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Research Papers in Economics

In the past, the run-up to Mexico’s presidential elections
has often been accompanied by economic crisis.
Looking at the upcoming election year, Dallas Fed econ-
omist Erwan Quintin concludes that Mexico is in much better
shape than it was prior to the Tequila Crisis of 1995. Mexico
ran into trouble a decade ago because its debt was large, main-
ly short-term, mostly in foreign hands and predominantly in
U.S. dollars. 
This year, fewer financial vulnerabilities loom. Mexico’s
debt-to-GDP ratio has fallen somewhat. Net public debt
peaked at nearly 100 percent of GDP in the late 1980s. The
ratio fell to 40 percent in 1995 and is now at around 30 percent.
Mexico has also been able to issue bonds with longer
maturities. Mexico started issuing 20-year bonds in 2003, and
today the weighted average maturity of the country’s internal
public debt is nearly three years. In 1995, the longest bond
matured in one year.
Mexico’s government now relies mainly on domestic bor-
rowers. Two-thirds of net public sector debt is in domestic
hands, compared with a third in 1995. Because a greater por-
tion of Mexico’s debt is peso-denominated, exposure to cur-
rency-market risks has been substantially reduced.
MEXICO: Chances Diminish for Election-Year Crisis
The price of natural gas rose to its highest levels on record
in December, prompting widespread fears of even further
price hikes.
Stephen P. A. Brown, Dallas Fed assistant vice president
and senior economist, attributes the market spike to a tight
market and speculation based on three assumptions: (1) Gulf
Coast gas production would be slow to recover from hurricane
damage, (2) a colder-than-normal winter would add to
demand and (3) higher prices wouldn’t curtail consumption.
Only one of those assumptions has held. It has taken
longer than expected to repair the damage done by Hurricanes
Katrina and Rita.
Business activity continues to improve in the region, but
January’s Beige Book found growing concerns in the Dallas
Federal Reserve District about high or rising costs. 
Prices are going up for a number of inputs, including
health insurance, shipping, paper, metals and property insur-
ance. Most construction-related materials costs are rising, too.
Homebuilders say they’re paying more for steel, concrete, cop-
per, roofing and framing.
Energy prices remain high by historical standards. After
falling steadily through mid-December, retail gasoline prices
rebounded at month-end because of escalating crude prices
and fears that reviving regulations on fuel additives could
reduce supplies, particularly imports.
Some firms managed to pass the increased costs along to
NATURAL GAS: After a Big Price Jump, Falling Back to Reality
The winter turned mild in January, reducing the need to
burn gas for heat. The higher prices have dampened demand,
largely in the industrial sector. The petrochemical industry, for
example, hasn’t restored production to pre-hurricane levels.
And homeowners might be turning down their thermostats.
Since December, natural gas inventories have risen to 30
percent above their seasonal averages. And prices have come
tumbling down—from the peak of $15.41 per million Btu on
Dec. 13 to less than $8.50 in the third week of January.
Starting with Katrina, natural gas prices moved way above
their historical relation to oil prices. With the declines since
mid-December, they’ve fallen back in line with oil.
BEIGE BOOK: Rising Costs, Stiff Competition Squeeze Economy
customers, but many Beige Book contacts report that stiff com-
petition limited their ability to raise prices. Builders, for exam-
ple, say that home prices aren’t going up as fast as they’d like.
Wage and fuel costs have risen faster than shipping rates, par-
ticularly for state and federal government contracts whose rates
were set three or four years ago.
Not all recent readings involve higher prices. Reduced
consumption and warmer weather pushed natural gas prices
down sharply in January. Prices declined for most petrochem-
ical products, including styrene, polystyrene, polypropylene,
bottle resins, benzene and ethylene glycol. Contract ethylene
prices have held up, but spot prices are down significantly.
Details of the latest Beige Book report can be found at
www.dallasfed.org.
NoteWorthy
QUOTABLE“Cross-border shopping accounts for a
lot of jobs along the border, and it’s significant even in
places like San Antonio and Houston.”
—Keith Phillips, Senior Economist
SouthwestEconomy FEDERAL RESERVE BANK OF DALLAS • JANUARY/FEBRUARY 2006 14

Noteworthy

http://dallasfed.org/assets/documents/research/swe/2006/swe0601f.pdf

Noteworthy

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Research Papers in Economics