The Tequila Crisis: Mexico's 1994 Currency Collapse

RUNNING HEADER: MEXICAN CURRENCY CRISIS
Case Assignment: The “Tequila Crisis”
A Case Study on the Currency Crisis in Mexico (1994-1997)
Stacey Troup
Global Finance/MBA-624
September 21, 2019
Professor Dr. Lisa Smith
Touro University Worldwide

Abstract
Mexico showcases how it has tried and failed but never given up on its people and its
economy through a series of policy reform and loans from international banking entities
designed to help restabilize the newly floated currency, revitalize the country, bring international
investors and foreign direct investments to the areas, and recover from the infiltration of drug
cartels all while striving for positive exports as part of NAFTA and the continued hope that the
country will rebound and once again be a place for tourists, families, and prosperity for
everyone.
Keywords: Economic Hardship; GDP; Foreign Direct Investment; Drug Cartel
Influence; Economic Principles; Macroeconomic approach to recovery; World Bank; IBF;
Corruption; Policy Reform.

Mexico’s Financial Crisis
Governments are faced with many decisions, of which how to handle their currency value
as well as their (often inherited) trade deficits while battling the economic factors which
negatively impact both value of currency and the extent to which their country imports from
others due to exchange rate variables. Mexico is no stranger to this problem as they faced
economic strife during the 1980’s that led to the “Tequila Crisis” and subsequently to the
“Midnight Decision”, both of which fed into the collapse of the U.S. economic problems in
2007/2008. Within the issues the country faced were the decision on how to maintain value of
their currency, how to repay their debt, ensuring trade relations internationally while reaching for
a positive economy, and how to structure assistance with foreign banking systems in order to
recover from these problems were all part of how this country sought to overcome their
collapsing economy and recover themselves in a world economic market.
Early Problems – Before “The Tequila Crisis”
The economy in Mexico went from “boom to bust” between 1987 and 1995 as the
political climate changed drastically among Latin American countries. Starting in 1982, the
Latin American debt crisis began implementing policies in order to stabilize their economy and
comply with both the IMF and WB standards. This resulted in a temporary freeze of public
sector prices and wages as well as tighter fiscal policy changes which resulted in wider tax and
increased policing on negative impacts of their economy, including tax evasion. Policy reform
was continued as the government decided to pre-fix the currency (peso) against a rate band in the
hopes of stabilizing the capital flow in that country to a more positive result under then Mexican
President Miguel de la Madrid. Through these policy changes, the hope was to reduce public
debt while simultaneously increasing interest from foreign investors (Turk, 2013).

By 1988, newly elected president Salinas de Gorteri continued to push for economic
liberalization for the country through already established policies and reforms to continue
positive growth in the country. His first change was to privatize several banks which assisted in
the growth and stabilization of the Peso while eliminating direct lending through this
privatization, resulting in a GDP growth rate of 3.5% per year from 1989-1992 while lowering
inflation, opening the doors wide for foreign capital inflow. Investors began pouring into the
country through an influx of U.S. based investors, which aided in crediting of the capital
accounts through (mostly) new portfolio investments. The peso, as a result, saw a 60% increase
in value during this time (1988-1992) (Turk, 2013).
Beyond these policy changes, President Gorteri was an integral part of the negotiations
which developed what became NAFTA, allowing for a more free-flowing economy between the
U.S., Canada, and Mexico, leading to the development of several treaties designed to enforce
transnational investments and trade contracts (Musacchio, 2012).
Many of the policy changes that came as a result of President Gorteri’s term of office
were begun between 1976-1982 by the administration of Jose Lopez Portillo who, during that
time, announced a moratorium on foreign debt service while starting a process of renegotiation
of their debt repayments that did not come to fruition until 1989 (during Gorteri’s term). The
announcement to suspend payments and investors began to sway, other countries in Latin
America followed suit and economic hardship followed as investor confidence moved away from
these countries. When the country could no longer support their efforts through policy change,
they sought assistance from the IMF and WB who offered relief in the form of loans, technical
assistance, and policy reform of economic policies which were designed to remove government
intervention in the economy through privatization (Musacchio, 2012).

By 1989 the government was in favorable economic light to begin borrowing again and
expanding international interest in their country. Through changes in the Foreign Investment
Act, a greater freedom for foreign investment in the Mexican Stock Exchange was enjoyed by
foreign investors, resulting in the trade of foreign securities to be done on the Mexican Exchange
for the first time in the country’s history (Musacchio, 2012).
Balance of Payments
Thanks to reforms to the public policies in Mexico, the country experienced a positive
inflow of foreign direct investments in 1991 as the country saw growth from $2 billion per year
to $4 billion per year. Portfolios (individual) also saw a positive reaction to these changes and
thanks to lifted controls on such investments, the government saw an increase from $3.4 billion
in 1990 to $12.7 billion by 1991, and $18 billion by 1992 (Musacchio, 2012).
Debt flows saw an increase as companies in Mexico sought to finance expansions through
foreign-currency loans, resulting in a dramatic increase in debt flows from 1990 and 1991
(Musacchio, 2012). A full impact of the reforms as compared to the Balance of Payments can be
viewed in Appendix “A”.
Fixed Exchange Rate
The decision in 1982 to change the currency to a fixed rate (of exchange) was truly seen
by 1995 when, since the decision to switch to a fixed rate was implemented, foreign investors
were met with assurances that their investments would not lose value in normal circumstances,
bolstering trade for the Mexican government. With the addition of NAFTA, businesses began,
through their loans and expansions, to prepare for the influx of business that would result from
this trade agreement. In turn, this fixed-rate exchange helped fight domestic inflation thanks to
enforcement of a monetary policy which fluctuated according to balance of payments

