Mexico's Videgaray Expects Peso Support Program Will Be Extended

  • Currency commission to meet in coming days on dollar auctions
  • Nation's finance minister sees peso eventually strengthening

Finance Minister Luis Videgaray said it’s highly probable Mexico will extend its dollar sale program beyond next week’s expiration and the nation’s undervalued currency will eventually strengthen.

Speaking in an interview with El Financiero-Bloomberg TV at the World Economic Forum in Davos, Switzerland taped Wednesday, Videgaray said that while he sees the possibility of "some marginal change" to the dollar sales designed to boost peso liquidity, the decision will need to be taken by the currency commission that he leads. The peso lost the most among major currencies on Wednesday, tumbling to a new record low.

Videgaray said the currency has been swept up in global risk aversion spurred by falling oil prices. When calm returns, investors will be attracted to Mexico’s growth prospects and responsible economic management, he said. After outperforming its peers last year, the peso has been the worst performer in Latin America this year as investors sold the currency as a proxy for emerging-market risk amid forecasts for a global slowdown and a slump in China.

"Clearly our conviction is that this is a global phenomenon and that we see an overreaction in the market regarding the peso," Videgaray said. "By any measurement our currency looks clearly undervalued, and we’re convinced that eventually the market will return to its higher level as long as we have the discipline in Mexico to strengthen the foundations of the macro economy."

Under Mexico’s current peso intervention, the central bank offers $200 million daily in auctions triggered when the currency weakens by 1 percent from the previous day’s fixed rate and an additional $200 million in daily sales when it declines by at least 1.5 percent. The nation’s currency commission that decides on changes to the program is composed of six officials from the central bank and Finance Ministry.

The peso slumped 7.1 percent this year through Wednesday, the worst performance among major currencies after South Africa’s rand. Banco de Mexico spent about $25 billion in 2015 on interventions to support the currency, a policy that hasn’t significantly tempered its decline, Mexico’s Institute of Finance Executives said Tuesday. The group urged policy makers to evaluate whether they should continue to sacrifice international reserves, which fell to a two-year low of $172 billion in November.

Videgaray said that he doesn’t see a need for new spending cuts beyond those announced last year, and that the 95 percent of Mexico’s economy that isn’t related to the oil industry is growing. While some emerging markets could benefit in extreme circumstances from central banks buying long-term bonds and selling short-term debt to provide liquidity, this isn’t needed in Mexico at the moment, Videgaray said.

Before it's here, it's on the Bloomberg Terminal.