Mexico Finance Minister Luis Videgaray said the government will allow the peso to float freely, even after a rally that outstripped gains in all major currencies this year.
“We’ll continue with a currency policy where the exchange rate is freely determined by the market,” Videgaray said today at the Bloomberg Mexico Economic Summit. “A flexible exchange rate is a useful instrument to preserve macro-economic stability, particularly in a world where we have risks, where problems exist.”
The peso gained 3.4 percent this year against the U.S. dollar, the best performance among the 16 most traded currencies tracked by Bloomberg. Mexico is sticking to its policy even as countries from Japan to Costa Rica move to weaken their currencies in a bid to boost economic growth.
The currency pared an earlier loss after Videgaray’s comments and fell 0.7 percent to 12.4295 per U.S. dollar today after earlier climbing as much as 0.2 percent to 12.3226, the strongest level since September 2011.
Mexico’s foreign exchange rate is at a level that doesn’t hurt exports, Jens Nordvig, a New York-based managing director at Nomura Holdings Inc., said at the summit. The currency will probably strengthen to about 12 per dollar by year-end and can rally beyond that should the government succeed with its push to open the oil industry to more private investments and boost tax collection, he said.
The impact of a stronger currency on exports is overshadowed by the optimism that the government’s economic plan will boost growth, Mexican Economy Minister Ildefonso Guajardo said at the summit. Guajardo said Pena Nieto’s energy overhaul will require amending Mexico’s constitution.
Foreign direct investment can more than double to at least $30 billion a year, Guajardo said, without providing a timeframe. FDI fell 34.9 percent last year to $12.66 billion, according to preliminary figures from the economy ministry.
The central bank has been selling dollars since November 2011 when the currency weakens more than 2 percent in a single day. Any intervention on the market will be based on existing rules, Videgaray said.
“The intervention by the currency commission will be as it has been until now, with previously-known rules that have the objective of moderating abrupt variations from one day to the next,” Videgaray said.
Costa Rica’s central bank has bought $185 million so far in March, more than 14 times the amount purchased last month, to limit the colon’s appreciation in Central America’s second-biggest economy. Japanese Prime Minister has pushed the Bank of Japan to expand monetary easing that has contributed to the yen’s more than 17 percent decline against the dollar in the past six months.
President Enrique Pena Nieto’s top economic priority is passing bills to increase productivity that could accelerate annual expansion beyond 5 percent, Videgaray said.
“Mexico’s growth is good, but it’s not enough to achieve our goals and fight poverty,” Videgaray said. “If we capitalize on this opportunity, Mexico could lift its potential growth.”
Pena Nieto in coming weeks will present a bill to boost bank lending, Videgaray said. The financial system doesn’t provide enough credit to help sustain faster economic growth, he said.
The president said during his last year’s election that he would make opening Petroleos Mexicanos to more private investment his “signature issue” as he looks to reverse production declines 75 years after his Institutional Revolutionary Party nationalized the oil industry.
Pena Nieto, 46, brought Mexico’s three biggest political parties together to sign the Pact for Mexico on Dec. 2 as part of his bid to gain congressional support for his economic plans.
Mexico’s politicians have shown “greater maturity” in working together since Pena Nieto took office, Alejandro Valenzuela, chief executive officer of Grupo Financiero Banorte SAB, Mexico’s third-largest bank by outstanding loans, said at the summit.
Moody’s Investors Service, which rates Mexico Baa1, the third-lowest investment grade, will probably reassess Mexico’s rating at mid-year, said Mauro Leos, a senior credit officer at the agency.
Standard & Poor’s last week raised its outlook on Mexico BBB rating to positive from stable on the prospect that proposed legal changes will fuel expansion in Latin America’s second-largest economy.
“What we should expect along the course of the year, very probably at mid-year, is to do an evaluation, a re-evaluation of the rating to see to what degree the things that we see merit a change,” Leos said in interview.
Mexico may become Latin America’s largest economy by 2020, surpassing Brazil, said Steven Costabile, the global head of the private funds group at PineBridge Investments.
Mexico’s economy has grown faster than Brazil’s the past two years and will expand 3.5 percent this year, compared with 3.4 percent for Brazil, 1.9 percent in the U.S. and a 0.2 percent contraction in the euro area, according to the median estimate of economists surveyed by Bloomberg.
While Mexico is in a “sweet spot,” there will also be difficulties as the nation attempts to move forward in making its economy more competitive, Leos said.
“Be prepared to be disappointed, because there are going to be setbacks,” he said.