Mexico Devalues Peso 15% as Revolt Flares Up : Economy: Move to head off damage from Chiapas uprising gets mixed reaction. Some fear a rekindling of inflation.

Acknowledging that political instability threatens Mexico’s hard-won economic rehabilitation, the government moved to devalue the peso by 15% at dawn on Tuesday.

The move rippled through the economy, recalling the 1976 and 1982 peso devaluations that sent Mexico into a tailspin. Whether this latest step leads to similar economic havoc will depend mainly on investor perception, observers said.

The government’s action also was being closely watched in the United States, especially in California and Texas, where border merchants rely heavily on the purchasing power of Mexicans and where hundreds of U.S. companies have dramatically ratcheted up their economic transactions with Mexico in the free-trade climate of the past year.

In Washington, Treasury Secretary Lloyd Bentsen sought to calm concerns: “Mexico’s exchange rate action today will support the healthy development of the Mexican economy. With a balanced budget, continuing economic reform and prudent monetary policy, Mexico’s fundamentals remain sound.”

In a 4 a.m. communique, the Mexican government blamed guerrillas in the southern state of Chiapas for the instability that made the devaluation necessary. The guerrillas announced Monday that they will no longer observe a cease-fire that has been in effect since mid-January.

But in addition to the potential instability, economists and investors said, the peso is under pressure for economic reasons, mainly a foreign trade deficit that is widely regarded as unsustainable and has been a major factor in the stagnation of Mexico’s economy.

With the devaluation of the peso, Mexico’s exports become cheaper and goods and services from other nations become more expensive, causing trade deficits to shrink. The devaluation means more pesos are needed to equal one dollar, with the result that interest rates--which have been kept high in order to attract foreign investments--will decline and invigorate the Mexican economy.

The danger, however, is a rekindling of inflation.

“It’s purely an economic decision,” said one institutional investor. But “the timing is political. If you can paint the (guerrillas) as the cause, that’s a pretty good mud ball.”

The Mexican Stock Exchange Index rose 43.06 points--1.93%--on the news, although the prices of Mexican stocks traded in the United States fell an average of 6%. Devaluations generally raise stock prices as investors anticipate lower interest rates, unless companies have dollar-denominated debt.

Technically, the government widened by 53 centavos the band within which the peso trades. That means the currency--which had been trading at 3.46 pesos to the dollar late Monday--could drop as low as 4.00, a devaluation of 15%, before the central bank intervenes to defend it.

Foreign exchange desks were quoting the dollar at 3.89 pesos on Tuesday, but some banks were offering 4.00.

Rumors of devaluation had been rampant since spring as the peso clung to the top of the trading band, a clear indication that the central bank was drawing on foreign reserves to defend the currency.

Besides spending foreign reserves, the government also tried to offset the trade deficit with foreign investment, attracting capital from abroad by keeping interest rates high. That angered Mexican industrialists who must borrow at those high interest rates to modernize their outmoded factories and compete internationally.

Less than three weeks into the administration of President Ernesto Zedillo, it became clear that the monetary policy could not continue.

Devaluation is a delicate issue in Mexico because previous administrations have depleted international reserves and brought the economy to the brink of collapse before dropping the peso’s value.

Some foreign stock investors said they were shaken by Tuesday’s devaluation and unsure whether it was the right decision. Direct investors were more confident.

“We see this as a short-term event,” said one U.S. banker based in Mexico. “We had planned to invest $100 million in Mexico in the coming years, and we are not reducing our operations in the least bit.”

But U.S. retailers along the 2,000-mile U.S.-Mexico frontera --many of whom depend on border-crossing Mexican shoppers for their livelihoods--will probably be hurt.

Mark Torres, manager of Kragen Auto Parts store in San Ysidro, just across the border from Tijuana, said that although business was good on Tuesday, he expects the devaluation to hurt as the news sinks in. “Ninety percent of our business comes from over there. So whatever happens to them will affect me. Yes, I have to be worried.”

Meanwhile, the hundreds of U.S. manufacturers with plants in Mexico will benefit because the cost of labor and Mexican supplies will drop accordingly with the peso’s loss of value against the dollar, said Ed Brekke, president of the Western Maquiladora Trade Assn., a group of some 240 foreign manufacturers with plants in Baja California.

The degree of benefit will depend on where those plants are situated and where their products are shipped, Brekke said. U.S. plants situated in Mexico’s interior shipping products back to the Midwest, for example, will benefit most, because the cost of labor and supplies should fall according to the peso’s loss of value.

But that benefit will be less pronounced for U.S. companies with plants close to the border, because the border economy is heavily dollar-oriented, Brekke said.

In downtown Los Angeles, Jorge Sanchez, owner of the record store Discoteca Favorita, was happy about the peso drop, because it would help him save money when purchasing much of the Mexican music the store sells--and because the $500 he sends monthly to his parents and siblings living in Ensenada would go a little further.

“I can afford to send that money every month, and I’ll keep sending what I can,” Sanchez said. “Just because the dollar is worth more doesn’t mean that I’ll send less.”

*

Darling reported from Mexico City and Kraul from San Diego. Staff writer Ray Delgado in Los Angeles also contributed.

* CHIAPAS CLASH

Mexican troops move in to reassert authority among rebels in Chiapas. A1

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Peso’s Slumping Value

It now takes more pesos to buy one U.S. dollar. Pesos to the dollar, monthly closes except latest:

Tuesday: 3.965

Source: Dow Jones News Service