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Tuesday, October 4, 2022

Mexico’s external debt crisis 1981-1983

The week before last, the Mexican Economic Cycle Dating Committee (CFCEM) announced the results of its work to identify the “turning points” of the Mexican economy from 1980 to 2020. The “turning point” is the point at which economic activity “peaks” and a recession begins, and when said recession ends, which is called the “valley” (“Mexico’s Six Recessions in the Last 40 Years,” Aug. 9). In this sense, the Committee has identified twelve turning points that define six downturns and five upswings. The Committee’s responsibility is limited to identifying and communicating “turning point” dates, so it does not make decisions about the causes of recessions or economic policies. Thus, in my personal capacity, I will comment on the six recessions identified by the Committee in this area. This time, I’ll start with the first recession, which I’ve decided to call “The External Debt Crisis of 1981.”

Recession 1981-1983 lasted 19 months, from December 1981 to June 1983, during which economic activity contracted by 7.2 percentage points (pp) of GDP. This is the longest recession identified by the Committee and, in my opinion, was caused by a balance of payments crisis exacerbated by a series of economic policies that exacerbated the economic downturn and also made it difficult to reach the expansion phase. This balance of payments crisis in Mexico was caused by a significant increase in the federal government’s foreign currency debt, from $14.5 billion in 1975 (16.4 percent of GDP) to $52.9 billion in 1981 (23.0 percent of GDP). – mainly for investments in oil exploration and production, in connection with the discovery of the Cantarell field, the second largest in the world after Gawar, in Saudi Arabia. Thus, an increase in imports of capital goods caused the current account deficit to widen from 2.0 percent of GDP in 1977 to 7.0 percent in 1982. However, the fall in the price of oil from $39.5 in April 1980 to $28 5 dpb in March 1982 (-27.8 percent) made paying off the government’s foreign debt very difficult, mainly because the debt had a very short maturity (one year) and also because the country had no alternatives. Source of dollar income. In fact, the level of international reserves fell from $3,187 million (mdd) in December 1981 to $751 million in 1982.

Given the government’s difficulty in continuing to fund the debt, the Mexican government decreed a six-month suspension of payments (August 1982 to January 1983). It should be noted that this was the first debt crisis in a Latin American country in recent times. Thus the Mexican government had to devalue the peso against the US dollar by 170% from December 1981 to September 1982. accompanied by an increase in inflation from 28.7 percent in December 1981 to 117.3 percent in April 1983. rose from 31.8% in December 1981 to 62.0% in March 1983

The recession was exacerbated by the government’s decision to expropriate the banking system in September 1982. It should be noted that at that time, Mexico was a practically closed economy, where the sum of imports and exports was about 20 percent of GDP (today about 80 percent of GDP), and the management of the economy was focused on the economic policy decisions of the federal government, where public spending and investment accounted for about 23 percent of GDP (while they currently account for just under 12 percent of GDP) . It should be noted that between the very significant fall in GDP and the sharp devaluation of the Mexican peso, public debt reached 146 percent of GDP at the end of 1982. These circumstances, both external and internal, in addition to political decisions, made the recovery take a long time to achieve. The level of economic activity in November 1981 – the “peak” of this cycle – recovered for more than 80 months. In fact, he did not recover during the expansion phase of this cycle, which lasted 27 months. This was mainly due to the effects of the expropriation of the bank, as well as a number of macroeconomic adjustment measures that had to be implemented by the government led by Miguel de la Madrid (1982-1988). These included a significant reduction in public spending and investment from over 22 percent of GDP in 1981 to 16.6 percent of GDP in 1983. triggered the next recession.

* The author is Chief Economist for Latin America at Barclays Bank and a member of the Mexican Cycle Dating Committee..

* The opinions expressed in this column are personal..

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