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Mexico's economy taking hits from all directions

  • Story Highlights
  • Mexico's gross domestic product down 10 percent from same period last year
  • Analysts: Main cause of Mexico's nosedive is economy's dependence on U.S.
  • "If the United States isn't importing, Mexico isn't exporting"
  • Also: decline in tourism, oil and tax revenues; fewer expats send home earnings
By Arthur Brice
CNN
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(CNN) -- The Mexican economy went off a cliff in the second three months of 2009, with the gross domestic product dropping 10.3 percent from the same period last year, according to government figures.

The GDP for the second quarter also declined 1.1 percent from the first three months of the year, the National Institute of Statistics and Geography said Thursday.

The GDP, which is the market value of all goods and services in a country, is used to measure a nation's economic performance.

Analysts say the main cause of Mexico's nosedive is that the nation's economy is tied strongly to that of the United States, which is mired in the deepest economic downturn since the 1930s.

About 80 percent of Mexican exports go to the United States, said Allyson Benton, an analyst with the Eurasia Group consulting firm.

"If the United States isn't importing, Mexico isn't exporting," Benton said.

Susan Kaufman Purcell, director of the Center for Hemispheric Policy at the University of Miami, said Mexico can take some measures but "until the U.S. economy really starts recovering, Mexico is going to have a hard time moving up."

Other factors dragging the Mexican economy down include a tourism decline caused by the H1N1 flu outbreak and fears over continuing violence, declining oil and tax revenues, and fewer Mexicans abroad sending money back home.

"They're getting a blow from almost every corner," Purcell said.

Oil revenues, long Mexico's main source of money, are being hurt by lower global prices and declining production. Purcell and other analysts point to the rapid decline of the Cantarell oil field, at one time the world's second-largest. Production at Cantarell peaked in 2004 and has been falling by more than 10 percent every year since then.

"Oil production has been in decline since 2004 but it has declined significantly over the past couple of years," Benton said.

Mexico, which relies on oil revenues for roughly 40 percent of its budget, also is hurt by falling prices for crude oil. According to some estimates, Mexico needs oil to be at $70 a barrel to sustain revenue levels. Prices on Friday hovered around $70, but earlier this year they had dipped to close to $30 a barrel.

Remittances from Mexicans working abroad, most of them in the United States, also have fallen victim to the economic downturn. Fewer jobs in the United States means fewer opportunities for Mexicans to find work and send money home. Remittances rank after oil in terms of revenue for the country.

That revenue fell from $26 billion in 2007 to $25 billion in 2008, Mexico's Central Bank said, and is expected to decrease even more this year.

Tourism, Mexico's third-largest source of revenue, has declined steadily since an outbreak of the H1N1 flu was first discovered in Mexico in April.

In addition to a global recession that has affected travel everywhere, tourists had already been wary of going to Mexico because of violence that has seen more than 11,000 people killed since President Felipe Calderon came into office in December 2006.

The Mexican government said earlier this month that the tourism downfall has already cost the nation up to $300 million and some analysts say that figure is sure to climb.

The H1N1 outbreak also caused revenue shortfalls because the government closed bars, restaurants and many other public places at the height of the epidemic this spring.

As a result of all these circumstances, tax revenues have taken a hit.

"The big problem in economic decline in both Quarter 1 and Quarter 2 has been much lower tax revenues," Benton said. "When you are not producing or you are firing people, you don't have taxes."

For example, Purcell said, the taxes that Mexico's state-owned Pemex oil company pays to the government have fallen by up to 40 percent.

Mexican officials see hope on the horizon, however.

"In June of this year, the economy probably stabilized or touched bottom, and ... we'll start to see a recovery in the next quarter," Deputy Finance Minister Alejandro Werner told the Wall Street Journal.

Purcell said Mexico could help itself by adopting labor and tax reforms and modernizing its energy policy. For example, she said, Mexico's labor laws make it difficult to fire unproductive employees and Pemex has not been aggressively pursuing other oil fields to replace Cantarell.

She doesn't see that happening, particularly since Calderon's PAN political party suffered a drubbing in last month's midterm elections and no longer controls Congress.

Mexico's economic problems, she said, are "a combination of bad luck, bad planning and a stalemated political system."

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