Mexico: Say Adios to the Super Peso

Mexico's exporters are breathing easier after the peso's 5.1% devaluation since April. The peso, which hovered around 11 cents (U.S.) for much of the past year, closed at 10.27 cents on June 5.

The weakening was due partly to Mexican companies raising money at low peso interest rates and buying greenbacks to pay down dollar-denominated loans. Rates on 28-day Cetes were 7% on June 5, but had recently touched an historic low of 5.28%. The Central Bank's recent modest easing of monetary policy signaled that a slightly weaker peso would not aggravate inflation, now at 4.4%.

The decline relieved worries that an overly strong peso might eventually face an abrupt correction, spooking investors. The "super peso" was clobbering the export-driven economy: Over the past year, Mexico lost 350 factories and 240,000 jobs in the maquiladora assembly industry, which produced half of its $158.5 billion in exports last year.

Economic recovery hinges on a U.S. rebound. The U.S. takes 88% of Mexico's exports. After shrinking 1.4% last year, Mexico is expected to grow 1.8% in 2002. While the economy shrank 2% in the first quarter, April brought promising signs: Exports and imports both rose above year-ago levels for the first time in 11 months.

The cheaper peso could kick-start foreign direct investment, which last quarter was down $300 million from a year ago. Investors are waiting for Mexico's divided Congress to decide on opening the electricity sector to private investment and on new loan-collection rules to encourage bank lending, which has slumped badly since the 1995 peso crisis.

Buyers may also trickle back to stocks. Foreigners invested $150 million in stocks and bonds through March, compared with more than $550 million in the first quarter of 2001. The Mexican bolsa gained 10% in dollar terms in 2001. It is up 4.1% this year, and a correction may be inevitable. Mexican equities would then look very attractive to investors with dollars to spend.

By James C. Cooper & Kathleen Madigan

By Geri Smith in Mexico City

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