Mexico's economic future up in air. Move to drop peso signals government revising policy
By forcing a sharp devaluation of the peso, the Mexican government is trying to stop speculators from abandoning the peso for the dollar. But Wednesday's devaluation only managed to spark new speculation about the country's economic future. While the sudden measure gave no clear outline of future policy, most analysts say it did clarify what the Mexican government will not do:
It will refuse to use its $15 billion in foreign reserves to shore up the peso, preferring to keep it as a cushion for economic policies and as a lever in negotiations with international creditors.
It will no longer pursue its unsuccessful anti-inflation strategy of low interest rates coupled with a more slowly devaluating peso.
But both signals leave the door wide open for a revised economic policy that encourages growth while combatting public enemy No. 1: inflation, which hit an annual rate of 141.8 percent in October - the highest in Mexican history.
Several financial experts close to the Mexican government suggest that a modified ``shock'' program to freeze prices and fight inflation might be necessary by early next year.
Less than an hour after the dollar's free-market price started rising rapidly Wednesday, people started panicking that inflation might become even more acute. Lower-class women crammed into a dirty downtown market, stocking up on meats and vegetables while they could afford them. Upscale consumers started cleared department-store shelves of televisions and videocassette recorders, as harried clerks warned of overnight price hikes.
It was all spurred by a seemingly simple action: Banco de Mexico - the country's central bank - stopped selling dollars to exchange houses. Fueled by public frenzy, the scarcity of greenbacks pushed the dollar's free-market selling price from 1,713 to 2,275 pesos, a 32.8 percent devaluation. On the black market, people were reportedly paying up to 3,000 pesos for one dollar by the end of the day.
Finance Minister Gustavo Petricioli appeared on national TV Wednesday evening to quell fears and explain the government's actions.
Combined with this week's sharp rise in interest rates, the rapid devaluation of the peso is meant to curb an excessive demand for dollars, Mr. Petricioli said. The demand, mainly from the horde of people seeking safe harbor for their money, has weakened local currency and threatened the country's $15 billion in foreign reserves.
Most experts on the Mexican economy agree that the peso needed to be devalued. ``There was a growing feeling that the peso was close to becoming too expensive,'' economic consultant John Christman says. An overvalued peso, he adds, ``would have had a negative impact on tourism and exports.''
Unlike last year, when the rate of devaluation was faster than the inflation rate, the peso has lagged behind inflation for most of the year. That has hindered non-oil exporters, whose 30 percent increase during the first half of the year has been the center-piece of Mexico's modest recovery. But while most economic analysts agree that exports needed to be encouraged, many felt the market didn't merit such a violent shake-up.
``It's a clear decision on the part of the government not to deplete its reserves by propping up the peso,'' says one Western banker here. ``But a country with $15 billion [in reserves] shouldn't have to jolt the market. It could have been done much more calmly.''
The wild gyration in the dollar market could undermine confidence in the economy. ``When the government decides to affect the flow of money, then people are nervous,'' one stock broker says. ``That will create a lack of confidence in the system, which will lead to the very capital flight it [the devaluation] was designed to stop.''
Banks and exchange house estimate that between $6 billion and $8 billion dollars returned to Mexico in the first 10 months of the year in response to positive developments in the economy. Mexico received the first half of a $7.7 billion loan signed with foreign banks in March. Its trade surplus grew to 4.5 percent for the first half of 1987. And it accumulated over $15 billion in reserves.
But since the drop in the Mexican stock market was compounded by the Wall Street crash on Oct. 19, capital started flowing out of the country at an estimated rate of $50 million a day.
After falling 75 percent in the previous 28 trading days, however, the stock market index rose a record 27 percent in the wake of Wednesday's devaluation.