George S. May Business Blog

Mexico Asks IMF to Renew Credit Line

Mexico asked the International Monetary Fund to renew a $48 billion credit line on Wednesday to protect against possible market turmoil when rich nations withdraw life support from their economies.

Mexico, unlike similarly troubled nations, is not asking for money in order help itself out of these times, but they have been hit hard, and are wary as other countries perhaps withdraw money from the country and use it for their own ends.

Mexico, a major U.S. trading partner and Latin America’s No. 2 economy, is recovering from its deepest recession since the 1930s. Its financial markets have stabilized since the global financial crisis exploded in late 2008.

But it and other poor countries are still concerned about what will happen when the United States and other rich nations eventually raise interest rates and rein in spending. It’s the aftershocks of this that Mexico is currently troubled by, not just the immediate situation it faces.

Higher U.S. interest rates could lead investors to pull money out of emerging markets like Mexico to invest them in U.S. debt instead. Weaker government spending could slow the U.S. economy, which absorbs about 80 percent of Mexican exports, and thus obviously stands as a crucial number when figuring into the Mexican economy.

“The eventual withdrawal of monetary and fiscal support in industrial countries could cause a correction in the prices of some assets,” the ministry and country’s central bank said.

News of the request helped the Mexican peso to strengthen 0.28 percent to 12.59 per U.S. dollar. The loan program is one piece of the IMF’s Flexible Credit Line, which was set up in early 2009 to help well-managed emerging market countries weather the global crisis, and act as a kind of umbrella to shield these qualified countries when the going gets tough.

Poland said last month it would likely renew its credit line, there are several other countries interested in maintaining or expanding their relationship with the IMF, often seen as a necessary evil of the global economy for some more economically depressed countries, but sometimes their money can act as a lifeline to a country that cannot take a wait and see approach to their economies.

Mexican Central Bank Governor Agustin Carstens has said Mexico would like to gradually extricate itself from the IMF credit line after building up international currency reserves — also with hopes of warding off future market volatility.

In a joint statement announcing the request to the IMF, the finance ministry and central bank said Mexico wants a 1-year extension on the credit line, which it opened last year and was set to expire in April.

A senior IMF official said the institution would work to quickly approve Mexico’s request.

“A successor Flexible Credit Line arrangement can play an important role in continuing to support Mexico’s policy strategy and in maintaining external confidence,” said IMF First Deputy Managing Director John Lipsky.

A sharp drop in U.S. demand for Mexican exports like cars and refrigerators led Mexico’s economy to contract 6.5 percent last year. The country also was hit by sliding oil production and political gridlock, leading rating agencies Standard & Poor’s and Fitch to downgrade the country’s debt rating.

Mexico’s situation is at least example of a country without the most money or strongest economy guiding themselves through economic turbulence with prudent changes and tough decisions rather than asking simply for a bailout, or throwing money at the situation.

Economic troubles will likely run rampant for Mexico, but as long as they have a promise from the IMF they can work back towards being debt-free without worrying if they have enough capital simply to exist.

In a country which is no stranger to turbulent times, perhaps it’s not America who should worry how Mexico will fare, it seems like this time around they’re more experienced in how to weather fiscal storms.

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