Mexico Lets Peso Float and Cuts Price of Its Oil

In twin moves aimed at halting rampant speculation and restoring a viable economy, Mexico has imposed new currency exchange rules that effectively devalue the peso by about 37.5% and has slashed the price of oil.

The measures, which were announced late Wednesday night by President Miguel de la Madrid, took effect Thursday. The Mexican leader thus discarded a major element of his original economic stabilization plan and virtually abandoned efforts to conform to the pricing rules of the Organization of Petroleum Exporting Countries.

The most important measure was the elimination of the official rate of exchange--the so-called “interbank rate,” which had become all but irrelevant in the last few weeks. Thus, the peso will be allowed to float, rising or falling in response to supply and demand.

The official “buy” rate of 248.48 pesos to the U.S. dollar vanished overnight, and exchange houses, banks and businesses in Mexico City pegged the dollar anywhere from 330 to 341 pesos.

Pemex, the Mexican government oil monopoly, established a differential pricing structure that reduced the cost of its highest-quality brand of oil by an average $1.24 a barrel and the price of its cheaper Maya oil by an average of 77 cents.

Even with the devaluation, dollar demand was high. A major exchange house two blocks from the capital’s Independence Monument ran out of dollars by 1 p.m. and told waiting customers to return early today. At Pan American World Airways, the rate was 340 to $1 for customers buying tickets with pesos. “But we have no idea what it will be tomorrow,” a spokesman said.

Importers Accommodated

For the time being, a controlled rate that currently stands at 230.21 pesos to the the dollar will continue to exist in order to allow certain importers to buy the U.S. currency they need to meet payments abroad for commodities deemed essential for Mexico.

Despite some uncertainty, it appeared that exporters will be permitted to exchange their dollar earnings into pesos at the free-market rate instead of the controlled rate. This is considered an important step because it will make Mexican exports more competitive on international markets and eliminate any incentive for private exporters to hoard their dollars or speculate against the peso.

Economists and bankers said privately that the most significant aspect of the government’s move was not the devaluation itself, but rather the elimination of the official rate, which had failed to control speculation against the peso.

The system was established shortly after De la Madrid took office in December, 1982, in the throes of a major economic crisis that forced Mexico to undergo a fourfold devaluation in less than a year. The peso dropped from roughly 30 to the U.S. dollar to about 150.

The key feature of De la Madrid’s plan was the creation of an official rate of exchange with a daily “slippage” of 13 Mexican cents a day against the dollar. That was increased to 17 cents a day a year later and, in March, to 21 cents.

This accelerating deterioration of the currency was designed to dampen speculation and keep the official exchange rate both stable and in line with its true value. The government hoped to avoid a drastic devaluation and yet retain a measure of control over the value of its currency.

Thursday’s actions were privately applauded by bankers and economists, who feared that recent speculation could destroy De la Madrid’s overall plan to stabilize the economy and bring Mexico back from the edge of the 1982 disaster.

“This will allow the government to stabilize the exchange market,” said a Mexican economist and consultant to U.S. banks, “although, of course, they can no longer control it.”

The volatility of the peso can be measured by the sudden, steep drops in the currency’s rate of exchange in the last two months.

Exchange houses were selling dollars at 253 to $1 on May 15 in Mexico City, but by the end of the month, the figure stood at 275 to $1. By mid-June, it plunged to 298, and on July 4 it hit 320.

The trend made eventual changes in the official currency rates inevitable, but decisions were postponed because of last Sunday’s elections. This permitted speculation to continue.

‘Bold’ and ‘Audacious’

One banker called the new measures “bold” and “audacious” because they risked creating something of a panic and eroding the exchange rate further. They will also make it harder for Mexico to pay its foreign debt of $96 billion, one of the world’s largest.

The government, of course, expects the opposite impact--that the steps will dampen speculation and restore confidence in the government’s ability to manage the economy.

Mexico had expected to earn roughly $15 billion in 1985 from its international oil sales, based on a daily export volume of 1.55 million barrels. Oil earnings remain by far the most important element in the country’s ability to repay its foreign debt.

Although Mexico is not a member of OPEC, the De la Madrid government had made serious efforts to abide by OPEC foreign-sales quotas and pricing regulations in order to keep the market strong for producers.

However, Pemex disclosed Wednesday that these efforts had seriously undermined Mexico’s position in the international market. In June, the government agency said, Mexico registered foreign sales of only 800,000 barrels a day.

The new price of Mexican oil will be $26.75 for the higher-quality Isthmus variety and $23.50 for Mayan oil destined for North and South America.