fight the Cartels as if they were just criminals, the business model is intact. We need to fight them in their financial core… and maybe this will lead to a deepend recession. We really don’t know the impact of the billions of dollars in the Mexican Economy.I do think that we will survive as a nation and as a country, the reason is that we have cultural integration, more than 60% of our population is poor so as the article states, the middle and upper clases will feel the crisis, the larger part of our population is living in crisis since they were born.The problem is not if we are going to be a viable country, but a viable capitalist nation, the turn to the left seems so obvious… and no, I am not a leftist.

        • Guest   December 21, 2008 at 12:52 am

          So by fighting them at their financial core, do you specifically mean legalizing drugs and lowering their costs-or some other method?Calderon’s problem (in my opinion) is that he is still treating this as a law enforcement action…but when the thugs no longer fear the police/law enforcement it’s really an all out war.

  5. anon   December 20, 2008 at 2:36 pm

    Re: “It is too bad that very few Mexicans appreciate the calamity that lurks in the shadows.”I am an American living in Mexico – but not in a major city. If anyone can survive this global financial mess, it is the indigenous peoples of Mexico. They have taken what the 21st century has to offer, but never lost their survival skills. Who I feel sorry for are the chilangos and politicians. What will become of them when the people have nothing left to steal? Oh well – behavior has consequences, doesn’t it?

  6. GloboTrends   January 16, 2009 at 8:13 am

    this was one of the best written prediction-pieces Ive seen. Very negative, but should lead to lots of discussion, and debate. If you dont mind, Im going to start a forum discussion around this topic here:http://globotrends.com/forums/

  7. Trevor   January 27, 2009 at 12:15 pm

    Well I am from the US, my wife is Mexican. We were thinking of moving to Mexico, maybe Puebla or Xalapa, as I don’t like the hot weather. Do you think that it will be possible to find work as an American? We both are fluently bilingual.

  8. Trevor   January 27, 2009 at 12:16 pm

    Forgot to add, I have a bachelors in Economics and have work experience in sales, she is an accountant BS.

  9. Trevor   January 27, 2009 at 12:25 pm

    Calderon did what was necessary in legalizing small quantities of drugs in Mexico. This will have a small effect as most of the demand for drugs is here in the US. Once the violence starts to get bad in the US maybe we will learn and legalize small quantities of drugs for personal use, lessening the demand and money supply of the Narcos. They still may be able to stay in business by means of extortion and kidnapping but will be much easier to control without their billions of dollars of drug money. Unfortunately the US will have to learn the hard way as it usually does.