Mexico's Balance of Payments Problem Essay

1889 Words Apr 23rd, 2012 8 Pages
| Mini Case for Chapter 3 | Mexico’s Balance-of-Payments Problem |

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Chapter 3 Mini-Case: Mexico’s Balance of Payments Problem
The term balance of payments refers to the accounting record of the country’s monetary transaction with the rest of the world. These transactions include the exports and imports of goods and services of the country, financial capital and financial transfers. The balance of payment record is a way to allow countries to recognize potential business partners for trade and to evaluate a country’s performance in the global economic competition. .
In this mini-case we will look into 4 key aspects such as Mexico’s key economic indicators, the causes of the country’s balance of payment problems, policies in
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With debt instruments like Tesobonos, Mexico has been financing their trade deficit mainly from the surplus from their capital account. However, by doing so, Mexico was exposing itself to a great deal of risk as with the case of “Nobody knows when the investors will stop investing” risk was always present. Mexico’s policy makers were aware of the dangers of having an overvalued currency and over reliance on portfolio investments as a financing tool for their deficit in current account. Despite the above complications, they were over optimistic about the economy, believing that it would remain attractive long enough for them to close the gap between imports and exports.
During that period, Mexico was left exposed to lax banking and corrupt practices. Members of Salinas family were known to have gained large sums of illicit pay offs. The financial sector was also liberalized, with no restriction on the lending and borrowing rates and there was no need for minimum bank reserve requirements. Mexico also witnessed banks that were allowed to be privatised without strict criterion inspection in the choice of new shareholders and top management.
With the high debt incurred by the government and large trade deficits by excessive spending by the people, the continued confidence of foreign investors was crucial in maintaining these debts. However three major events that took place that sparked off the loss of

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