Mexico Currency Slides as World Crisis Hits

| Sept. 23, 2011 |

Published by Minyanville

Mexico’s Finance Minister José Antonio Meade has ruled out a boost in spending, as the US crisis hits Mexico hard. The International Monetary Fund (or IMF) this week pulled down its estimates for Mexico’s economic performance for this year and next.

However, Meade will stick by his 4% growth forecast for the year. “Some countries that were very active fiscally and very active monetarily are now paying the consequences,” Meade said, speaking to Bloomberg. “Mexico has reaped the rewards for proving to be responsible.” A Banamex survey fails to corroborate Meade’s hopes, predicting that Mexico’s economy will grow just 3.85%.

The peso is sliding steadily against the US dollar, falling 7.5% this week alone. It has hit its weakest levels since March 2009 at 14 pesos to the US dollar on Thursday. The breaking of this psychological hurdle is expected to drive the currency down further.

The fall is thanks to fears over Europe and, of course, the United States. Writing in the Financial Times, Adam Thomson points out that these are external problems which have “nothing to do with Mexico’s still-solid economy.”

Thomson puts forward advice from Sergio Martín, HSBC’s Mexico economist based in Mexico City. Martín recalls a mechanism which was in place until a couple of years ago, through the world crisis in 2009. An automatic intervention would cause the Central Bank to auction off US dollars as the currency swung more than 2%.

“The advantage of the system is that it does not try to establish a target exchange rate for the Mexican peso—which could easily become the currency equivalent of waving a red rag at the markets,” writes Thomson. “Instead, it would slow down and 'smooth' the peso’s path, giving greater stability to its trajectory.”

Inflation figures have pleasantly surprised many analysts, with annual inflation slowing to 3.16% in the first half of this month, lower than the 3.31% expected by analysts polled by Reuters. The consumer price index rose 0.21% in the first half of the month, according to figures from the country’s national statistics agency.

Inflation is usually high in September, due to seasonal factors such as tuition fees, according to analysts at Nomura. These did rise; however, agricultural prices rose only slightly, with fruit and vegetable prices falling while core goods inflation was significantly below target. “The latest data again confirm the lack of inflation worries in Mexico,” write the New York-based analysts in a report to investors.

The question is what the Central Bank will decide to do with interest rates. Brazil was the first of the emerging markets to cut rates, down to 12% at the end of August. However, Nomura’s analysts believe that the rate cut is unlikely right now as the peso is so weak against the US dollar.

The man expected to take over the presidency after next year’s elections, Enrique Peña Nieto, has finally announced his candidacy for the Institutional Revolutionary Party (or PRI). The PRI led Mexico for more than 70 years until 2000 when current President Felipe Calderón’s party, the National Action Party, took over. Thanks in part to his disastrous record with the country’s war on drugs, the PRI are likely to make a comeback with Peña Nieto at the helm.

Calderón has always put a lot of pressure on Washington, criticizing its role in both US demand for drugs and the fuel it provides for Mexico’s gang warfare in the form of weapons. Speaking in New York, the president said: “We are living in the same building. And our neighbor is the largest consumer of drugs in the world. And everybody wants to sell him drugs through our doors and our windows.”

Calderón added: “Decision-makers must seek more solutions—including market alternatives—in order to reduce the astronomical earnings of criminal organizations.” Those “market alternatives” are thought to be a hint at legalization, which many believe will have a dramatic effect on the drug war.

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