This article was originally published in Maclean's Magazine on January 23, 1995
Mexican Peso Slides
While Canada's dollar crisis reached a boiling point last week, Mexican Foreign Minister José Angel Gurria was in Canada for emergency meetings with bankers and senior federal ministers in an effort to shore up confidence in his country's own floundering currency. The symbolism was overpowering, bringing into sharp relief the nagging concern in the minds of many Canadians: could Mexico happen here? For that reason, the Mexican crisis generated more interest than usual in Canada.
The timing of the Gurria visit could not have been worse. The crisis with the dollar and the peso overshadowed the preparations in Ottawa for Prime Minister Jean Chrétien's 11-day trip to Latin America, which begins this week with visits to Uruguay and Argentina. Instead, the focus of concern shifted away from hemispheric trade to the turmoil in the Mexican economy and the impact on Canada.
Gurria's presence last week was significant because, for Canada, Mexico is no longer just another Latin American nation - certainly not since the abrupt devaluation of the peso on Dec. 20. As the third member of the North American Free Trade Agreement (NAFTA), along with the United States, it is now one of Canada's closest economic partners. As a result, the devaluation of the peso and the drastic plunge in value of Mexican stocks and bonds caused tremors for Canadian and U.S. currencies, just as Chile is stepping up its campaign to become the fourth member of the trade pact. The jitters created by Mexico's political and economic problems prompted a steep slide in the value of the Canadian dollar and led to a hike in interest rates and a new round of domestic economic uncertainty.
The repercussions of Mexico's crisis also were evident throughout Latin America. In Chile, the stock index sank three per cent last Tuesday, while on the same day in Argentina, the Merval stock index was pushed down by nine per cent and Brazil's Bovespa index was down 10 per cent. "The panic is spreading," said Claudio Di Gregorio, a spokesman for the Argentinian embassy in Ottawa. "The echoes of the wave are reaching us."
Business and government leaders from the region were doing all they could to mute that echo. In Toronto, where he met Trade Minister Roy MacLaren, Gurria insisted that Mexico remains a good place to do business, and, furthermore, has become an even better place to invest because of the devalued peso. "I think it provides excellent opportunities simply because the market is so cheap," he said. In fact, Gurria insisted - however improbably - that the currency crisis was just the tonic that his country's economy required, "the last adjustment that was needed."
For their part, Canada and the United States joined forces to help Mexico prop up the peso with a currency stabilization fund that is part of a $13.5-billion international support plan organized by the United States. Mexican officials first said that the fund would not be drawn down. But early last week, the Mexicans raised eyebrows - and ignited a panic in the financial community - by announcing they had already tapped $83 million from the Canadian credit line and $700 million from the U.S. portion. But despite the pledge of further support for the peso from U.S. President Bill Clinton - and the prospect of another, larger international rescue fund - MacLaren said that Canada had no intention of increasing its contribution to that effort. "I am confident - as I am sure the foreign minister [Gurria] is confident - that the worst is over," MacLaren said. In fact, buoyed by a strong international display of support for the peso, Mexican markets rallied in the final three days last week, regaining almost 12 per cent.
Even if the worst was over, the Mexican crisis tarnished Latin America's lustre, as well as that of other emerging economies, in the eyes of international investors. For critics of NAFTA, including Bob White of the Canadian Labour Congress, the panic was proof that NAFTA is fatally flawed. "I think those people who said this was going to be good for all three economies have egg on their faces," White said. And even keen supporters of free trade, including Reform mp and foreign affairs critic Bob Mills, conceded that the view that Latin American economies have matured and become stable needs some modification. "We need our eyes open," he said. "Now, we realize that there is a fair amount of risk."
Certainly, one of the principal problems that Chrétien will have to overcome in his upcoming trip - his itinerary does not include a stop in Mexico - is the relative ignorance of Canadians about Latin America and the heightened concern about the risks associated with doing business there. The Prime Minister's whirlwind schedule includes stops in Trinidad, Uruguay, Argentina, Chile, Brazil and Costa Rica.
So far, Canada's relationship with the 13 countries of South America is shaped almost exclusively by trade - and business is the overwhelming focus of Chrétien's trip. That is also in keeping with his often-expressed view that a prime minister can be a country's most effective salesman. Pre-negotiated contracts worth about $500 million are expected to be signed during the trade mission and, noted Chrétien's communications director, Peter Donolo, "increased demands for exports mean jobs at home."
The timing of the trip was intended to capitalize on the moves at December's summit of hemispheric leaders in Miami towards an American free trade zone and the commitment to include Chile in NAFTA by 1996. "Miami opened the door and we wanted to be the first ones through it," Donolo said. And despite last week's crisis, the federal government is not wavering in its commitment to expand trade south of Mexico. Chile's ambassador to Canada, Rodrigo Diaz, added that Chrétien's arrival is doubly important in the wake of the Mexican economic crisis. "It will show that Mexico's crisis is in Mexico and not generalized," he told Maclean's. "We must continue with the process."
In addition to its enthusiasm for trade, Canada and Latin America also share a sometimes overwhelming, and often difficult, relationship with the United States. As with the inclusion of Mexico in NAFTA, Canadian leaders increasingly view international trade with Latin America - as well as such emerging Asian markets as China - as a remedy to Canada's traditional over-reliance on U.S. markets. While the U.S. accounts for 80 per cent of Canadian exports, South America, Central America and China each account for only about one per cent. For their part, Latin American countries often perceive Canada as a developed and experienced potential intermediary in their dealings with Washington. "With the United States, there are problems. With Canada, we don't have complications," says Chile's Diaz.
Because Chrétien, as a politician, is intent on maintaining an unwavering domestic focus, his Latin American visit will almost certainly carry some national political messages. For one thing, Chrétien may hope to remind Quebecers, on the eve of the referendum, that, as he declared during the Asia-Pacific economic summit last November, "membership has its privileges." Canada may be a well-respected member of global trade blocs, so goes Ottawa's argument, but Quebec's participation is far from guaranteed.
As with so many other initiatives that Chrétien's government has embraced, however, the heightened interest in Latin America actually dates back to the days of the Tory government, when Brian Mulroney, in 1990, enrolled Canada in the Organization of American States. Now, spurred by Chrétien's visit, Marc Lortie, Canada's ambassador to Chile, expressed the hope that Canadian business ties will grow, and political and social ties will flourish as well. "There is no doubt that it is the future of where we are going," he said. But, as the dollar and peso crisis brought home last week, such close relationships are for both better and worse.
Maclean's January 23, 1995