Case Assignment (Mexico) Global Finance Finance Research Paper

CASE ASSIGNMENT (MEXICO) GLOBAL FINANCE
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CASE ASSIGNMENT (MEXICO) GLOBAL FINANCE
Question 1
a) Key economic indicators
Figure 1: Mexico Balance of Payments
b) Mexico in order to combat stagnation as well as rising inflation had made several changes in its economic policy which have led to the crises in 1994. The chief aim of this particular strategy was to foster the foreign direct investments as well as to restructure the external debt and escalate the growth of the private sector of the country. Along these lines, the peso the Mexican currency was pegged to the United States dollar with the intent to encourage price and trade stability (Hermosillo & Billings., 1996). This trade liberalization has resulted in the rise of imports and exports of the country and at the same time increment in the capital inflow. Furthermore, the opening of the borders to United States facilitated the economic growth of Mexico and diminish the inflation. Nevertheless, the country became exceptionally vulnerable to the changes in the external forces. At the instance, when Peso was pegged against the United States Dollar, the value was set at an extremely high rate due to which the purchasing power of the Mexican consumers significantly increased. As a result, trade deficit of Mexico continued since the government was compelled to pay for the rise in consumption.
Another factor leading to the Balance of Payment issue in Mexico was the decline of the confidence of the investors. The confidence of the investors lessened mainly because of the overvalued money as well as deficit of the current account (Springer & Molina., 1995). The political condition in the country further worsened the condition. The political crises prevailed due to uprising of the Chiapas in the start of the years and ending with the assassination of the presidential candidate in March. These aspects to a great extent damaged the trust of the investors.
c) Policy Actions
The balance of payment issues as well as collapse of Peso could have been preventing by restricting the devaluation of Peso against the Dollar. In the year 1993, the current account deficit was 6.5% of the Gross Domestic Profit. It was extremely large when compared to majority of the standards and at the same time was financed by the short-term capital inflows. To avoid such situation, the policy should have been derived that emphasized on the direct investments by the means of license arrangements, joint ventures as well as completely owned facilities of the foreigners and other different sources of the hands-on capital. A policy should have been derived that not only made the host country attractive but also ensure the engagement in different trade actions (Kamin., 1999). Such form of capital exchange leads to long-standing stability and at the same time significantly contribute to the transformation of the host nation.
Further analysis of the financial crises in Mexico revealed the following shortcomings. For instance, the country was suffering from fragile and restricted links with foreign markets and at the same time was primarily dependent on the external conditions. Other aspects include financial underdevelopment at domestic level, weak fiscal situation arising as a consequence of vulnerability to both internal and external factors. Furthermore, there was lack of credibility with respect to the monetary policy. Taking into consideration, these elements, the general policy recommendations shed light on the need of strengthening the external financial links and utilizing them in the situation of crises as well minimizing the direct exposure of the country to the external threats (Gelos & Werner., 2002). One significant policy action that can be implemented in order to avoid such situation in future is the acceleration of the establishment of domestic financial markets and other intermediaries. Efforts should have been made in order to lessen the exposure of the public accounts to the external as well as internal shocks. The last policy action involve stabilizing of high and low frequency movement with respect to the nominal exchange rates.
d) Lessons from the Mexican experience
There are several lesson derived from the Mexican experience that can be utilized by other developing nations in order to financial crises. One noteworthy lesson is that...