considerations rather than political influence. This led to stable prices of imports which created a
competitive price compared to imports, helping to fuel the local economy (Musacchio, 2012).
President Salinas implemented macroeconomic strategies to ensure that this currency adjustment
was strategically implemented to avoid the pitfalls usually associated with currency changes,
such as inflation and depreciation as had been experienced in several years prior (Musacchio,
2012).
While from the outside, the new value to the peso may seem positive, the resulting
increase in valuation of the country’s currency led to a drop in exports and a current account
deficit growing at a rate beyond the ability of the country to repay. President Gorteri’s
administration immediately issued “Tesobonos” (government bonds) in 1994 which were hedged
against the Dollar and this resulted in a transfer of risk in the FX rates from investors to the
Mexican government and (Tesobonos) became a major factor in the debt crisis after the fact
(Turk, 2013).
The “December Mistake”
Policy change, presidential shifts, changes to the economy. Seemingly, the government
was unable to attain a firm grasp on the problems looming in their economy following specific
policy changes designed to help the country rebound, combined with the privatization attempts
of their banking system in the late 1980s. A few issues caused these issues to escalate by 1994,
they were capital flight, turbulence due to political unrest, and overall mismanagement of the
budget and solutions to help resolve the capital flight issues (Musacchio, 2012). The incident
which caused the collapse in value of the Mexican Peso came to a head in December 1994, was
aptly referred to as “The December Mistake” (Robertson, 1995).

Background and Uprising
On January 1, 1994, the country got its first major political upheaval at the hands of the
Zapatista National Liberation Army (EZLN) following the taking of some of the largest towns in
the southern state of Chiapas. In March of the same year, a series of violent acts by EZLN began
with the public assassination of Luis Donald Colosio, the PRI candidate for the ruling party,
during a rally in Tijuana. Following that assassination, several more which followed as well a
surge of high profile kidnappings (of foreign and domestic executives) in the region as the EZLN
sought to take control of the unrest caused by the politicians in the area (Turk, 2013)
(Musacchio, 2012).
Among the kidnappings was the head of Mexico’s largest banking group who was taken
on March of 1994 and returned in June of the same year after reports that his ransom had been
paid (Mexico's Financial Crisis, N.D.). This unrest led to an exodus of investor confidence (and
investments) in the region as they began to move their investments from this area en mass. As a
result, the country depleted its reserves of foreign exchange, causing a shift in the exchange rate
peg against the U.S. dollar (Musacchio, 2012) (Turk, 2013) from excess borrowing. This unrest
also caused a massive collapse on the Mexican Stock Market as the kidnappings grew and the
fraud was growing, the market dropped 81 points out of growing fears among investors relating
to political unrest as well as uncertainty over the ability to overcome the growing losses at that
time (Mexico's Financial Crisis, N.D.).
The U.S. Federal Bank adopted a higher interest rate as a way to curb inflation, marking a
reversal in downward trend by 1990. By this time the nominal rate had dropped from 8% to
below 4% (1993) with a nominal interest rate hike to over 6.5% in just under a year, was causing

investors to wary, resulting in investments being kept at home rather than abroad, retracting most
foreign investment in the Mexico region at the same time (by 1994) (Musacchio, 2012).
Capital accounts were depleting due to the upheaval in the government in the region
(Mexico), money was bleeding from the country reserves and investments, and on January 1,
1994, the EZLN (after trying peaceful demonstrations, unsuccessfully), declared war on the
Mexican Government from the Lancandon jungle in the southern part of the State of Chiapas.
This upheaval was a public protest against NAFTA and the concurrent “capitalist ideology”
behind it and was carried out during the Mexican elections in 1994 (Musacchio, 2012).
During the last quarter of 1994, the country saw a near full depletion of foreign direct
investments in the area (which were predominantly liquid in-state) at the hands of the U.S.
investors as they were retracted en mass. By this time, nearly $20B in portfolio investments
were cut in half leading to a major depletion of the capital accounts and further unrest both
politically and financially in the area (Turk, 2013) (Musacchio, 2012).
Upon review of the macroeconomic state of the country, the government realized that
median household savings were not increasing which was causing a stagnant response to gross
fixed income levels. The government had done significant foreign borrowing but failed to assist
the failing economy or the people investing in same as domestic savings in Mexico fell from
18% of GDP in 1989 to 15% by 1994. This was concurrent with an increase in foreign
borrowing and an interest rate which was higher than that of their main trading partner, the
United States. Between 1994 and 1995, the Mexican economy saw its unemployment rise,
wages drop by 30% and a staggering inflation rate that rose from 10% to over 50% during that
time. This change in currency regimes, which came to be known as the “December Mistake”

