Some Traders Shun Currency : Mexican Peso Seesaws as Fears Over Economy Rise

A heavy upsurge in trading of the Mexican peso over the last few days has triggered wild fluctuations in the currency exchange rate and raised new fears over the stability of Mexico’s beleaguered economy.

Although the official exchange rate set by the government stands at 241 pesos to $1, some American merchants along the Texas border have been demanding as much as 300 to $1. Some currency traders have dropped out of the peso market altogether.

“The risk factor was becoming too severe,” complained Terry Keller, manager of the Deak-Perera Group’s currency trading office in San Diego. The office stopped buying large amounts of pesos on May 28.

Only two weeks ago, exchange houses were trading the peso at close to the exchange rate, but since then the rate has risen and fallen erratically, though the general trend has been upward.

Underlying the peso fluctuations are a number of disturbing economic trends and reports that portend more trouble for Mexico. They include a drain on hard currency reserves, continuing capital flight, swelling inflation and a worsening trade picture.

Even more significant is an anticipated reduction in the price of oil, Mexico’s principal export and the source of $16.6 billion in foreign income last year.

The average Mexican has learned, rightly or wrongly, to gauge the state of the economy by the stability of the oil market. Reports that Mexico might enter the spot market or be forced to cut prices to remain competitive have contributed to the lack of confidence in the peso.

The peso was traded at the rate of 300 to $1 over the last weekend at Brownsville and other spots along the Mexican border in Texas, although slackened demand has permitted a slight reduction in the pressure on the peso.

“It’s at 291 here as of yesterday,” said Arnold Arrowood, president of the McAllen, Tex., Chamber of Commerce in the lower Rio Grande Valley. “Many of our merchants, as you know, prefer dollars. They will not take huge sums of pesos.”

In Laredo, a major trading city about 125 miles up the river from McAllen, the peso stood at 270 and trading was reported normal on Tuesday.

Mike Haskell, owner of the Valuta Corp., which operates the largest money exchange house in San Ysidro, Calif., said the peso remained volatile but was “strengthening” on Tuesday. Haskell said he was buying pesos at a rate of 264 for $1 and selling them at 271.

The dumping of pesos began on the inter-bank market in Mexico City and spread to the border, according to Haskell.

“The imbalance between buying and selling makes everyone jumpy,” he added. “It’s a time to make or lose a lot of money.”

An American economist in Mexico City said many large businesses are “flush with liquidity” at the present time, and he speculated that they may have been the source of much of the peso leakage.

The outbreak of economic instability coincided with the start of a 17-day visit on Tuesday by President Miguel de la Madrid to five European countries. The trip is designed to improve Mexico’s economic relations with major industrial powers such as West Germany and France.

The absence of De la Madrid from Mexico for more than two weeks means that it is unlikely the government will take any sudden measures to shore up the faltering peso at this moment.

“When the president goes out of the country--and takes the treasury minister with him--you can bet that all important economic decisions will be put on hold,” said an American banker who asked not to be identified.

No Decisions Announced

The government’s economic Cabinet held a meeting Monday night on the eve of De la Madrid’s departure, but no decisions were announced.

One possible measure--considered by many economists an eventual certainty--is an increased “slippage” in the exchange rate. At the present time, the government devalues the currency by 21 Mexican cents every working day in order to compensate for inflation and maintain a realistic parity with the dollar.

Increasing the “slippage,” however, makes dollars more expensive for Mexicans, a fact that is particularly irritating to residents in the northern border states who are accustomed to shopping in the United States on occasion.

Two of these states are Nuevo Leon and Sonora, where the government is running hard to overcome a challenge from the opposition National Action Party (PAN) in gubernatorial elections scheduled for July 7.

Since an acceleration in the rate of devaluation would provide the opposition with a handy tool with which to attack the government, it would come as a surprise if increased slippage or similar steps were implemented before election day.

Because oil remains the pillar of the Mexican economy, much of the concern over the peso in recent days has focused on reports of an impending fall in prices. Mexico sells its light crude for $27.75 per barrel and the heavy Maya variety, which accounts for nearly 60% of foreign sales, for $25.50.

A report by economists at the National University on Monday said Mexico could easily weather a $1 cut in the overall price, which would lead to a loss of about $500 million in annual revenues. Deeper cuts might well require significant adjustments in economic policy, particularly public spending.

Stability Factors

Other trends in the Mexican economy that could affect the stability of the peso include the following:

--Bank of Mexico figures released last week registered a capital flight of $2.5 billion in 1984, an important indicator of confidence--or lack of same--in the economy. Between 1977 and 1984, the bank said, $32.7 billion left the country.

--The official inflation target remains 35%, but most economists predict it will reach at least 50% this year. Important straws in the wind: Telephone rates went up by one-third, and the cost of electricity is growing at a controlled rate of 45% for the year.

On the brighter side, the labor movement recently accepted a wage increase of only 18%, even though workers had demanded as much as 50% to make up for lost earning power. The discipline of the labor movement has contributed impressively to whatever stability the economy has achieved.

--Treasury reserves dropped by about $2.1 billion in the first few months of the year. Mexican officials explained that this was due to the fact that Mexico was required to make substantial repayments on some foreign loans during a relatively short period of time.

--Mexico registered a trade surplus of $2.27 billion in the first quarter of 1985, but this was 42% less than during the same period in 1984. Maintaining a huge trade surplus has been the key to balancing accounts and allowing Mexico to roll over its $96 billion foreign debt even while borrowing more money abroad.