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BLI: From the peso oro to the maquiladoras

BLI: From the peso oro to the maquiladoras

  • Luxemburg
  • Jean-Philippe Donge Head of Fixed Income
  • BLI
  • http://www.banquedeluxembourgnews.com
  • mike.thome@bli.lu

Historically, until the 19th century, the Spanish dollar, the forerunner of the Mexican peso, was used in a number of regions around the world. The “Mexican peso” was legal tender in the United States until the Coinage Act of 1857.

Today, the country once known as NewSpain is still the exception in the “emerging markets” universe. The global economic slowdown has exposed the vulnerability of economies with excessive dependence on commodity exports: Russia, Brazil, Indonesia, Colombia and Venezuela are just a few examples. These low-diversity economies have suffered the backlash of falling commodity prices as well as expectations of a hike in interest rates in the United States.

Fortunately, many countries have learned the lessons of past crises, including the need to adopt a floating exchange rate and, more generally, economic policies aimed at budget surplus and contained inflation. Mexico is one such. Like other countries in Latin America, Mexico lost a decade in the 80s with soft growth (estimated at –0.3% over ten years) and very high inflation. Average annual inflation was 69% between 1980 and 1990 with a peak in annual inflation of 175% on 31 March 1988. The country defaulted on its external debt in 1982. In 1994, just after the signing of NAFTA (the North America Free Trade Agreement), Mexico was subject to increasingly speculative movements of capital whereas the currency was anchored to the dollar, and was forced to devalue.

Despite these various destabilising episodes, Mexico remained firmly rooted in its industrial heritage. Contrary to what one might expect, and although it is one of the world’s leading oil producers at the intersection of two worlds (a rich service-based economy in North America and a South America still dependent on its below-ground wealth), Mexico’s economy is less focused on the export of primary products than its more southerly neighbours. Industry and especially services (tourism, telecoms, etc.) have played a vital role in the country for many years although there is huge disparity in terms of development between the Chiapas and the state of Sonora, or the Yucatán and the banks of the Pacific. Between the end of the 19th century and the 1930s, the development of the railway network boosted the integration of the north and north-east and greater economic proximity with the United States. Economic activity was to develop particularly with the maquiladoras, assembly plants and sub-contracting outfits for the United States which would drive the country’s modernisation.

In the 21st century, Mexico, heir to the Aztec administration, becomes increasingly dynamic. In an earlier blog, we mentioned the reforms adopted by the Mexican parliament. In particular, the reform of the energy sector will enable private players to participate thus tempering the bottlenecks that subsist at many levels. This is especially true for the petrochemicals, synthetic textiles and plastics sectors. NAFTA continues to be the driving force for the modernisation of the Mexican economy, with foreign investments no longer exclusively targeting energy but also the automotive industry, electronics, chemical and aeronautics.

A number of big names in American and European industry have started to establish operations in the central industrial region: for example, Bombardier, Airbus and GE Aviation are investing in Querétaro. Since the 1980s, foreign direct investment in the aeronautical sector amounts to nigh on 33 billion dollars. According to the FT, in 2014, compared to 2009, Mexico had doubled its automobile production to 3.2 million vehicles. Honda, Mazda, Audi, Kia, Nissan and BMW have already invested or plan to invest several billion dollars to set up assembly lines in the country. All this comes against the backdrop of Mexico not only becoming increasingly competitive but also gaining in expertise versus one of its biggest rivals, China, whose currency has slowly but surely appreciated against the dollar since the summer of 2005.

Over Content Editor V

Content editor of PressCenter website.

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