was a major contributor to the Tequila Crisis and was the largest deficit to be experienced since
the 1982 Latin American Debt Crisis (Musacchio, 2012) (Turk, 2013).
FOBAPROA, Fraud, and Violence
Following this 1994 disaster sparked by the devaluation of the Peso and the economic
hardships that followed the massive capital flight by investors came great recession and
widespread defaulting of loans by both individuals as well as businesses as interest rates rose to
catastrophic levels (Musacchio, 2012).
Mexico was burdened with 174.4B in debt and the new president, Ernesto Zedillo was
faced with the monumental task of unburdening his country, and its inhabitants, from this
economic hardship. The solution to this debt crisis came as the result of a collaborative effort by
both the Mexican Government and the Central Bank who would work to re-establish confidence
in both foreign and domestic investors through monetary restructuring and revitalization of the
Peso. The IMF and several members of other countries partnered together to create a rescue
package for the Mexican Banking System. The package, which was used by the Mexican
government to guarantee deposits, was known as “FOBAPROA” (Fondo Bancario de Protection
al Ahorro) and was implemented through intervention by the National Banking Commission
(NBC) as a way to clean up their balance sheets while brokering the sale of banks to new
investors (usually foreign) (Musacchio, 2012) (Turk, 2013).
The process of brokering banks to new investors came after the US Congress approved a
reform to the Banking Law (International Banking Act of 1978) which lifted sanctions against
the foreign ownership of banks (or from holding a controlling interest). The NBC brokered the
sale of 7 of the 27 commercial banks operating in Mexico by 1996 (Musacchio, 2012).

FOBAPROA was conceived in 1990 under then-President Salinas de Gortari who had
developed the system as a way to utilize the capital gained from the privatization of public banks
as am emergency measurement to aid in the repayment of public (outstanding) debt, capitalize
banks and give greater liquidity relief during a crisis (Turk, 2013).
The Aftermath
By 1995, the true fragility of the banking system was felt across the nation. Defaults on
loans were at an all-time high, crippling the banking system which extended those loans. For
this reason, the Central Bank and the National Banking Commission began the bailout (and
cleaning) of the financial system in Mexico in February of that year. The first program, a trust
fund named PROCAPTE (which was funded by the FOBAPROA deposit insurance reserves in
conjunction with funds from the Central Bank) was created. PROCAPTE lent capital to banks in
order to provide a 9% capital ratio in exchange for (five-year) subordinated debentures which
came with the caveat that should the loans default, the debt was convertible to ordinary stock that
could be sold by the government to aid in repayment. During this time, banks were prohibited
from issuing further debt or paying dividends to investors until these debts were repaid to the
government. The Mexican government also opened a special dollar credit window to help banks
pay for their dollar-denominated debt window (collateralized debt) (Discount Window, N.D.)
(Musacchio, 2012) (Turk, 2013).
During the extension of the FOBAPROA program, The Banco de Mexico gave a U.S.
$46.4B dollar-in-dollar credit, at above-market interest rates, to banks. This incentive increased
liquidity from both the program and the Banco de Mexico, allowing banks to meet their short-
term domestic and foreign currency-denominated debts, thus boosting confidence in the banking
system and forming a base for future investment in the country. During this program

implementation (February 1995) Mexico received $48.8B through the support package with the
IMF (in conjunction with the U.S., G10, central and commercial banks) to help finance this debt.
This bailout, at 14% of GDP, was the most expensive bailout of the 1990s (globally)
(Musacchio, 2012) (Turk, 2013).
What was not expected during this bailout was the widespread fraud that would take
place. As bankers determined that the brunt of the risk was on the government, they began to
issue (unsecured) loans to themselves and their related companies to the tune of 20% of (the
value of) all large loans at that time, ultimately paving the way for the U.S. Equity Markets
Crash in 2007/2008 (Musacchio, 2012).
The United States tried to come to the aid of the country in 1995 following a public
statement by Robert Rubin, the (then) Treasury Secretary of the U.S. who warned of worldwide
devastation as a result of the devaluation of the Peso which could have dire consequences to
global economies. This relief came in the form of a $50 billion bailout (similar to TARP funds
issued within the U.S. during 2007/2008), of which, the U.S. Treasury provided $20B and the
remainder was given through the IM ($18B), the Bank of International Settlements ($10B), and
private banks who gave $3B. Seeking to unburden the country from this crippling debt, the
government in Mexico only used what was necessary from the U.S. ($13B) and promptly repaid
the bailout ahead of schedule while rebuilding reserves it had previously depleted while
simultaneously overhauling its macroeconomic public policies (Musacchio, 2012).
The G-10 was vocal during this time regarding the payments made on behalf of the
country as well as the impact it would have on a global scale. By 1996 the statements by the G-
10 were more focused on “improving sovereign debt restructuring mechanisms including
collective action clauses on sovereign debts” while suggesting that the IMF should prepare itself

to lend money to help bailout (outstanding) bonded debt (globally) (Musacchio, 2012). This
impact would again be needed in 1998 during the FOBARPRA bailout as a reformative measure
to correct the fraud and imbalances that were present.
Bouncing Back – Post-1995
Following this crisis and the management of repayment of the loans/bailouts the country
took during this time, Mexico ended up with a more stable economy (1997-2012). The country
also rapidly expanded their trade relations with the US and abroad, leading to the country
becoming the recipient of the single largest foreign direct investment (among emerging markets)
and saw their GDP grow to $15,000 (USD, per capita, per person) (Musacchio, 2012).
The trade boom that was felt by the country had an impact on their balance of payments.
As the country positively impacted their current account through net trade, net income was only
“minimally affected” by this trade boost. The exchange rate (currency/Peso) assisted in the
outcome of the balance of payments widening as it rose in value, leading to a surplus of currency
due to lower exchange rates at that time (Turk, 2013).
The Capital account was impacted during the is time, as portfolio managers (PM’s) fled
to the region to invest their money locally. Foreign direct investors, however, were not as eager
to return to the area at this time. Mutual funds and stocks rose as the PM’s sunk money into
mutual funds and stocks. While these investments are more easily traded and “liquid” in nature,
their returns are often greater and this was a draw for PM’s within the country wishing to
rebound portfolios for their clients accordingly in a positive light (Turk, 2013).
As of 2012, the Mexican currency was still rebounding while adhering to a floating
exchange rate of the currency (Peso), leading to a more conservative attitude toward lending
(following banking reform). The country enjoyed the lowest private debt rates among Latin

