Mexican Growth: Too Much of a Good Thing? --- Deteriorating Trade Balance Could Spur a Correction If Oil Prices Fall Sharply
MEXICO CITY -- Mexico may be starting to suffer from too much of a good thing. That has authorities worried.</br></br>Good news since the year's start -- including the surging price of oil, falling inflation and the decision by Moody's Investors Service Inc. this month to elevate the country to investment grade -- has strengthened the peso by more than 4%, reignited domestic demand and caused a deterioration in the trade balance.</br></br>All of this makes Mexico vulnerable to a sharp economic correction if the price of oil, Mexico's single largest export, falls more than expected, or if the economy of the U.S. -- the country's largest trading partner -- slows precipitously.</br></br>"I've seen this movie before and I don't want to see it again," central-bank governor Guillermo Ortiz says. "It's a bad movie."</br></br>Problem is, there isn't much authorities can do to choke off rising domestic demand. Monetary policy, exercised through the corto, a mechanism that drains liquidity from the interbank market, is already tight. So, too, is fiscal policy, despite the room for relaxation afforded by strong oil prices in the past year. There is little political incentive to put an end to the fiesta, given that the most fiercely contested presidential election in Mexican history takes place in early July and that the purchasing power of most people here still hasn't recovered to the levels they enjoyed when President Ernesto Zedillo took office in 1994.