“In the face of the most serious contraction in decades, it is hard to imagine that Mexico will avoid recession too,” said Gray Newman, Latin American economist for Morgan Stanley in New York.
When the US sneezes, Latin America catches a cold, is the old saying.
After a decade of sound economic management, Mexico’s government does have some room to maneuver. Next year the government will run its first budget deficit in five years as it increases spending to give the economy a push. It is also taking on new loans from the World Bank and the Inter-American Development Bank to support social and environmental projects. The central bank has almost $85 billion in reserves to defend the peso and room to bring down interest rates.
When Mexican crude was selling at $130 a barrel last summer, officials began selling Mexico’s future 2009 exports at $70 a barrel, a price that seemed wildly conservative in those heady days. In the fall, the congress estimated a $70 price for its 2009 budget projections. The government usually locks in the price of its future production by buying options to sell oil at a certain price. When the market price rises above the option price, the government loses money. When the price falls, as it has, the government makes a profit.
Buying the options cost the government $1.5 billion last summer, but at the current price, now below $30, Mexico would stand to earn more than $10 billion. That money would go to job creation plans in infrastructure, tourism and small business.Well, that's good investing.
“There have been substantial gains by the main Latin American countries from the mid-1990s to 2006,” said Santiago Levy, a vice president at the Inter-American Development Bank in Washington, who started the Mexican program 11 years ago. “It would be very, very sad if this was lost.”