American countries and was able to rebound from the Equity Market Crash/crisis of 2007/2008
(Turk, 2013). At this time it is estimated that 80% of assets within the Mexican banking system
are owned by foreign entities (multinational companies), following the change in law which
allowed foreign ownership of banks in 1997 (Musacchio, 2012).
While seemingly legitimate business reforms are seeing positive light, the drug trade,
which is prevalent in this area, continues their strife against corporate regimes and international
trade restrictions, seeking to control drug flows into domestic and foreign lands without reprieve
or consequence through methods of violence, corruption, and murder to attain their goals (Turk,
2013).
FOBAROA Bailout – 1998
In 1998, following widespread loan fraud with FOBAROA loans in Mexico, the country
sought to attain monetary assistance to help them recover the losses to the program as well as
reform policy for regulatory regulations within the country. In October of 1998, the agreement
on the FOBAROA bailout pact was reached between Mexican legislators and the Mexican
Government (Dow, Jones & Co, 1998).
The pact called for loans to be returned to banks rather than to be held by the program
which transferred the responsibilities of managing the loans as well as the risks associated with
the potential losses back to the banks. In addition, the program was audited from an operational
perspective in order to drive reform and assistance to the region (Dow, Jones & Co, 1998).
New regulations relating to bankruptcies were adapted as well as new loan-loss
provisions equal to 100% of their credit portfolios which were not backed by a credit agency,
now required to be established as a safeguard. The total monetary bailout in exchange for these
reforms was estimated at $56 billion (Dow, Jones & Co, 1998).

Ironically, a majority of the crime and fraud that happened to the program was at the
hands of private banking executives who defrauded the program before leaving the country to
places without extradition (Rosen, 2007).
Corrupt Banking – HSBC
HSBC had acquired branches of Mexican banks through a levered buyout during this
time. Confidence in the banking system was growing as corporate banks came in and the public
view began to improve at the thought of recovery through growth. This, however, was simply a
smokescreen hiding bigger problems.
On December 11, 2012, the SEC (Securities and Exchange Commission, a civil
regulatory agency governing the banking and trading industry) filed suit in a New York court
citing that HSBC intentionally and willfully allowed the laundering of Mexican (and Columbian)
drug cartel money through its branches (and purchase/acquisition of same) between 2003 and
2010 having ignored regulatory requirements of KYC (AML Laws) which are direct violations
under Title 31, United States Code, Section 5318(h)(1), and Title 31, United States Code,
Section 5318(i)(1), respectively (U.S. Department of Justice, 12) (U.S. Department of Justice ,
2012) (Viswanatha & Wolf, 2012).
The case was settled under a Plea Agreement with U.S. Regulators and resulted in the
largest payout in U.S. History and included forfeiture of $1.26B in profits from the trade as well
as a civil penalty of $665 Million. Subsequent punitive damages for corrupt business practices in
dealings with nations/customers who have known drug cartel or terrorist connections followed,
with a penalty of $1.5 billion from same later that same year (Viswanatha & Wolf, 2012).

Policy Reform – U.S. Trade/Mexico
In 2019, President Trump announced a retaliatory tariff (threat) on imports from Mexico
as a combative measure to the influx of illegal immigrants who were flooding into the country.
He boasted that the tariffs could bring up to $17B in revenue to the U.S. as a result but this
measure was met with discord from both houses. That same day, the U.S. and Mexico reached a
deal for greater protection at the border while removing the imposed tariff as a way to strengthen
bonds between neighboring lands and boosting trade for both (Shear, Swanson, & Ahmed,
2019).
The border war continues in the U.S. with many countries as the current regime seeks to
lower the deficit through imposed tariffs and fees, geared toward not only lowering the deficit
but driving jobs to the U.S. However, as inflation rises in the U.S. and wages are at an all-time
high, the sectors of business which are imported such as electronics from China, Avocados from
Mexico, steel from Japan, and others will likely never make a U.S. come back to the levels
experienced in the 1950s when U.S manufacturing jobs and farming jobs were sustainable in the
economy due to the cost of living.
Mexico, by current standards, is also living poorly for more than 33% of its residents.
Often living 2 to a room in impoverished conditions, 34% of Mexicans live this way and often
flee the country for a better way of living. However, without formal education or language
skills, they often become “drags” on the U.S. economy through pubic assistance, the inability to
work legally, and federally funded programs that allow them to live free while the country (U.S)
overlooks its own problems of homelessness and strife courtesy of “Sanctuary Cities” such as
NYC (Johnson, 2019).

Mexico needs greater investments in human capital as a way to help their citizens better
themselves in ways which the U.S. has adopted, such as free city colleges, student loan
availability based on income, etc.
Cartels continue their growth earning approximately $49B per year while the country’s
oil production industry slumps by 50% but remained the Number 1 exporter of cars to the U.S. as
auto manufacturers relocated shops there due to the lower cost of production afforded to them
(Johnson, 2019).
President Trump chose to scrap conventional NAFTA policies and agreements in favor of
his own machination referred to as The United States-Mexico-Canada Agreement, believing his
ideas are greater than those prize-winning economists of past. This plan, with its acronym
USMCA, can only be made legal following a Congressional vote and its impact only felt once it
is passed (as a way to determine succession of ideas).
New President, New Outlook
In 2018, Mexico elected a new president with (seemingly) more democratic views on
reform as well as a strict plan to weed out corruption within the government (and its projects).
Starting with the freshly announced International Airport for Mexico City project which was
scrapped amid controversy of padded contracts given to contractors from previous
administration. This cancellation caused a huge drop in the Peso which, surprisingly, recovered
quickly (in under a week) when announcing an airstrip to be the new location for the large
airport project, causing an index drop of 50 points as investors grew fearful of success (Zaga,
Trujillo, & Ortiz, 2019) Appendix B .
A halt on oil drilling followed for a period of 3 years, which will cost an estimated $1B
pere year in lost investments. Special economic zones were next on the list for cancellation.

