Mexico's Cordero Sees No Need for Capital Controls as Foreign Inflows Rise

Mexico doesn’t need to use capital controls to offset the effects of investment inflows because the country’s currency is undervalued when compared with its pre- crisis level, Finance Minister Ernesto Cordero said.

“During the crisis, Mexico’s foreign exchange rate had a severe depreciation,” Cordero told reporters during International Monetary Fund meetings in Washington. While the peso had a nominal appreciation in 2010, in the “long-run” it is still undervalued in real terms and “therefore, we consider it should not be a problem for the exporters,” he added.

The Mexican peso has gained 7.5 percent since the beginning of the year, which is the best performance among the 16 most traded currencies tracked by Bloomberg and follows a 4.4 percent gain in 2009. In 2008, the peso plunged 20 percent against the dollar.

The increase in inflows into Mexico is due to a “short- term phenomenon” in emerging markets, but also because of structural improvements in Mexico’s economy, and therefore the country isn’t considering the use of capital control instruments at the moment, Cordero said.

‘Trust Markets’

Latin American economies might consider “carefully designed” taxes to avoid excessive appreciation in their currency markets, Nicolas Eyzaguirre, the director of the fund’s Western Hemisphere department, said yesterday.

“We trust the markets to regulate the foreign exchange level,” Cordero said. Mexico would have to “very carefully” weigh any plan to impose capital controls in part based on similar experiences in other countries, he said.

“There is no conclusive argument that these kinds of controls on capital flows had the expected results in the economies where they were put in place,” Cordero said. “Even with capital controls, their currencies continued to appreciate.”

Brazil in October slapped a levy on foreign purchases of equities and fixed-income securities in a bid to restrain the real’s rally.

Colombian Finance Minister Oscar Ivan Zuluaga yesterday said he sees growing global acceptance for the use of short-term capital controls as a way to offset strong investment flows.

Zuluaga said he sees no need to use such mechanisms in Colombia at present.

Cordero said Mexico doesn’t have a “structural” inflation problem and that there are signs that consumer prices may soon begin to ease.

Mexico’s annual inflation rate accelerated to the highest level in seven months in March as costs increased for vegetables, airline fares and tourist packages, the central bank said last week. Prices in Latin America’s second-biggest economy rose 4.97 percent in March from a year earlier and 0.71 percent from a month earlier, the bank said.

To contact the reporter on this story: Fabiola Moura in Washington at fdemoura@bloomberg.net

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