From the mid-1970s through the early 1980s, Mexico faced persistent balance-of-payments problems resulting from the government's efforts to defend the overvalued peso while incurring massive external debts. By the late 1970s, oil prices had begun to fall, and international interest rates rose sharply, throwing Mexico's external payments so far out of balance that by mid-1982 the country could no longer service its external debt. The government was forced to declare a unilateral moratorium on debt service, devalue the peso, and drastically reduce public spending. By 1985 these measures had brought the current account back into surplus and eliminated the government's fiscal deficit, but at the cost of foregone economic growth and a sharp deterioration in the capital account. Throughout the early and mid-1980s, Mexico suffered a net capital outflow as a result of external debt service, high domestic capital flight, and weak foreign investment.
International oil prices collapsed in 1986, pushing Mexico's current account back into deficit. Meanwhile, debt-equity exchanges and capital repatriation produced a significant capital inflow and brought the capital account back into surplus. The external account balance was again reversed in 1987, as higher oil prices, increased nonoil revenue, a new commercial bank loan, and continued capital repatriation generated a US$4 billion current-account surplus, while heavy debt service obligations forced the capital account into a US$2.5 billion deficit.
Mexico's trade deficit rose sharply between 1989 and 1994, pushing the current account deeply into deficit. The current-account deficit ballooned from US$4 billion in 1989 to US$29 billion in 1994. Capital inflows were adequate to cover the current-account deficit through 1993, but began to falter in response to a series of political crises in 1994. The dramatic improvement in Mexico's trade balance between 1994 and 1995 enabled the current-account deficit to fall to US$654 million in 1995 and to be nearly eliminated by early 1996. This development increased the likelihood that the new peso would be strengthened by capital inflows, especially portfolio investment.
Mexico hemorrhaged capital through most of the 1980s. According to Morgan Guaranty, some US$53 billion fled the country between 1975 and 1985. Total capital flight from Mexico between 1983 and 1988 was approximately US$18 billion. Debt amortization was another major negative item in the capital account. According to the World Bank, debt repayments averaged US$5 billion annually between 1985 and 1990. Capital began to return to Mexico in 1986 and 1987, as investors and lenders were attracted by high domestic interest rates. The trend was reversed in 1988 as a result of an exchange-rate freeze, domestic interest-rate reductions, competition from higher United States interest rates, and political uncertainty. But capital flows were positive again between 1989 and 1993.
In November 1993, the Mexican government announced that cumulative foreign investment between December 1988 and November 1993 was US$34 billion, exceeding by 40 percent the government's original target. United States direct investment in Mexico more than doubled between 1986 and 1993, to US$23 billion. United States-based multinationals provided more than 60 percent of foreign direct investment in Mexico at the end of 1992. During 1993 foreign investors vastly increased their holdings of Mexican stocks and bonds, producing a huge inflow of portfolio investment. In October 1993, foreign investors held 29 percent of Mexican stocks and 74 percent of bonds.
Foreign investment for all of 1993 reached a record US$16 billion, an increase of 87 percent over 1992. Some two-thirds of this amount (US$11 billion) was portfolio investment, while US$12 billion went to projects approved by the National Foreign Investment Commission (Comisión Nacional de Inversión Extranjera--CNIE) and the remaining US$3 billion went to investments approved in the government's official register. The manufacturing sector received 47 percent of the new investment, and the services sector received 30 percent. The capital inflow boosted Mexico's capital-account surplus to US$16 billion between January and June 1993, representing a 35 percent increase over the same period of 1992. The government was counting on the capital inflow to ensure a continued large capital account surplus with which to balance the current-account deficit.
Mexico's capital account registered a US$15 billion surplus in 1995, mainly because of the country's huge increase in borrowing. Loan disbursements to Mexico rose from US$7 billion in 1994 to US$27 billion in 1995. Foreign direct investment dropped by US$4 billion to a total of US$7 billion for the year, while stock-market investment plunged from US$4 billion in 1994 to US$519 million in 1995. The capital-account surplus allowed Mexico's international reserves to recover from a low of US$3.5 billion in January 1995 to US$15.7 billion by year's end.
Data as of June 1996