The Tequila Crisis
By Anthony Kila
Under normal circumstances (whether sober or not), tequila is a clear to brownish amber-coloured liquor celebrated for its versatility. It is used in cocktails such as Margaritas or enjoyed neat without accompaniment. It can also be aged in oak barrels to produce various delightful styles of drink, including Reposado, Añejo, and Extra Añejo. All this changed in 1994 when, in economic and financial circles devoid of parties or boozing, tequila became a prefix for crisis.
In its new form, “tequila” became The Tequila Crisis, a term popularised by journalists and analysts, particularly in the United States and the United Kingdom, to describe the currency crisis that struck Mexico in late 1994 and early 1995. The crisis was triggered by a sharp devaluation of the Mexican peso, resulting in widespread economic instability, a loss of investor confidence, capital flight, and a deep recession. Mexicans refer to it as the “Peso Crisis”, but outside Mexico, the international media, aided by some of us with a perverse taste, chose to associate the shock of the crisis with the jolt of a strong tequila shot.
Before the shock, Mexico was a country being observed globally for its rapid transformation during the administration led by President Carlos Salinas de Gortari (1988–1994). The country was rapidly adopting the administration’s neoliberal economic reforms, which were profoundly affecting society, business, and governance.
Many sectors of the economy were liberalised and privatised due to the government’s policies. Crucial ventures, such as banks, telecommunications, and other state-owned enterprises, were sold to private operators, attracting domestic elites and foreign investors. With the North American Free Trade Agreement (NAFTA), signed in 1992 and implemented in January 1994, considerable excitement arose, and businesses anticipated a surge in exports and investment. Companies gained easier access to international loans and capital markets, leading to rapid expansion, but also increasing the system’s exposure to risk. The opening of markets also introduced competition that caused many local businesses, particularly in manufacturing and agriculture, to struggle against cheaper foreign goods.
President Carlos Salinas de Gortari’s aim and focus were to transform Mexico into a modern, market-driven economy integrated with the U.S. and Canada. The administration embarked on heavy foreign borrowing to finance growth with short-term, dollar-denominated debt instruments (tesobonos), increasing the country’s vulnerability. The peso was kept artificially strong to control inflation and attract investment, making Mexican exports less competitive. Overall, as I have pointed out in my “Rise of the Zapatista Movement by Anthony Kila”, the economic liberalisation helped some urban populations, but increased income inequality and poverty persisted for much of the country and amidst economic reform, political tensions simmered, and the PRI’s one-party rule faced criticism for its authoritarianism and corruption.
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Many Mexicans experienced a mix of hope and anxiety. While reforms promised modernisation, they also resulted in job losses in state-owned enterprises. A small but growing middle class began to benefit from access to credit, imported goods, and improved infrastructure. However, the benefits of the reforms eluded many rural and indigenous communities, which suffered as land reforms (like the revision of Article 27) weakened protections for communal land (ejidos), and small farmers faced competition from imports.
The reforms’ flaws, frailty, and contradictions were simmering and soon going to turn into steam. The peso was pegged to the U.S. dollar, but Mexico faced high inflation, low local production, and a resultant growing trade deficit that made the fixed exchange rate unsustainable. The country was importing more than it was exporting and relying heavily on foreign capital to finance the gap.
The short-term bonds issued by the government (Tesobonos) were repayable in dollars, and by 1994, they constituted a substantial part of the public debt. In its efforts to defend and maintain the peso’s value, the central bank resorted to utilising U.S. dollars from its foreign reserves.
By December 1994, reserves had fallen by approximately 70% (from $29 billion to less than $6 billion), leaving little in the coffers for defence. When the inevitable devaluation eventually occurred, it became apparent to all that the country’s economic situation was worse than anticipated. Banks and businesses that had borrowed in dollars could not repay their debts. Foreign investors exacerbated the situation by quickly withdrawing capital, leading to a run not only on the peso but also on the stock market.
By early 1995, Mexico’s GDP had contracted by approximately 6%, while inflation and interest rates surged, unemployment doubled, and widespread poverty escalated.
With interest rates at over 70% and inflation at over 50%, it was more than difficult for businesses to project, borrow, and operate. Foreign and domestic investment froze due to uncertainty and risk. Businesses with dollar-denominated loans faced immediate repayment problems after the devaluation. Many firms defaulted, and some multinational companies paused operations or pulled back. Small and medium-sized enterprises (SMEs), especially those reliant on loans or imports, went bankrupt.
Labour-intensive industries such as construction, manufacturing, and retail were particularly affected, resulting in significant layoffs across the board. The fortunate few who retained their jobs experienced a drastic drop in wages, and the purchasing power of their meagre income plummeted. Informal employment rose as individuals adopted survival strategies, including street vending and informal services. Millions fell below the poverty line, making food and medicine increasingly unaffordable. The hardship led to heightened crime rates and social unrest in urban areas, where many families struggled with housing debt, as mortgage payments in dollars tripled overnight. Middle-class savings and retirement funds were wiped out or severely devalued.
The government faced a serious liquidity crisis and was unable to meet its debt obligations. It had to restructure its debt, implement austerity measures, and launch emergency programmes to stabilise banks, support the impoverished, and restore investor confidence.
Recovery from the Tequila Crisis was painful but ultimately achieved. It came as a tough cocktail of international support, domestic reforms, and strategic economic management. To stabilise Mexico’s currency and avoid default on its short-term dollar debt, the USA and the IMF led a £50 billion bailout package (£20 billion through the Exchange Stabilisation Fund and £17.8 billion from the IMF). The bailout reassured investors that Mexico would fulfil its obligations, allowing the government to roll over the dollar-indexed bonds and avoid total collapse.
For its part, the government needed to reduce public spending and increase taxes to diminish the budget deficit, limit new debt, and concentrate on restoring macroeconomic stability. There was a deliberate effort to promote an export-led recovery, and the cheaper peso made Mexican goods more competitive abroad, particularly in the U.S. market.
Politically, the Tequila Crisis totally undermined the PRI’s long-standing one-party dominance. In the subsequent years, reforms were implemented to enhance transparency, electoral competitiveness, and lessen central control.
Join me if you can @anthonykila to continue these conversations.
- Anthony Kila is a Jean Monnet Professor of Strategy and Development at the Commonwealth Institute of Advanced and Professional Studies.
