Mexico Tequila Crisis Analysis Research Paper

The Mexican financial crisis of 1994-1995, also known as the “Tequila Crisis”, took place in December 1994 and is known as the first global crisis of last decade of the twentieth century. The crisis had little to do with the external debt situation and more to do with the short term foreign exchange problem which led to the devaluation of the peso against the U.S dollar. This action lead to the following significant outcome: 1.Worst banking crisis in the Mexican history.

2.Most devastating recession with GDP falling over 6% in 1995. 3.Largest depreciation of the currency, from 5.3 pesos per dollar to over 10 pesos per dollar.

THE CRISIS AND ITS TRIGGERS It is impossible to just point at one trend or event to explain the Mexican crisis. Below are the key triggers to cause this crisis:

1. The liberalization of the financial account allowed money to flow freely in and out of Mexico.

2. The low policy rate set by FED at the beginning of the ’90, led to a search by investors for higher yields. Mexico, which was fighting inflation, had a relatively high policy rate, making it attractive for foreign investment. This resulted in a strong increase of portfolio investment. In 1994, the FED raised its policy rate, causing a lower spread, as Mexico’s central bank did not follow. The result was a strong decline in portfolio investment.

3. Until 1994, Mexico was running a current account deficit, which was compensated by the financial account. However, a sudden stop of the inflow of portfolio investment in March/ April, led to a considerable depletion of the foreign exchange reserves.

4. To stop the outflow of foreign currency in March 1994, Mexico’s government started to issue short term dollar denominated debt, called Tesobonos. By November 1994, 70% of foreign holdings was dollar denominated. The deterioration of the ratio of foreign exchange reserves to foreign denominated debt (with a short maturity) started to concern investors.

5. In the year prior to the crisis, Mexico’s was confronted by social unrest. Two political leaders were assassinated, while the province of Chiapas was confronted with violence. In addition, there were doubts about the fairness of the presidential elections of 1994. THE BAILOUT

The major impact of the crisis was seen in the financial sector. Bad and fraudulent loans by the recently privatized banks were exposed. Many banks went bust. Thousands of Mexicans, particularly in the new middle class, defaulted on loans as interest rates rocketed, and had their homes repossessed. In 1995 GDP shrank by 6.2%. But Mexico had an ace up its sleeve: the North American Free Trade Agreement (NAFTA), which had come into effect on January 1st 1994. President Bill Clinton of United States reasoned that Mexico, then America’s third-largest trading partner, must be helped because of its importance to American jobs and investment. He also urged that this would dissuade a potential surge in illegal immigration into Mexico and to mitigate the spread of investors’ lack of confidence in the Mexico economy.

The United States coordinated a $50 billion bailout package in January 1995, to be administered by the International Monetary Fund (IMF) with support from the G7 and the Bank for International Settlements (BIS). The package established loan guarantees for Mexican public debt aimed at alleviating its growing risk premium and boosting investor confidence in its economy. The conditionality of the bailout required the Mexican government to institute new monetary and fiscal policy controls, although the country refrained from balance of payments reforms such as trade protectionism and strict capital controls to avoid violating its commitments under NAFTA. The loan guarantees allowed Mexico to restructure its short-term public debt and improve market liquidity.

IMPACTS OF CRISIS Just after the devaluation of the peso, Mexico’s economy started to rebalance. The process of rebalancing proceeded quite fast. In the first half of the year, Mexico’s economy contracted by 10%. In the three years thereafter, the economy recovered rather well, with an average growth rate of almost 6%. Moreover, the current account deficit declined from -5.8% in 1994 to -0.5% in 1995. Along with the fall in GDP, unemployment rose from 3.7% in 1994 to 6.2% in 1995. But, as with the overall economy, the situation on the labor market improved fast, showing a decline to 5.5% in 1996. The story for inflation was different. Due to the devaluation of the peso, goods and services from abroad became more expensive, pushing up inflation. In addition, given Mexico’s history of high inflation, the expected inflation shot up as well, worsening the inflation outlook.


After twenty-one years, Mexico continues fighting to recover their position against dollar. At 16.86 MXN/USD in 2015, the Mexican peso has lost roughly 21% of it is value against the dollar within a year. Fortunately, some changes in the monetary and fiscal policies had good impacts creating big changes positioning inflation around 5%, and current-account deficit is around 1.4% of GDP. However, the actual president Enrique Peña Nieto has created a bundle of energetic reforms that are an expected driver to growth the economy during 2016 through foreign investment within the oil industry, but due to a falling in the oil prices these strategies are losing interest from the private sector. On the other hand, a stronger dollar is good for Mexico because it generates more exports and investment in others industrial sectors like manufacturing and retail that can be translated as a support for the domestic economy.


The role of a business analyst could have a big impact to support or prevent a crisis as commented above. This role is very important during the life of any private or public organization that is trying to execute changes or implement new strategies, but the expectations of these roles are wide and depend of the type of organization and project.

As a regular activity, the business analyst should be able to work as a liaison among stakeholders or organizations in order to understand internal structure, policies, and operations and recommend solutions that can generate new values or enable organizations to achieve their goals. Thus, the main activities that should be performed by the business analyst can be listed as: to understand what the business or organization does and how it does it, determine how to improve existing business process and finally monitor any change of business processes in order to validate alignment and add values to the organization. MITIGATING THE CRISIS WITH A BUSINESS ANALYST

One of the main problems that lead Mexico to a financial crisis was not understanding the risks related with the new strategies based on a float currency and an early incorporation in the North American Free Trade Agreement (NAFTA) without knowing the real capabilities of the Mexican institutions. A Business Analyst would have helped the government to understand the future impact of these changes, would be able to anticipate the main risk and uncertainties and create more efficient plans to mitigate or reduce the impact of the newly changes over the Mexican economy. Some of the actions that a Business Analysis could have performed are: 1.Analyzing the current state of the international reserves to guarantee the percent of devaluation so that the currency could be protected with the sales of dollars.

2.Prepare the Mexican industries and organizations to compete with large and foreign organizations like US and Canada in terms of quality and manufacturing process that allow them to offer high quality products and export more services related to manufacturing and not only agricultural products.


The Mexican Tequila Crisis was triggered by a combination of poorly carried out reforms, a currency peg, current account deficits, policy rate hikes in the US and social unrest, which finally led to both a currency and banking crisis. Having considered these problems, it is possible to conclude that the advantages of working with a Business Analyst could have significantly reduced loses and maybe even prevented the crisis in the long run. Their insights and analysis could have supported the government in making decisions more effectively and considering more perspectives to prevent major problems and reduce impacts around big changes or strategy implementations.