Mexico OKs Dollar Bank Accounts in Its Border Cities

Attempting to attract U.S. currency to its battered economy after a four-year ban, the Mexican government Thursday approved the opening of dollar accounts in banks in its border cities.

Experts described the action as a “positive sign” but added that it probably will not have a significant short-term impact on Mexico’s debt-ridden, inflation-ridden economy other than to increase use of the dollar along the Mexican side of the border.

U.S. dollar accounts were banned in August, 1982--as Mexico’s economy was unraveling and the value of its peso plunging--and the government froze more than $12 billion in dollar accounts. Funds in those bank accounts were converted into Mexican pesos, resulting in an immediate 30% currency value loss for investors.

7% Interest Rates

The government needed the dollars in those accounts to repay its foreign debt, Mexican officials said at the time.

The dollar accounts in Mexican banks offered interest rates in 1982 that were about 10% higher than U.S. money market accounts, attracting many U. S. investors.

Interest rates for the new dollar accounts will be slightly above 7%, according to Bernardo Gonzalez, director of economics at Colegio de la Frontera Norte, a research institute in Tijuana. Bank officials in Tijuana said Thursday afternoon that the government’s action had not yet sparked any infusion of U.S. dollars.

Annual interest rates for peso deposits vary from 81.4% for six-month deposits to 51% for one-year deposits, according to officials at Bancomer in Tijuana. The high interest reflects Mexico’s anticipated 65% inflation rate for 1986.

“If it does work, it will take a while,” said economist Norris Clement, associate director of the Institute for Regional Studies of the Californias at San Diego State University. “They have to show that when push comes to shove, they won’t devalue those dollars, too.”

Gonzalez suggested that the government’s move may allow the dollar to circulate freely alongside the peso in the border regions.

“They’re grabbing at straws,” suggested Brian Kelleghan, chief executive of Amforex, a Los Angeles firm that advises import-export companies on international currency matters. “I wouldn’t participate (in dollar accounts) personally because of the propensity of (the Mexican government) doing things totally unpredicted. It’s just a question of time before they take a radical measure, such as change their currency like Argentina and Chile.”

Mexico’s shortfall on its capital obligations will reach between $9 billion and $11.5 billion this year, Kelleghan said.

Foreign Investment

“In the broadest terms, they’re encouraging foreign investment, (but) this is a small step in that direction,” said a California banker who is an expert in Mexican affairs. “It’s a positive sign, but it’s not going to have a major significant affect on the economy.”

The attempt by Mexican officials to lure U.S. dollars is viewed by some experts as an “increasing dollarization of the Mexican economy,” Clement said.

Contracts along the Mexican border are increasingly quoted in U.S. dollars instead of pesos, and the government’s action Thursday is an attempt to “get businessmen to think more in terms of keeping their money in Mexico,” Clement said. “If they can prove that the Mexican government can use the money and increase the stock of dollars in Mexico, then the action will be successful.”

Gonzalez said that Thursday’s action by the Mexican Treasury Department “presents many problems” and suggested that it could “change considerably the workings of the banking system in Mexico and how liquid assets are held. The main question is whether Mexicans will . . . have an incentive to hold pesos.”

When dollar accounts were frozen in 1982, the peso traded on the open market at about 88 pesos to $1. On Thursday, the exchange rate was 520 to 1.