Low inflation, a flexible exchange rate, and deepening financial markets give the United Mexican States increasing degrees of freedom to adjust to negative external shocks. Growing integration with the U.S. economy, as shown by the tight connection between industrial growth in the U.S. and GDP growth in Mexico, contributes to greater stability. That, in turn, sustains investor confidence despite little prospect of structural reforms until the next presidential elections in mid-2006. Monetary stability and growing domestic capital markets, especially pension funds, have facilitated the substitution of domestic debt for external debt in recent years by both the private and public sectors. About two-thirds of the central government's debt stock is now in local currency, and about one-half of its domestic