These zones were designed to foster economic growth while attracting foreign investors (and
foreign direct investments) through tax incentives, trade facilities, duty-free customs
deregulation, infrastructure development, and deregulation of same. Scrapping of these projects
will cost billions per year in lost revenues and investments (Zaga, Trujillo, & Ortiz, 2019).
What the new President did do was give greater benefits to the elderly, increasing their
pensions to liveable standards; increased minimum wage to variable rates including up to 100%
in some areas, and implemented a program to reward a stipend to students who are trained on
specific job sites for work-study based programs to foster career development. This president
simultaneously lowered the wages for civil servants impacting what he felt were overpaid wages
for over 11k government workers at that time (Zaga, Trujillo, & Ortiz, 2019).
Analysts within the financial markets speculate that in the second half of 2019 (should
Trump’s new trade law pass), while anticipating public consumption to rise as wages and
standards of living are improved and the inflation rate is reduced due to the new Mexican
President’s programs (Zaga, Trujillo, & Ortiz, 2019). Overall, the outlook for this candidate is
strong but can he fight the immense power of the cartels and keep his government free from its
corruption?
Conclusion
Mexico has proven that it has what it takes to recover its self from a crushing blow to the
economy and the currency all while overcoming corruption and widespread crime at the hands of
the drug cartels in the area. They have changed how their currency is valued, repaid bailout
loans faster than anticipated, lowered their trade deficit through local production and sourcing of
goods for exports and remained a driving force in the NAFTA agreements for the three countries.

This recovery has come at great cost to the country. From kidnapping, murder, violence,
and infiltration by the cartels into the very core of the government (through incentives), the
country faces a long road ahead of them if they wish to rebound their people into the future. The
need for adaptation of human capital is imperative as is continued trade with foreign countries, as
well as the continuation of direct foreign investment which is legitimate and not wrought with
fraud and corruption.
The future of the country has a big task ahead of it trying to stay on the positive side of a
President who is so vocal about building a wall to keep its (illegal) immigrants out while
attempting to keep trade out through implied forced tariffs on imported goods to the U.S., public
humiliation and defamation of the country and its people by the U.S. Government, and violence
stemming not only from its own country but now from the people in the U.S. who have been fed
a diet of false accusations and misinformation as truth. The question is really not only can the
government of Mexico continue its upward trend of prosperity, low trade deficit, and positive
growth of its people but also can it foster international trade beyond the borders of the U.S. and
Canada while reducing its trade deficit while encouraging foreign investment and prosperity in
the area all while fighting against the cartels and their respective regimes who seek to control the
government actions? Only time (and possibly vast change in the regimes) will tell.
Mexico has the will, they have the way, but as long as the corruption of the government
and the control of the cartels is prevalent in the area, they will never truly be able to be a nation
where foreign investors flock to put their money, as the nation is viewed as unsafe and uncertain,
rather than a paradise (of which, parts of Mexico are amazing). They need to restore their former
glory and remove this influence, driving all of the above as well as tourist money to the area as a

way to bolster money (foreign and domestic) to the area through collaborative, global visitors
flocking to the area to witness the serenity and beauty the area can offer (but currently does not).

RUNNINGHEADER: MEXICAN CURRENCY CRISIS
Appendix “A”
Mexico: Balance of Payments Analytic Presentation by Country
Millions of U.S. Dollars
1988 1989 1990 1991 1992 1993 1994
Current account (excludes reserves
and related items)
$ (2,374.00) $ (5,825.00) $ (7,451.00) $(14,888.00) $(24,442.00) $(23,400.00) $(29,662.11)
Goods, credit (exports) $ 20,547.00 $22,842.00 $ 26,838.00 $ 26,855.00 $ 27,516.00 $ 30,031.00 $ 34,612.96
Goods, debit (imports) $ 20,273.00 $25,438.00 $ 31,271.00 $ 38,184.00 $ 48,193.00 $ 48,924.00 $ 58,879.80
Balance on goods $ 274.00 $ (2,596.00) $ (4,433.00) $(11,329.00) $(20,677.00) $(18,893.00) $(24,266.84)
Services, credit (exports) $ 8,421.00 $10,209.00 $ 11,646.00 $ 12,919.00 $ 14,018.00 $ 14,929.00 $ 16,124.31
Services, debit (imports) $ 6,281.00 $ 7,880.00 $ 10,323.00 $ 10,959.00 $ 11,959.00 $ 12,046.00 $ 13,042.61
Balance on goods and services $ 2,414.00 $ (267.00) $ (3,110.00) $ (9,369.00) $(18,618.00) $(16,010.00) $(21,185.14)
Primary income, credit $ 3,049.00 $ 3,160.00 $ 3,273.00 $ 3,523.00 $ 2,789.00 $ 2,694.00 $ 3,346.66
Primary income, debit $ 10,092.00 $11,261.00 $ 11,589.00 $ 11,788.00 $ 11,998.00 $ 13,724.00 $ 15,605.47
Balance on goods, services, and
primary income
$ (4,629.00) $ (8,368.00) $(11,426.00) $(17,634.00) $(27,827.00) $(27,040.00) $(33,443.95)
Secondary income, credit $ 2,270.00 $ 2,559.00 $ 3,990.00 $ 2,765.00 $ 3,404.00 $ 3,656.00 $ 3,821.67
Secondary income, debit $ 15.00 $ 16.00 $ 15.00 $ 19.00 $ 19.00 $ 16.00 $ 39.83
Capital account (excludes reserves
and related items)
$ - $ - $ - $ - $ - $ - ...
Capital account, credit $ - $ - $ - $ - $ - $ - ...
Capital account, debit $ - $ - $ - $ - $ - $ - ...
Balance on current and capital
account
$ (2,374.00) $ (5,825.00) $ (7,451.00) $(14,888.00) $(24,442.00) $(23,400.00) $(29,662.11)

