Quake and Mexico’s Economic Strains Push Peso to Record Low Exchange Rate

Mexico’s currency staggered toward a record low exchange rate of 500 pesos to the U.S. dollar this week as uncertainty over the costs of earthquake damage, worry among businessmen about government land takeovers and recurrent economic problems combined to drive its value down.

On the open market Thursday, it took 495 pesos to buy a dollar in Mexico City. The peso has fallen by more than 25% in the last two weeks.

The sharp decline is interpreted here as an indication of a lack of business confidence in the vitality of Mexico’s economy.

“Dollar demand is driven by expectations, and expectations now are not very good,” a government economist said.

The weakened peso has double-edged significance for the economy. The decline will spur already high inflation as imported goods grow more expensive, but the cheaper peso should make Mexican goods less expensive in foreign markets and perhaps attract tourists looking for bargain vacations.

Unsteady Nature of Decline

It is the unsteady nature of the decline that bothers economists. “The activity does not reflect the state of the economy,” said one university economics professor.

In recent years, declining prices for oil, Mexico’s main export, have been the key to the peso’s fall. Recent predictions by officials of oil-rich Saudi Arabia that the price of petroleum will soon drop has increased economic anxiety here.

The state-owned oil company, Pemex, late Wednesday announced that it will raise the price of its light crude oil by 60 cents a barrel and cut the cost of heavy crude by 40 cents a barrel. The move, undertaken primarily to boost demand for heavy crude, will slightly increase oil earnings but does not foreshadow better times, economists here say.

Income from other exports is also declining, and the reduced overall export earnings, coupled with payments on Mexico’s enormous foreign debt, will make dollars scarce here.

There are other, more localized ills affecting the peso, some of which emerged after September’s earthquakes.

Printing Extra Money

The government of President Miguel de la Madrid, like others before it, commonly prints excess pesos to cover public expenditures that exceed tax and import revenues.

Businessmen fear that the spending needed to repair earthquake damage will aggravate that tendency and further debase the currency. Already, the De la Madrid government has promised to build apartments, hospitals and schools to replace buildings wrecked in the quakes and to pay off residents who lived in destroyed government housing.

The government was already running big budget deficits before the quake. Estimates for earthquake damage run as high as $4 billion.

In addition, businessmen were upset by the post-quake expropriation of private real estate holdings in the city to turn over to people left homeless by the earthquake.

“Buying dollars is a way to protect yourself,” said a physician purchasing greenbacks at an exchange house on Tiber Street. “You never know here when the government might take your business or even your house.”

A Red Flag

A government economist close to financial decision-making remarked: “The government could have gotten the land some other way--assess it and offer to buy it, anything but outright expropriation. It was a red flag for private enterprise.’

The government has made efforts to reassure the private sector that the expropriations do not spell an increase in state intervention in the economy.

The expropriation was neither “statist or socialist,” said Mexico City Mayor Ramon Aguirre, but an emergency measure to head off potential unrest among the homeless.

“The government will not be a landlord, nor is it threatening private property,” said Aguirre.

The peso also suffered a seasonal deterioration as merchants sought scarce dollars to purchase imported goods to fill their shelves for the Christmas season, economists and foreign observers said.

Christmas Buying

Still on tap is the traditional dollar-buying surge among thousands of Mexicans who will take their Christmas vacations in the United States. The quest for Yule dollars will likely further depress the peso, which for many years was one of Latin America’s most stable currencies.

Traditionally, when the peso falls sharply here, authorities blame “speculators” and assert that dollar-mania contributes to fulfilling the worst fears of the exchange traders.

Not long ago, Finance Minister Jesus Silva Herzog said that the government would not dip into dollar reserves to prop up the peso “simply to benefit those who are nervous about our situation.”