Mexico Gets Record Credit Line from IMF

Sources:
Bloomberg.com: Mexico Peso Climbs to Strongest Since 2008 on IMF Credit Line
Eluniverso.com.mx: FMI da crédito ante escenario adverso
FT.com: IMF Approves $72bn Credit Line for Mexico
FT.com: Mexico Ups Its Insurance Cover

Last week the International Monetary Fund (IMF) announced that it had extended Mexico’s precautionary credit line from $47 billion to $72 billion for the next two years—this is the largest credit line in the history of the IMF. The funds are available under a new IMF program that extends credit to countries with sound economic policies, which begs the question as to why the credit line is necessary in the first place.

The Bank of Mexico requested the credit extension in the face of what it considers a weak recovery from the global financial crisis. The country’s GDP grew by 5.1% last year, but growth is expected to slow in 2011 to 3.7%. The most common explanation economists give for the weak recovery is the country’s overdependence on the United States as a consumer of its exports. Slow U.S. economic growth works as an inhibitor to Mexican growth as U.S. consumers purchase fewer Mexican manufacturing products. Remittances from Mexican workers in the U.S. have also declined as unemployment levels in the U.S. remain high.

The IMF pointed to concerns over declining petroleum exports, tourism rates, low foreign reserves, and currency appreciation as additional stresses to the Mexican economy. The first issue is blamed partly on reduced demand, but also on the inefficiencies of the state-owned oil company. The second issue comes as a result of fears produced by reports of high murder rates linked to Mexico’s drug trade. To address the third issue, Mexico has been making purchases in the foreign currency markets for the last few months to replenish the reserves spent during the peak of the financial crisis. The purchases have become cheaper recently as the peso has appreciated in value, but the appreciated currency is a double-edged sword for Mexico. An appreciated peso makes Mexican exports more expensive, and thus less competitive, on the global market. Continued currency appreciation could therefore have further negative effects on Mexico’s already reduced exports.

It is this economic uncertainty that led the country to request the extended credit line. Neither the IMF nor the Mexican government seem to believe that the country will actually need to tap the funds in the next two years, but both apparently thought extra insurance would not hurt in uncertain times. The day the credit line was announced the Mexican peso increased in value to its highest level since 2008, a possible sign of confidence in the IMF’s decision and the Mexican economy generally. Only time will tell if that confidence lasts.

Discussion:
1) What steps should Mexico take to strengthen its economy over the medium term?
2) Mexico is scheduled to have its next presidential elections in 2012. What effect might election cycle politics have on the Mexican economy over the next 2 years?