Mexico: Weaker Outlook

BY CHRONICLE STAFF

What a week it has been for Mexico's President Felipe Calderon.  His closest advisor in the country's war against crime died in a plane crash, even as authorities were able to arrest prominent criminals and confiscate a record number of firearms. Meanwhile, Fitch revised down its rating for Mexico from "stable" to "negative" and the International Monetary Fund revised down its estimates on Mexican GDP growth this year and next year.

Perhaps then, Calderon received some useful advice and a couple of encouraging words today as he met Colombian President Alvaro Uribe, who knows a thing or two about successfully reducing violence and drug trafficking and boosting economic growth and investments.

Mexico, Latin America's second-largest economy, is now facing the "perfect storm" of economic woes - falling prices on oil, its top export, and weaker exports to the United States (its top market), falling inflows of investments, weaker tourism from the United States (its top market) and weaker remittances from the United States, which accounts for most of the money Mexican workers abroad send home to their families. Combined, these five factors are dealing a major blow to Mexico's economy.

EXTERNAL SHOCKS

“The revision to Mexico's ('BBB+'/'A-') sovereign rating Outlook from Stable to Negative reflects concerns over the capacity of the economy and policy framework to absorb smoothly three simultaneous external shocks: the worst U.S. recession for 25 years; reduced capital and financial market flows; and lower oil prices,” Fitch said in a statement today. “The fiscal and external cushions that Mexico has to absorb these shocks are modest in comparison with many of its rating peers.”

The Oil Stabilization Fund is equivalent to just 0.5 percent of GDP and international reserves relative to short-term and liquid foreign debt liabilities are quite low, Fitch points out. “Moreover, recent financial stress...

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