Macroeconomic figures showed that households were not increasing their
savings and that gross fixed investment was not increasing, despite the increase in foreign borrowing. If capital inflows are used to finance an ephemeral consumption boom rather than productive investment, this will not generate adequate resources for future debt services Exhibit 4 paste (Credit growth for all sectors) Exhibit 12: Decrease in domestic saving % yoy Exhibit 6a: Pvt Consumption growth and fixed capital growth Exhibit 8b: Difference in exports and imports widening 2. Exhibit 1: Share of Domestic and Foreign in total financing. Most of the financing needs are met through foreign capital which are merely seeking high-yielding abode while home markets are depressed 3. Exhibit 15: Sentiments/expectations are influencing the foreign exchange rate. Exhibit 7: Proportion of portfolio investment and direct investment These were yield-sensitive flows and reliance on capital inflows subject to volatile animal spirits can be problematic 4. Basic balance, Capital flight risk and CAD calculation (Exhibit 3 & Exhibit 7) 5. Currency appreciation http://www.slideshare.net/Hasnain1991/mexico-crisis (Slide 3): Prof point Solution 1. Free-float peso: Peso should be allowed to float against dollar because otherwise there are chances of the government running out of foreign exchange reserves if it sticks to pegged exchange rate. In case of pegged exchange rate, if a floor is reached, there are no daily fluctuations in exchange rate that can provide signals to policymakers to produce good monetary policy. 2. Transactions intended to change the market's evaluation of a currency do not address the underlying economic conditions that ultimately determine the foreign exchange value of that currency. Most of the time, an arbitrary fixed exchange rate masks and over time amplifies imbalances that eventually surface as major crises. Without the veil of a peso pegged at 3.5 to the dollar in 1994, the policy errors of the Mexican central bank, which included monetary base growth in the neighbourhood of 25 percent, would have been evident well before the crisis broke. Investors would have been warned and officials forced to take action to avert the crisis. Exhibit 14: High foreign exchange reserves were also not sufficient to maintain the pegged exchange rate The first step toward a market solution is to curb inflation by reducing growth of the money supply. Exhibit 4: Growth in monetary base (M1b & M4c) - Hence, there should be inflation in the economy and it was contained due to PACTO agreement leading appreciation rather than depreciation of currency
3. Improve the financial regulation and accounting standards to ensure that
non-performing assets are not created and credit-worthy parties are given debt by banks 4. No loans in Tesobonos: Dollar denominated loans expose Mexico to exchange rate risk. Mexican debtors should negotiate directly with private creditors (not governments or international agencies) to arrange conditions and terms of repayment
Exhibit 16: Loan amount (110 bn pesos-Show the change in