*Mexican economy shrinks


The Mexican government announced on August 14 that the country's gross domestic product fell by 10.5% in the second quarter of the year in comparison to the same period in 1994. This was about double the 5-6% contraction economists had predicted. "Mexico has not seen a quarterly drop like this since the 1930s", according to Gray Newman of Interacciones Brokerage in Mexico City. Foreign reserves in the central bank fell by $353 million to $12.914 billion in the week of August 7.
Finance secretary Guillermo Ortiz Martinez insisted that the economy would begin recovering in the second half of the year, but admitted that even with a recovery, the total contraction for the year would be 4%.
In July Mexico had its sixth consecutive trade surplus, $605 million for the month, with a total of $3.69 billion for the year so far. Most of Mexico's trade surplus comes from its main trading partner, the US.
US exports to Mexico were down 11.9% from January to June compared to the same period last year; Greg Woodhead, an economist with the US AFL-CIO union federation, estimates that nearly 140,000 US jobs have been lost so far because of the Mexican devaluation last December.
In July the World Bank was considering a cut of nearly $1 billion in the loans it had scheduled for Mexico. The cuts would affect loans for infrastructure and social programs; the $1 billion package to bail out the Mexican banking system would not be touched. One cut could come from the $368 million environmental package the White House promoted to win support for NAFTA in 1993.
Meanwhile, Mexico's often-praised privatisation program is in trouble. The British Financial Times blames much of Mexico's current banking crisis on the way the banks were privatised four years ago.
"Governments privatizing banks need to pay less attention to the cash the sales generate", an editorial warns, "and more to the quality of the buyers ... When buyers pay too much, as many did in Mexico, they often try to recoup costs by an unsustainable expansion of loans", and even "drug money laundering."
[From News Update on the Americas.]