US Ambassador Carlos Pascual Quits as Mexico Ebbs and Flows With US Economy

| Mar. 25, 2011 |

Published by Minyanville

US Ambassador to Mexico Carlos Pascual resigned this week, the first high-ranking diplomatic casualty of the WikiLeaks cables. The news came as a surprise to many, especially after Pascual had initially, poetically brushed off the cables as “impressionistic snapshots of a moment in time. But like some snapshots, they can be out of focus or unflattering.”

Mexican President Felipe Calderón first went public with his distaste for revelations in the cables just days before a visit to Washington. In an interview with El Universal, the president lashed out at America’s lack of cooperation with Mexico, describing the disclosures as showing the US to be “ignorant.”  When in the US, Calderón told the Washington Post that the cables had caused “serious damage” to the two countries’ relationship.

Calderón interpreted the cables as suggesting that Mexican soldiers were simply not brave enough. Mexican authorities have made it clear for a number of weeks that they believed that Pascual was due to be recalled.

The relationship between the US and Mexico is a fractious one but very important for the Mexican economy, which sees 80% of exports heading north. A recovery of the US manufacturing sector helped spur these exports and job growth. With exports rising 23% to $79.7 billion in the three months to January, finance minister Ernesto Cordero announced this week that he expects the economy to expand up to 5% in 2011, following 5.5% growth last year.

“The overview for the Mexican economy this year and next year is quite good and we believe that we are going to have a very good rally in terms of economic growth for the next years,” Cordero told Bloomberg.

The US Commerce Department reports that Mexico exported $229.7 billion to the US in 2010, 30% up from the previous year. While oil is a major export for the country, the current rise in prices will not help Mexico as it will other oil producers, says Cordero. High energy costs can dampen US growth and therefore cut its need for Mexican exports of oil.

“Oil prices are extremely important to Mexico in a good and a bad way. It’s good because Mexico exports oil and the higher the cost of oil, the more revenue the government gets,” says Eduardo García, founder of Mexican financial news site Sentido Común. “So that’s good for public finances. On the other hand, Mexico is probably more worried now than ever about oil prices dampening the growth rate in the industrialized world.

“The government would like to see oil prices come down a bit, not drastically, so that the recovery in the US may begin,” García added.

The Mexican economy ebbs and flows with that of its northern border. It shrank 6.1% in 2009 as the US fell into a recession but then rebounded quickly in 2010.

Retail spending fell in January, suggesting that domestic demand is some way behind exports as a driver of growth. Sales slipped 0.13% in January from the previous month in their sharpest decline in seven months. The worrying message, according to analysts is that January was the third consecutive month when data was below consensus.

“Although Mexican domestic demand is recovering, slowly but surely, it remains on a shaky footing,” said Benito Berber and George Lei of Nomura in a statement. “We believe some growth projections for 2011 are overly optimistic and premature.” Current growth estimates are between 4.5-5%.

As the dollar weakened against other major world currencies, the Mexican peso was able to close as its strongest in more than a week against it.  The peso closed at 11.49 per USD on Thursday, compared to 12.024 the previous day. The value of the peso has been straddling 12 to the dollar in recent weeks, bolstered by healthy US markets but pulled down by events in Japan and the Middle East.

The IPC Index rose 0.9% to 36,872 points on Thursday, its third consecutive rise in three days. Volume was 219.7m shares valued at $558m. Monterrey-based cement manufacturer Cemex (CX) saw shares up 3.6%, America Movil (AMX) up 0.7%, Grupo Mexico up 1.2% and Banorte was up 2.1%.

Indeed, it was retailers Wal Mart de Mexico (WMT) and Soriana that fell 0.3% and 1.5% respectively.