Appendix “A”
1988 1989 1990 1991 1992 1993 1994
Financial account (excludes reserves
and related items)
$ 4,495.00 $ (1,110.00) $ (8,441.00) $(25,139.00) $(27,039.00) $(33,760.00) $(15,786.77)
Direct investment, assets $ - $ - $ - $ - $ - $ - $ -
Equity and investment fund shares $ - $ - $ - $ - $ - $ - $ -
Debt instruments $ - $ - $ - $ - $ - $ - $ -
Direct investment, liabilities $ 2,011.00 $ 2,785.00 $ 2,549.00 $ 4,742.00 $ 4,393.00 $ 4,389.00 $ 10,972.50
Equity and investment fund shares $ 2,028.00 $ 2,344.00 $ 2,100.00 $ 4,811.00 $ 4,032.00 $ 4,440.00 $ 8,038.90
Debt instruments $ (17.00) $ 441.00 $ 449.00 $ (69.00) $ 361.00 $ (51.00) $ 2,933.60
Portfolio investment, assets $ 880.00 $ 56.00 $ 7,354.00 $ 603.00 $ (1,165.00) $ 564.00 $ 766.77
Equity and investment fund shares $ - $ - $ - $ - $ - $ - $ -
Debt instruments $ 880.00 $ 56.00 $ 7,354.00 $ 603.00 $ (1,165.00) $ 564.00 $ 766.77
Portfolio investment, liabilities $ 1,001.00 $ 354.00 $ 3,369.00 $ 12,741.00 $ 18,041.00 $ 28,919.00 $ 8,182.21
Equity and investment fund shares $ - $ 494.00 $ 1,995.00 $ 6,331.00 $ 4,783.00 $ 10,716.00 $ 4,083.70
Fin. derivatives and employee stock
options, liabilities
... ... ... ... ... ... $ -
Other investment, assets $ 874.00 $ 1,114.00 $ 1,345.00 $ 395.00 $ (4,387.00) $ 3,038.00 $ 4,903.29
Other equity ... ... ... ... ... ...
...

Other equity ... ... ... ... ... ... ...
Debt instruments $ (5,753.00) $ (859.00) $ 11,222.00 $ 8,654.00 $ (947.00) $ 4,054.00 $ 2,302.12
Balance on current, capital, and
financial account
$ (6,869.00) $ (4,715.00) $ 990.00 $ 10,251.00 $ 2,597.00 $ 10,360.00 $(13,875.34)
Net errors and omissions $ (3,192.73) $ 4,503.73 $ 1,228.22 $ (2,277.95) $ (851.87) $ (3,128.34) $ (3,323.50)
Reserves and related items $(10,061.73) $ (211.27) $ 2,218.22 $ 7,973.05 $ 1,745.13 $ 7,231.66 $(17,198.84)
Reserve assets $ (6,721.40) $ 541.78 $ 3,260.88 $ 8,154.31 $ 1,172.85 $ 6,056.57 $(18,397.56)
Net credit and loans from theIMF
(excluding reserve position)
$ (83.66) $ 364.05 $ 957.66 $ 161.26 $ (572.27) $ (1,175.09) $ (1,198.72)
Exceptional financing $ 3,424.00 $ 389.00 $ 85.00 $ 20.00 $ - $ - $ -
This data report uses the BOP Standard Presentation format as defined in the 6th Edition of the Balance of Payments
Manual (BPM6).
(-) Indicates that a figure is zero
(...) Indicates a lack of statistical data that can be reported or calculated from underlying observations
(K) Indicates the splice point between official BPM6-basis estimates and IMF converted BPM5-basis estimates
Data extracted from IMF Data Warehouse 9/22/2019 10:35:49 PM
Appendix “A”
1988 1989 1990 1991 1992 1993 1994

