1.

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

exchange rate will bring in debt amount)