Hitting a New Low : Relentless Fall of Peso Deepens Uncertainty in Mexico Economy

The Mexican economy took a worrisome turn Wednesday as the peso, resisting all efforts to stabilize it, tumbled to a new low against the dollar amid soaring interest rates and deepening uncertainty in the nation’s financial markets.

At the close of trading, the peso stood at 7.8 to the U.S. dollar--its lowest level since Mexico’s economic crisis began 11 months ago. Mexico’s stock market, or Bolsa, closed down nearly 1% after heavier losses on light trading earlier in the day.

Wednesday’s bleak developments came after speculators drove up annual interest rates on Mexico’s benchmark 28-day government bonds to 54.24% at Tuesday night’s weekly auction--their highest level since May 17.

The peso, which had matched a previous record low of 7.45 to the dollar on Tuesday, has now lost 58% of its value since Mexico’s worst economic crisis in more than a decade erupted last December. More than 15% of the loss has come in the past month--4% of it on Wednesday alone--during a period when positive assessments of Mexico’s economy from the Clinton Administration and Mexican President Ernesto Zedillo have failed to restore investor confidence here.

A spokesman for Mexico’s Finance Ministry insisted that the peso’s slide was a temporary phenomenon, adding “there is no fundamental reason” for its fall.

But the relentless fall of the peso--despite the availability of an international bailout fund of $50 billion orchestrated by President Clinton earlier this year--has the investment community on edge. Mutual funds specializing in Latin America, which began attracting cash after the bailout, are reporting net outflows of money again.

Latin funds are down 37% on average since the currency devaluation last December, slammed by the double-whammy of the peso’s drop and the Bolsa’s slide.

The Bolsa stock index, down 21.53 points to 2,234.47 on Wednesday, has slumped 6.6% since Oct. 1.

“What’s happening is more worrisome than what was happening last December because the peso is still falling even though the government has kept monetary policy tight and kept a budget surplus,” said Soraya Betterton, manager of the $300-million GT Latin America Growth Fund.

As a stark illustration of the fragility of Mexico’s markets, the mere rumor--clearly unfounded and quickly denied but widely reported by news agencies--of a possible military coup against Zedillo sent the peso and stock markets tumbling late last week. Suspecting deliberate manipulation that it labeled “economic sabotage,” the Mexican Congress on Tuesday ordered an investigation into the origins of the rumor.

*

But independent analysts said the continuing negative mood among Mexican and international investors reflects a deeper lack of confidence in the ability of Mexico’s economy to recover in the short term.

Compounding that insecurity this week, they said, is a widely debated proposal to establish a fund of up to $5 billion supplied by private, export-oriented corporations and possibly the government to help stabilize the peso.

It was the decision by Zedillo and his economic advisers on Dec. 19 to expand the government’s fixed peso-trading band--and remove all government monetary supports the following day--that detonated the crisis. Zedillo was forced to lift those controls after months of supporting the peso at 3.4 to the dollar nearly exhausted the nation’s foreign-exchange reserves.

But Zedillo on Wednesday stood by his continuing commitment to allow the peso to float freely on the international markets, which has helped boost Mexico’s reserves to their present level of $14.16 billion.

“We know the answer to our challenge is to not move away from our economic discipline, our fiscal discipline and our monetary discipline,” the president said in a prepared speech. “We cannot and must not relax our efforts.”

At the same time, though, business executives were still debating the peso-support fund, which independent economic analyst Jonathan Heath said “is not being received well by everybody.”

“People are asking, ‘Why is the private sector doing what the government should be doing?’ ” the Mexico City-based analyst said. “It gives the idea that the government isn’t doing its job. And the proposal is still speculative; it hasn’t been made official.”

Darryl McLeod, senior economist of the global economics department of Lehman Bros., added, “It’s very well-intentioned, but it won’t work for a couple of reasons: It’s too small an amount, and it is not consistent with Mexico’s policy--with its commitment to a floating exchange rate.”

McLeod agreed with other independent economists who had hoped Zedillo would have established a monetary-exchange policy to support the peso’s value several months ago.

“The government was a bit overconfident and decided to keep a competitive peso,” he said. “Zedillo said in almost every speech, ‘We’re not going to appreciate the peso.’ Well, that meant it was almost certainly going to depreciate.”

The undervalued peso has boosted Mexico’s balance of payments, but it also has helped drive up interest rates, which continue to threaten Mexico’s banks and extend a recession that has thrown more than 1 million Mexicans out of work and shrunk the economy by more than 5% this year.

“Since Zedillo gave the idea that the peso was more likely to depreciate than appreciate, the government needed higher interest rates to attract investment and keep the peso stable,” McLeod concluded. “But it [also] became clear that higher interest rates were not in line with an improving economy . . . and it became less likely the government’s plan was going to work.”

*

Bloomberg Business News contributed to this report.