U.S. financial crisis spreads to Mexico
In Mexico, the peso has plunged, unemployment is rising and foreign investors started pulling money out last month -- all fallout from the economic crisis in the U.S. Dan Grech reports from Mexico.
To woo back customers, Lapstec owner Miguel Rodriguez offers to charge them in dollars for parts, but in pesos for services, which lowers most repair bills. (Dan Grech / Marketplace)
More on The Economy, International, Mexico, America's Financial Crisis
TEXT OF STORY
Kai Ryssdal: One of the things that makes this financial crisis unlike some of the others it's been compared to is how quickly this one went global. European banks are in deep trouble. The Chinese economy has slowed 30 percent already. But you don't have to go quite so far away to see how the fallout's affecting other parts of the world. The credit crunch hit the Mexican economy fast and hard. So investors started looking for safety by buying dollars. That sent the value of the peso down nearly 40 percent against the greenback and it hasn't come close to recovering yet. For the first of two reports, we sent Marketplace's Dan Grech to assess the damage.
Dan Grech: Miguel Rodriguez fixes laptops -- a lot of laptops. His company, Lapstec, has 12 branches and 80 employees. Rodriguez expected to do $4 million in business this year. That was before the Mexican peso started losing value. Today, store shelves are filled with hundreds of repaired laptops unclaimed by their owners. That's because Rodriguez buys his parts in dollars, and he bills in dollars for the repair. To customers paying those bills in pesos, that's a price increase of around 30 percent.
Miguel Rodriguez translation: With the devaluation, customers are reluctant to pick up their laptop. They know it's going to be more expensive, and they prefer to wait for the dollar to stabilize or go back down.
The economies of the U.S. and Mexico are deeply intertwined. Half of Mexico's foreign investment comes from the U.S. Eighty five percent of Mexican exports go to the U.S. But with the American economy on the skids, exports to the U.S. are falling and unemployment in Mexico is rising. Rodriguez, the owner of Lapstec, places the blame across the border.
Rodriguez translation: Those U.S. banks don't realize that because of their loans, economies that did nothing wrong are being hurt. It's collateral damage.
The damage started in September, when investors panicked and pulled out of emerging markets because they were too risky. Othon Ruiz Montemayor ran the Mexican bank Banorte for eight years. He says investors sought a safe haven in the dollar.
Othon Ruiz Montemayor: You get a market crowded, everybody's buying dollars. What happens? Well, from 11 pesos to 14 pesos and $0.40.
Jesus Villareal is with Tecnolab, a Monterrey company that buys medical equipment from the U.S. He got a bill for $30,000 the day the peso tanked. He's calculating how much extra he had to pay due to the devaluation.
Jesus Villareal: Twelve thousand dollars. Yeah, in one day, yes.
The plunging peso has rocked confidence in Mexico's economy. Andres Franco oversees foreign investment for the state of Nuevo Leon, home to Monterrey. He says 10 foreign companies have put off their investment plans for at least a year.
Andres Franco: That obviously affects us. That's less jobs that are going to be created because of that investment that is being postponed.
Grech: How much money are we talking about?
Franco: Between $350 and $400 million.
Not all Mexican companies are calculating their losses. The weak peso makes Mexican products cheaper. That's good for exporters. Mexican labor is cheaper too, so more companies may eventually open plants in Mexico. Then there's tourism: Cancun and other hot spots are becoming good deals for Americans. Mexican businesses have been through this before. Eduardo Elizondo runs Solotoner, a successful copier supply company. His business has endured hyperinflation, devaluations and a 1994 banking meltdown known as the Tequila Crisis.
Eduardo Elizondo: We have had a lot of bad time in the economy in Mexico, and we have learned.
Elizondo says copier sales have actually increased 60 percent since the peso started losing value. His customers are rushing to spend their pesos on necessities now, in case the currency becomes worth even less.
In Monterrey, Mexico, I'm Dan Grech for Marketplace.
Comments
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From Oxford, OH, 11/18/2008
Dear Marketplace:
Could Lapsteck not averted passing on higher costs to his cutomers had it hedged with a Futures Contract in Dollars?
If so, where could he have gone for help?
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