resident Ernesto ZEDILLO,
entered 1995 in the midst of a severe financial crisis. Mexico's
membership in the North American Free Trade Agreement (NAFTA) with the
United States and Canada, its solid record of economic reforms, and
its strong growth in the second and third quarters of 1994 - at an
annual rate of 3.8% and 4.5% respectively - seemed to augur bright
prospects for 1995. However, an overvalued exchange rate and widening
current account deficits created an imbalance that ultimately proved
unsustainable. To finance the trade gap, Mexico City had become
increasingly reliant on volatile portfolio investment. A series of
political shocks in 1994 - an uprising in the southern state of
Chiapas, the assassination of a presidential candidate, several high
profile kidnappings, the killing of a second high-level political
figure, and renewed threats from the Chiapas rebels - combined with
rising international interest rates and concerns of a devaluation to
undermine investor confidence and prompt massive outflows of capital.
The dwindling of foreign exchange reserves, which the central bank had
been using to defend the currency, forced the new administration to
change the exchange rate policy and allow the currency to float freely
in the last days of 1994. The adjustment roiled Mexican financial
markets, leading to a 30% to 40% weakening of the peso relative to the
dollar. ZEDILLO announced an emergency economic program that included
federal budget cuts and plans for more privatizations, but it failed
to restore investor confidence quickly. While the devaluation is
likely to help Mexican exporters, whose products are now cheaper, it
also raises the specter of an inflationary spiral if domestic
producers increase their prices and workers demand wage hikes.
Although strong economic fundamentals bode well for Mexico's
longer-term outlook, prospects for solid growth and low inflation have
deteriorated considerably, at least through 1995.

National product: GDP - purchasing power parity - $728.7 billion (1994
est.)

National product real growth rate: 3.5% (1994 est.)

National product per capita: $7,900 (1994 est.)

Inflation rate (consumer prices): 7.1% (1994 est.)

Unemployment rate: 9.8% (1994 est.)

Budget:
revenues: $96.99 billion (1994 est.)
expenditures: $96.51 billion (1994 est.), including capital
expenditures of $NA (1994 est.)

Exports: $60.8 billion (f.o.b., 1994 e