Asian Financial Woes Are Creating Unease in Mexico

Asia’s economic turmoil spilled over to Mexico on Friday, helping push the peso to a record low and driving the leading stock market index to its weakest close since May 1997.

Despite what are widely regarded as sound Mexican economic fundamentals, the peso slipped to a closing 9.07 to the dollar, down 0.8% from Thursday’s close of 8.99. The previous record low close was 9.04 pesos June 11.

On the stock market, the Bolsa’s key IPC Index fell 3.44% to close at 3844.93 points, its sixth straight daily drop.

Analysts agreed that concern over the worsening Asian financial outlook, and especially the prospects of a currency devaluation in China, had fueled the market’s unease.

“There are a number of firms revising their GDP growth estimates for China, and every time that happens the likelihood of a devaluation in China rises. The possibility of that event is quite dramatic for emerging markets,” said Jorge Mariscal, head of Latin American equity research for Goldman Sachs in New York.

Slower growth in China “would sink commodity prices worldwide,” Mariscal said, and that would pummel Latin American markets, which are highly dependent on commodity exports.

At the same time, weaker growth in the United States because of the Asian slowdown “would further pull the rug out from under Latin America” since 75% of the money invested in Latin markets comes from the United States.

“So you have the double whammy of a weak Asia and corrections in the U.S. market,” he said.

Moody’s Investor Service said Friday that Mexico remained vulnerable to reversals in the U.S. economy and uncertain investor confidence, even though its improved financial position supported a stable outlook for Mexico. The Moody’s report further discouraged the stock market, which has fallen 26% so far this year--including a nearly 10% drop this week alone--after soaring 52% in 1997.

Mexico has been hit hard this year by falling oil prices, contributing to a rise in its trade deficit to $494 million for June, compared with a surplus of $313 million in June 1997. But the revised deficit figures announced Friday show that manufacturing exports remain strong, growing 13.5% in June over the same month a year earlier.

The peso’s gradual weakening against the dollar makes Mexico’s exports more competitive, so the peso’s gradual decline has not generated widespread alarm.

Yet several major Mexican companies reported mediocre half-year results this week. That raised concerns that corporate earnings are starting to be constrained by competition from cheaper Asian imports as well as by greater Asian competition for Mexico’s traditional export markets.

Against the backdrop of global unease, consumption within Mexico has continued strong in recent months as a long-awaited recovery takes root following the 1994 peso devaluation and 1995 recession. That domestic economic revival has sustained forecasts of annual economic growth of about 4.5%.

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MARKETS GAIN: A benign employment report helped lift stocks on Wall Street. D3