INTRODUCTIONThe United Mexican States or simply Mexico is a country located in North America.
Mexico has a free market economy, and is firmly established as an upper middle-incomecountry with the highest per capita income in nominal terms in Latin America, and it is the13th largest economy in the world as measured in Gross Domestic Product in purchasingpower parity. After the 1994 economic debacle, Mexico has made an impressive recovery,building a modern and diversified economy.
In our report, we have analyzed this economic debacle called "Mexican Peso Crisis (1994)".
1. DEVELOPMENT OF CRISISFrom the mid 1970's through the late 1980's, Mexico was dealing with high inflation andcurrency devaluations, which prevented the country economically developing. Moreover,there was high current account deficit in the country. These economic events resulted inDomestic Debt Crisis in 1982. After this crisis, most of the Mexican banks have beenexpropriated. The government applied very strict regulations on these banks, deposits andcredit rates were determined strictly, reserve requirement ratio was significantly high.
Atthe last few years of 80,'s Mexican government started the liberation and deregulationperiod and initialized reforms to make its economy more open, efficient, and competitive.
Domestically, these reforms include privatizing many state owned enterprises, removingrestrictions on foreign investment, and reducing inflation and government expenditure.
Internationally they reduced trade barriers. These reforms resulted with an increase ininvestments and capital flows to Mexico. Most of the foreign resources were used as acredit for private institutions, there was a huge increase at private credits, the rate of thesecredits in GDP has increased from 10 to 40 percent, but simultaneously there was a hugeincrease in bad debts. In 1994, the government has devalued its money by 15 percent butinstead of helping the economy, this devaluation triggered the foreign currency crisis.
Devaluation in peso continued at beginning of 1995 and caused many...