Peso Drops as NAFTA Jitters Grow

The Mexican peso dropped against the dollar again Tuesday, continuing a three-day slide touched off by investor uncertainty over the outcome of next week’s congressional vote on the North American Free Trade Agreement.

Analysts estimate that jittery foreign investors have pulled as much as $7 billion out of Mexico during the last week as prospects for passage of the trade pact--a potential boon to the Mexican economy--appear in doubt.

Although Mexican government officials peg the investor outflow at closer to $1 billion, the central Bank of Mexico responded to the peso flight Tuesday by allowing the currency to drop 4% and raising interest rates to lure investors. At the close of business Tuesday, the peso was trading at 3.27 to the dollar.

Several analysts warned against attaching too much significance to the run on the peso, arguing that it is a temporary situation caused by increasing concerns that the trade agreement will not be approved by the House of Representatives next Wednesday. They noted that recent trading was probably influenced by the heightened awareness of the trade agreement created by the debate Tuesday night between Vice President Al Gore and Ross Perot, an ardent NAFTA opponent.

“This is a short-term phenomenon that should be ignored,” said Saroya Betterson, manager of the GT Global Latin America Stock Fund in San Francisco.

However, some analysts suggested that the government’s decision to let the peso drop shows that Mexican officials are preparing for the increasing possibility that NAFTA won’t pass. They note that if the pact is defeated, the Mexican government will find it easier to defend a lower exchange rate.

Until Tuesday, the Mexican central bank had been drawing on its ample $23 billion in reserves to maintain the existing exchange rate of about 3.15 pesos to the dollar. However, the bank decided to let the peso fall a bit and concentrate on keeping investors by offering higher interest rates.

The bank bought up $1.67 billion worth of Treasury bills in the open market and is expected to sharply reduce the offering of bills in today’s weekly auction. Both those actions cause interest rates to rise.

In addition, increasing interest rates will allow Mexico to shore up investor confidence before the vote to offset the negative impact of a rejection, said one U.S. institutional investor, who spoke on the condition that he not be named.

Still, with the central bank expected to announce a monthly inflation rate of 0.4%, the lowest level in 25 years, one government official noted that “the economy’s fundamental elements are still quite solid.”

In the long run, investors said, Mexico’s long-term prospects are bright with or without the agreement. The Mexican stock market’s Bolsa index jumped 25.92 points Tuesday to 1,953.84, after diving 83 points over the previous two sessions.

However, the stock market is still nervous about the vote on NAFTA and will probably become more edgy as the House vote approaches, said economist Rogelio Ramirez de la O.

Darling reported from Mexico City and Lazzareschi from Los Angeles.