Governor of the Bank of Mexico Warns of Severe Economic Shock

Agustin Carstens, governor of the Bank of Mexico, issued a stark warning about the country's economic prospects in light of a global downturn, which is particularly impacting oil-exporting countries such as Mexico.

“Emerging markets need to be ready for a potentially severe shock … The adjustment could be violent and policymakers need to be ready for it,” Carstens told the Financial Times Sunday.

According to the Mexican economist, the shock could come as a result of a change in what he called “non-conventional monetary policy” in rich countries and the slowdown in the Chinese economy.

International investors have begun selling off stocks and bonds from emerging markets. These were initially purchased during a period when these assets were attractive as a result of a commodities boom and the monetary policies of the U.S. Federal Reserve which made borrowing cheap.

The U.S. Federal Reserve raised interest rates for the first time since 2007 in December 2015 and economists have forecast three more increases in 2016, making it more expensive to borrow. This combined with the sell off could ultimately produce a credit crunch, making it difficult for companies to service their debts, putting serious pressure on central banks.

Mexico is witnessing troubling economic indicators. The value Mexican peso vis-a-vis the U.S. dollar has steadily declined approaching 20 pesos for one U.S. dollar.

The slide in the value of the peso is partially driven by the low cost of Mexican crude oil, a key export, which is currently being sold at approximately US$20 a barrel.

In response, the Bank of Mexico sold US$400 million in two auctions Wednesday, reported the Wall Street Journal.

RELATED: Venezuela Seeks Creative Solutions to Economic Challenges

Mexico is not alone in its need to counteract external economic factors.

Venezuelan President Nicolas Maduro acknowledged his country is facing an “economic emergency” and created the National Council for a Productive Economy in response, which is tasked with charting a course in order to preserve “the social achievements and political stability of the country.”

The dramatic drop in the price of oil, which accounts for 96 percent of Venezuela's export earnings, has severely impacted the availability of hard currency.

Ecuador, like Mexico and Venezuela, is also an oil-exporting country and similarly being challenged by the fall in the price of oil.

The governments of Venezuela and Ecuador, unlike Mexico, however, have pledged to maintain social spending.