Mexico Prepares for Negative Economic Impacts from Iraq War

SourceMex Economic News & Analysis on Mexico, April 2, 2003 | Go to article overview
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Mexico Prepares for Negative Economic Impacts from Iraq War

The Mexican government is preparing for negative fallout from the war in Iraq, including a downturn in the economy and a deterioration in relations with the US.

The negative economic forecasts are linked directly to an expected poor economic performance in the US, whose GDP growth could be restricted by high interest rates and a projected budget deficit during the next several months.

The US economy has yet to recover fully from the impact of the attacks on the World Trade Center in New York and the Pentagon in Washington in September 2001, and that trend is expected to continue for some time. In its most recent report on the US economy, the US Commerce Department reported a "disappointing" GDP growth of 1.4% for the fourth quarter of the year, a result of slow consumer spending and a decline in exports.

The expected decline in the US economy during the next several months could continue to put pressure on Mexico, which depended on the US for 90% of its US$161 billion in exports in 2002. The US was also a major source of the more than US$13 billion in direct foreign investment that entered the country last year.

Economists reduce GDP forecasts

The war in Iraq has led most private economists to reduce their forecasts for Mexico's GDP growth in 2003. "If the armed conflict lasts three to five months, US GDP growth will be limited to 1% this year, which would put Mexico's growth at between zero and less than 1%," said Gerardo Cruz Vasconselos of the Instituto Mexicano de Ejecutivos de Finanzas (IMEF).

Even with a short war, most economists now doubt that Mexico will attain the 3% GDP growth target of President Vicente Fox's administration for this year. Mexico attained GDP growth of only 0.9% in 2002.

Analysts at BBVA Bancomer said a prolonged conflict in Iraq could cost the US Treasury as much as US$300 billion. "This would increase the US deficit and affect growth in the US and Mexico," said BBVA Bancomer.

Economist Raul Feliz of the Centro de Investigacion y Docencia Economica (CIDE) said economic fundamentals are strong enough for Mexico to attain a GDP growth of 2.6% this year if the war concludes soon, although a prolonged war could reduce the country's annual growth rate to about 1.5%.

Still, the Mexican business community remains pessimistic about economic prospects for this year. The monthly survey conducted by the Banco de Mexico (central bank) during March showed a decline in forecasts for GDP growth and an increase in inflation relative to those in the February survey. The survey among 30 organizations engaged in business analysis showed an average forecast for GDP growth of 2.5%, compared with about 2.8% in February. Annual inflation is now projected at 4.38%, compared with 4.27% in February.

The government has yet to release official data for the first quarter of the year, although the official statistics agency (Instituto Nacional de Estadicas, Geografia e Informatica, INEGI) reported a contraction of 0.23% in Mexico's GDP during January.

The Camara Nacional de la Industria de Transformacion (CANACINTRA), the organization most tied to manufacturing, says the Mexican economy has remained in a slump for the entire quarter. CANACINTRA estimates Mexico's GDP declined by 0.3% in January-March, which resulted in the loss about 25,000 jobs in Mexico.

The concerns of the private sector have not swayed the Secretaria de Hacienda y Credito Publico (SHCP), which insisted in a report released at the end of March that Mexico would still attain a 3% GDP growth this year.

In interviews with the Mexico City daily newspaper La Jornada, SHCP officials said it was "premature" to make new projections for 2003, because the trends for the international economy were not clear for the rest of the year. "For the moment, it is realistic to maintain our target of 3% GDP growth for this year," the SHCP officials said.

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