Hot spots: Mexico.(INTERNATIONAL SECTION)

The economy is now doing quite well, and the reason for the improved performance is no longer just the pull from the United States. At long last, after years during which politicians, from the President down, attacked the private banks for failing to help stimulate the economy by lending more, this has begun to change. Commercial bank credit extended to the private sector jumped by 28% last year, even though real GDP advanced by a far lesser 4.4%. Mortgages were up 26% and corporate lending rose 21%. Loans to consumers surged by 45% as the number of credit cards doubled from four years ago. The banks have remained hesitant to extend credit to small and medium-sized businesses, but most say that this is now also changing for the better.

In the past, the main problem was that the banks had taken a severe beating in the Tequila Crisis of 1994-95, during which interest rates had skyrocketed and driven hundreds of thousands of Mexican individuals and companies into bankruptcy. The financial institutions that survived this firestorm then spent years trying to clean up their devastated balance sheets. Even if they had wanted to lend, they would have found little demand, since many Mexicans, ruined by the debacle, had vowed never to borrow again. In the end, though, a number of multinational banks started taking stakes in Mexican lenders, and they brought in new expertise along with fresh money. They revived lending operations and introduced modern risk assessment systems.

These banks, including Banco Bilbao Vizcaya Argentaria SA (BBVA), Banco Santander Central Hispano SA, Citigroup, HSBC, and Canada's Bank of Nova Scotia, have taken over most of the system. Banorte is now the only large national player left. But they have also put the Mexican banking system into its strongest position in history. There are no signs today of serious problems with credit quality. Delinquency rates run at only about 3% on consumer lending. Of Loans extended to companies, a mere 1% are bad. The increases in credit extension last year were the fastest in at least a decade. They seem set to continue in 2005, and this will help a great deal in keeping the overall economic recovery going.

Another important factor is that maquiladora employment increased last year for the first time since 2000. The aggregate workforce of the assembly plants alongside Mexico's Northern border gained by 7.1% in 2004 to 1.1 million, as maquila output rose by 10%, to generate USD 19 billion in foreign exchange for Mexico and surpass earnings from oil as well as receipts from homebound remittances by Mexican expatriates as source of hard currency for the country.

This is not to say that Mexico has stopped losing low-tech manufacturing operations to China. If one Looks for a geographic pattern as to where maquila operations are doing well, one finds that by far the bulk of the job gains were reported by factories in three cities, all of which are important transportation hubs near the mouth of the Rio Grande serving as gateways to the U.S., namely Matamoros, Reynosa, and Nuevo Laredo. These places are booming because they provide high-end products for the U.S., or services ranging from repairs of home appliances returned to retailers under warranty to the sorting of supermarket coupons. Low-end producers (such as apparel makers) still have difficulty competing with China and other Asian ...