Appendix B

Definitions and/or Clarification of Financial Terms
1. Annual cumulative debt rate: Simply broken down is the yearly cumulative
(increasing) debt rate that a country carries. Debt can be in many forms from things like
student loans to tax payments in arrears.
2. Balance of Payments: Refers to the accounting of a country’s international transactions
during a specific period of time. It is inclusive of data from the Current Account, the
Capital Account, and the Financial Account (Khan, N.D.) (The Federal Reserve, N.D.).
3. Benchmark Rates: Rates calculated by independent entities to reflect the true cost of
borrowing money from each other. Banks may loan money at a rate of Benchmark +
“X%” (x=variable number) which implies that they would pay a set percentage over the
standard “benchmark” rate. For banks with a responsibility of FX trading or currency
regulation, the benchmark rate is used to monitor the “practical impact of our monetary
policy decisions. If an entity like the ECB/IMF who are lenders to countries in economic
strife, they will use the benchmark rates to track the changes in the currency which are
affected by a rate changes (Benchmark Rates, 2019).
4. Capital Accounts: Capital Accounts, for this purpose, refers to the imports/exports of
goods, services, and capital as well as things such as loans to other countries and foreign
aid between countries. For a country, the capital account is a snapshot of spending habits
in the country from an import/export perspective which will enable a broad view of if the
country is primarily an importer or exporter of goods from foreign countries while giving
a perspective on their financial health (Tuovila, 2018). Often referred to as a snapshot of
the change in assets owned by either domestic or foreign entities/individuals in the home

as well as foreign countries, it is a comparative analysis of the assets owned domestic to
foreign (Khan, N.D.).
5. Current Account: A measurements of goods and services which are imported and
exported from the country. It specifically measures the trade balance of a specific
country taking into account the international transfers of capital which affect its balance
(Amadeo, Current Accounts, 2019).
6. Debt to GDP Ratio: Compares a country’s public debt against its GDP. In simple terms
it is what a country owes in debt vs. what it produces for revenue (export) and can be
determined with the following formula (Kenton, Debt to GDP Ratio, 2019):
Debt to GDP = Total GDP of Country
Total Debt of Country
7. Dollar in Dollar: Is an even exchange of money for the same amount of money in
another currency, also referred to as a “dollar for dollar” exchange.
8. Economic Liberalization: The lessening of government restrictions and regulations in
exchange for “greater participation by private entities” (Economic Liberalization, N.D.).
A close relative to this concept in the U.S. is a government subsidy, such as a tax
abatement or incentive, in exchange for establishment of a business in a specific city or
state (Economic Liberalization, N.D.).
9. Embargos: Merriam-Webster defines this as a government order prohibiting commercial
ship departure at its ports, a prohibition on commerce, and a “stoppage” (Embargos, n.d.)
10. Exchange Rate Regimes for Currency:
a. Fixed/Pegged Rate: A “fixed” or “pegged” currency regime refers to one which
is fixed against another country’s currency or the value of their gold reserves.
The exchange rate is set by the central banks rather than the open market while

buying/selling the currency of the country on the open market as a way to balance
supply and demand (Pegged Exchange Rate, n.d.) allowing them to completely
control the value of their currency.
b. Floating: a floating exchange rate is one that continually changes based on the
demand for the currency on the open market. Example: Canadian dollar value
may be valued at .95c to $1.00 U.S. today but if the demand for Canadian
currency dips or becomes less in demand, the price drops such as when you try to
trade in your currency at the border and discover that your .95c on the dollar is
now valued at .63c. Your initial exchange if you had exchanged $500 (CAD) for
USD would have been $475.00 USD but since the exchange dropped your trade
back value would have dropped to $315 USD at the .63c to $1.00 USD once the
dip occurred. This variable exchange rate is the premises of a floating exchange
rate regime (Floating Exchange Rate, N.D.)
c. Managed Floating Rate (“Dirty Float”): This method allows a central bank for
the country in question to insert itself into the FX markets to change the direction
of the currency during volatile periods which are considered excessive in length
as a way to “shore up” the balances (Managed Floating Exchange Rate, N.D.).
11. Exchange Rate Variables: There are eight factors which impact exchange rates. These
variables are inclusive of inflation, interest rate, public debts, political stability (and
economic performance), terms of trade, current account deficit, recession, and
speculation (8 Key Factors that Affect Foreign Exchange Rates, 2019).

12. Financial Account: Is an account which records and represents the net acquisition and
disposal of financially based assets as well as liabilities for both domestic and foreign-
owned assets within a country (Financial Account, N.D.).
13. Financial Bailouts: Is the injection of financial support (cash) by a government,
business or individual as a way to provide needed resources to a failing company,
country, or entity (aka Capital Injection) (Twin, 2019).
14. Foreign Direct Investments: This is a definition of an individual or business who owns
more than 10% of a foreign company (per IMF definitions). When less than 10% of a
foreign company is owned by same, it is considered part of their portfolio (of
investments) rather than a foreign direct investment ownership (Armadeo, 2019).
15. FX: Is a banking term used to describe a foreign exchange (currency). An FX desk at a
bank is one that trades exclusively in currency from varying nations on a global scale.
16. G10: Is a collaborative of eleven nations including Belgium, Canada, France, Germany,
Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United
States where G10 is short for “The Group of Ten”. Their purpose, collaboratively, is to
consult and “cooperate” on matters concerning economic, monetary, and financial
matters as needed in coordination and conjunction with the IMF and the World Bank and
their needs (G10, N.D.).
17. GDP: In long-form is the Gross Domestic Product. The “GDP is the sum of the market
values, or prices, of all final goods and services produced in an economy during a period
of time” (Gross Domestic Product, N.D.). It is an output calculation of export vs import
variables a country consumes or sells to other countries.

