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Home / Page One / Mexican crisis causes jitters
over sinking Canadian dollar

Mexican crisis causes jitters
over sinking Canadian dollar

In the shadow of Mexico’s currency crisis, the Canadian dollar slowly slides, pulled down by burdensome debt and the threat of a Quebec secession.
But though Canada shoulders its share of problems, both fiscal and factional, experts agree that unlike Mexico, the country’s resilient and diversified economy will pull it through troubled times.
“It’s easy to compare the Canadian situation with the Mexican situation,” said Riad Ajami, professor of international business at Rochester Institute of Technology.
“But Canada has gotten itself in trouble, while Mexico has gotten itself in deep trouble.”
Still, Canada watchers–including local exporters to that country–have cause for concern. Servicing Canada’s $350 billion debt consumes 35 percent of government revenues. Another worry is debt racked up by Canada’s 10 provinces, which climbed 500 percent from fiscal 1990 to 1993.
Much of that debt–roughly 40 percent–is owned by foreign investors, who could unload their holdings at any time, throwing the economy into a tailspin.
Heavy debt and budget deficits are straining an already weak Canadian dollar. Last month, the Canadian dollar slumped to an 8 1/2-year low of 70 U.S. cents, dangerously close to its all-time low of 69 cents in early 1986. At midweek, the Canadian dollar stood at 71 cents, down 5 percent since October and more than 20 percent since 1991.
And then there is Quebec.
Rumblings of secession from the French-speaking province have plagued Ottawa for years. The situation will come to a head later this year, when Quebecers vote on a referendum of independence. Polls show support for sovereignty on the rise, topping the 45 percent mark last month.
If the question of Quebec’s secession were not on its plate, Canada’s fiscal woes “wouldn’t even be a pimple on the back of the nightly news,” said Peter Regenstreif, a principal in Policy Concepts Inc., a Toronto lobbying and consulting firm.
In fact, Canada in some ways is better off than its neighbor to the south, experts say. Economic output in the third quarter of 1994 clipped along at 4.8 percent over the same period a year earlier, outpacing all other members of the Group of Seven industrial nations. And the Organization of Economic Cooperation and Development projects Canada will lead the group in growth for the next two years.
Inflation, which wavered at 5 percent in the 1980s and early 1990s, now stands just under 2 percent–the lowest among the major industrial countries. Employment figures look good too: Unemployment fell from 11.4 percent in January 1994 to 9.6 percent by the end of the year.
Exports also are thriving in the current economic environment. In 1993, Canada boasted an $11 billion trade surplus with the United States, its largest trading partner. That year, Canadian exports to the United States totaled $111 billion.
A weak Canadian dollar actually helps its exports, RIT’s Ajami said, as does the North American Free Trade Agreement, which took effect a year ago.
The news is not so great for local companies that sell their products in Canada, however. An unfavorable exchange rate and cutbacks in government expenditures for health care are creating a flat market for medical-equipment maker MDT Corp.
Sales to Canada account for some 10 percent of total revenues, said Sampat Barnabas, director of sales for MDT’s international division. Projections for this year and the next are not rosy, he added.
At John V. Carr Inc., a freight-forwarding company at Greater Rochester International Airport, the volume of exports to Canada from this area has not fluctuated noticeably over the past year, export manager Linda Anderson said.
The exchange rate soon may change more favorably for U.S. exporters. Assuming Quebec stays with the union, the Canadian dollar should climb smoothly to at least 76 U.S. cents, Regenstreif said, and could go as high as 80 cents.
Recovery hinges in part on the government’s budget, to be released late this month. Prime Minister Jean Chretien has vowed to make substantial cuts in government spending, including social welfare programs and industry subsidies, which have drained Canada’s coffers.
“I think the international community will respond favorably,” said Regenstreif, a political science professor emeritus at the University of Rochester.
Mechanisms already are in place to deal with the Canadian dollar’s decline, too, said Marca Bear, assistant professor of international business at RIT.
Within the past six months, the U.S. government contributed $10 billion to shore up the Canadian dollar, she said, taken from the same pot–the U.S. Treasury’s exchange-stabilization fund–that President Bill Clinton recently tapped for Mexico.

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