De la Madrid’s Hold Shaken by Peso’s Fall : Currency Collapse Helps Export of Mexican Products but Hurts Image of the Government

The government’s decision to let Mexico’s currency float--which, as it turned out, was a decision to let its value sink dramatically--has shaken already-unsteady confidence in this country’s economic policies.

On Wednesday, the Bank of Mexico, the country’s central bank, withdrew its support of the peso in the free market. The retreat, following a long period of steady devaluation, resulted in a sudden decline in the peso’s value of 31% against the U.S. dollar, followed by a further drop of about 10% Thursday. Dollars were almost impossible to buy on the open market Thursday.

It is not yet clear where the value of the peso will settle. Some prices quoted here Thursday reached 2,700 to the dollar, compared to the rate of 1,713 two days before. The government of President Miguel de la Madrid is still keeping a rein on the so-called controlled market, where most import-export transactions take place. Free-market prices apply to private investments and debt payment as well as tourist exchange transactions.

Last 13 Months

Reaction to the plunge was swift, mostly negative and perhaps sharpened because the withdrawal of central bank support for the peso is but the latest in a series of whipsaw actions by the government that give the appearance of confused decision making.

In recent speeches, De la Madrid had promised that his administration, which is entering the last 13 months of a six-year term, would produce no surprises as he left office. The promise seems to have been broken.

“It is hard to imagine a worse moment to have let the parity of the peso to the dollar be fixed by the free play of supply and demand,” said a front-page editorial in the influential newspaper Excelsior. “Among savers there was already a case of nerves for the effect of the stock market crash. What will happen next?”

The government defended the free market devaluation by saying it needed to protect its cache of foreign reserves against a run on dollars by nervous investors and businessmen trying to pay off private debts.

‘Needed to Conserve’

The demand for dollars had increased in recent weeks due to the crash of the Mexican stock market, which “created nervousness and speculation against the peso,” according to Gustavo Petricioli, the finance secretary.

“We needed to conserve the savings of Mexicans and keep them within the country,” Petricioli said in a speech to the Mexican Congress on Thursday. “Our reserves were being threatened.”

Petricioli predicted that the value of the peso would recover in a matter of days.

In September, Mexico’s foreign reserves were reported to have nearly reached a record $15 billion. However, government officials say that demand for dollars and the government willingness to meet the requests was steadily eating at the reserves. Petricioli said the government needed to preserve its dollar hoard to “have a margin for maneuver in its economic policy.”

“Who knows what will happen in the coming months?” Petricioli asked. “We can’t afford to throw away our reserves. If we didn’t act now, we would have had to act later, when the situation might have been worse.”

Petricioli may have been thinking of the disastrous foreign reserve situation that greeted De la Madrid when he took office in 1982. During the previous year, a run on dollars coupled with falling oil prices had virtually emptied the treasury as the outgoing government resisted devaluating the peso and making dollars more expensive to buy.

‘Reasoning Not Soothing’

A sharp devaluation came anyway. Just months before De la Madrid’s term was to begin, the currency was devalued 100%, creating a political firestorm.

In any case, the government’s present explanations failed to convince many. “The reasoning of the government is not soothing,” said Rodolfo Guzman, a columnist in the business newspaper El Financiero. “(The reasoning) cannot hide the damage the devaluation produces in many businesses and the effect it will produce in family economies.”

Guzman and others said that the devaluation is sure to fuel inflation, which is already running at 140% a year, because the price of imports will climb substantially.

One reason for the generalized disgust is that the government itself caused some of the recent dollar drain. For most of this year, it had been devaluing the peso at a rate below inflation.

While the peso was falling rapidly against the value of goods in Mexico, it was falling less quickly against the value of the dollar. It therefore made sense to buy dollars; they were a bargain. Some companies bought dollars to pay off foreign debts.

The policy also ran counter to the government’s professed determination to encourage exports. An overvalued peso meant a rise in the price of Mexican goods abroad.

Businessmen began to complain, and the government started to accelerate the peso’s decline--after denying that the Bank of Mexico had propped up its value. The decision to devalue the peso is expected to once again encourage a surge in exports and is being reflected in the stock market, where issues rose sharply Thursday for the second day in a row, especially in companies that sell goods abroad.

Rescue Plan Abandoned

The government’s policy toward the stock market itself has exhibited unexplained reversals in recent weeks. The government ordered the market closed for the day on Oct. 5 because it was rising too rapidly. The rise was termed “disorderly” by government officials.

After the market crashed on Oct. 19 and continued to fall, the government announced that one of its banks, along with private brokerage houses, would intervene to stabilize prices. But the market continued to fall, and the government abandoned that plan, at least publicly.

The government also reversed its policy regarding so-called debt-equity swaps, which permitted foreign holders of loans to Mexican companies to trade in the debt for part ownership so long as the proceeds resulted in investment inside Mexico. That policy was stopped suddenly as a measure against inflation. However, the stoppage also threw into question the government’s stated opening to foreign investment.

Now, there are rumors that the government may be considering a sudden strike against inflation by imposing wage and price controls and establishing a new currency that would, presumably, hold its own against the dollar. The government has long denied that it was considering such a plan, already called “the Azteca” after the proposed name for the new currency.

But, with surprise decisions coming in short order, no one is willing to say that such a shock treatment may not be around the corner.

Today is a national holiday. Banks and most private exchange houses will be closed, giving the country a longer-than-usual weekend respite from the falling peso.