18. Inflation: Simply defined, it is the rate at which a (measure of) price of an item increases
over a period of time, impacted by the value of the currency in the country. Inflation is
often referred to as a decrease in the value of a currency’s buying power due to loss of
value (Chen J. , Inflation, 2019).
19. Intellectual Capital: Often referred to as “Human Capital” or “Knowledge Capital”, it is
the ability of a country to derive competitive edge through innovation as a result of
education available to the people within a country. The innovations and competitive edge
drive the earnings capabilities of the people, and ultimately, the country (Sharma, 2010)
20. Liquidity: Is a measure of a company’s (or country’s) excess cash reserves which enable
them to pay their debts. Liquid assets are, in essence, cash.
21. Macroeconomics (Trends): Is a measure of how an economy behaves. It takes into
consideration things like inflation, price levels, rate of economic growth, national
income, GDP, and changes in unemployment (Chappelow & Segal, Macroeconomics,
2019).
22. Microeconomic (Trends): Is a measure of things such as customer demand, production
theory, opportunity costs, market structure, supply, demand, and equilibrium, elasticities
measurements (that is, how the demand for a product changes in relation to price of
goods), etc. (Chappelow, Microeconomics, 2019).
23. Moratoriums (in debt repayment): Moratoriums are orders by government as a way to
temporarily suspend/halt a specific event or law. For this paper, moratoriums refer to the
announcement by Mexico’s finance minister, Jesus Silva-Herzog’s 90-day moratorium
announcement relating to the renegotiation of payment periods for its debts. During this

time, no payments were made against the debt while negotiations for repayment terms
were held (Kenton, Moratoriums, 2019) (Turk, 2013).
24. Mutual Funds: These are investments that are done on a “pooled” basis with other
investors in order to have greater purchasing power of a collective of investment vehicles
such as stocks, bonds, or other securities that might be out of reach to an individual
investor due to high purchase requirements. The Portfolio Managers who run these
strategies are responsible for collectively gathering the individual investors for this type
of investment and for reporting to these investors the performance of their investments at
specific, pre-determined times throughout the life cycle of the investment (Fidelity
Learning Center, N.D.).
25. NAFTA: The North American Free Trade Agreement: Treaty entered into by the United
States, Canada, and Mexico with an effective date of January 1, 1994. Its primary
purpose was to create a “tariff-free” trade environment between these three countries
within the agricultural, manufacturing and services industries while removing investment
restrictions and protecting intellectual property rights. The primary trade impacted by
NAFTA agreements is oil stemming from these countries which keeps gas prices low in
the United States (NAFTA (North American Free Trade Agreement), N.D.).
26. Non-Financial Assets: For this paper, the term refers to property owned by both foreign
and domestic parties. Referred to as non-financial assets due to the fact that the assets are
not trading on any markets like stocks are (which are financial assets), they are simply
physical assets (Chen J. , 2019).
27. Portfolio Investments: Is, in its simplest explanation, all of the investments held as part
of your investment strategy, including (but not limited to) things such as 401(k) plans,

that hold an inherent value at redemption or maturity. Also within this broad definition
are things like stocks, bonds, ETF’s, trust accounts, and many others (Jackson, 2019).
28. Privatization of entities (i.e. banks): To privatize an entity simply means taking it from
a government-owned entity to a private company owned entity. For the purpose of this
paper, most of the Banks in Mexico were government-run but they became privately held
through purchase by multinational companies during strife in the country, this is how a
company becomes privatized (Privatized Banking, N.D.)
29. Public Debt: Often referred to as “Sovereign Debt” is the debt outstanding from one
country to another, be it business, individual, or even another country (Amadeo, Public
Debt With Its Pros and Cons, 2019).
30. Public sectorpricing/prices: This term might be slightly misleading as you might
misinterpret the public sector as a public business (private) and the pricing of goods and
services they produce. However, Public Sector pricing actually refers to the pricing of
goods and services produced/provided by government-owned entities for public
consumption or sale (export) (Egwakhide & Nyor, 2012)
31. Risk Premium: is the risk associated with an investment in addition to the determined
“risk-free rate of return” given to it (Hayes, 2019)
32. Surplus: consists of both consumer surplus and manufacturer (producer) surplus and
refers to any amount of product in excess of the demand for it in a marketplace (Kenton,
Surplus, 2019).
33. Subordinated Debentures: Also known as “junior securities” are unsecured loans or
bonds that rank below other securities with respect to claims on assets or earnings. In the
event of default of a subordinated debenture, creditors who hold this type of security will

not be paid until more senior bondholders/debtholders are paid in full. In comparison to
US Bonds it is similar to the difference between an AAA-rated bond and a CCC-rated
bond (in theory) (Chen J. , Subordinated Debt, 08).
34. TARP funds: TARP, or Troubled Asset Relief Programs are emergency cash reserves
given to banks from the Federal Government (U.S.) as a way to keep them from collapse
during a financial hardship within the country. These funds were offered pursuant to the
Emergency Economic Stabilization Act of 2008 and are authorized from the U.S.
Treasury. Note: TARP expired October 3, 2010 (Amadeo, TARP Bailout Program,
2019).
35. The IMF: The International Monetary Fund (IMF) is a collective of 189 countries
working together to “foster global monetary cooperation, secure financial stability,
facilitate international trade, promote high employment and sustainable economic
growth, and reduce poverty around the world”. Originating in 1945, the IMF is governed
by and accountable to the 189 countries within its charter (About Us, N.D.). The primary
focus of the IMF is economic surveillance, lending, and capacity development. They
provide loans to countries in order to assist their economies when they have issues with
balance of payment difficulties (About Us, N.D.).
36. The World Bank: Is a collaborative financial institution that provides low or zero-
interest loans to developing countries or to countries experiencing strife within their
financial stability who may be experiencing extreme poverty. Established in 1944 in
Washington D.C., and is managed by the member/partner countries which are part of its
charter (What We Do, N.D.)

37. Trade Deficit: refers to the amount a country owes to other countries governments as
the result of importing more than they export.

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