Mexican Exports Likely to Gain From Peso’s Fall

One of the world’s strongest currencies against the dollar in 2001, Mexico’s peso has lost 7% of its value since early April partly because of the U.S. dollar’s comparable slide and because of a policy shift by the central bank to favor a weaker currency.

A prime beneficiary of the currency slide, however, could be Mexico’s export manufacturers, whose goods had become less competitive as the peso strengthened. A strong peso, combined with the U.S. recession, last year caused tens of thousands of jobs to be lost in maquiladoras, the Mexican assembly plants clustered along the U.S.-Mexico border geared to export markets.

A weakening peso could boost demand for export products by making them cheaper in foreign markets.

Further devaluation of the peso may be ahead. Economist Enrique Dussel Peters of the National Autonomous University of Mexico in Mexico City believes that the peso is still as much as 30% overvalued.

What is certain is that there is a lot less demand for the peso now than a year ago, a factor that inevitably diminishes its value on international markets.

Foreigners are less eager to buy Mexican stocks, bonds and money market accounts today than a year ago, and foreign companies’ interest in establishing businesses here has cooled.

Net foreign investment in stocks and bonds was $147.4 million during the first quarter, down 73% from the $555.7 million invested during the same three months in 2001, said Jonathan Heath, an economist with LatinSource in Mexico City. Foreign direct investment in Mexican businesses was $2.73 billion, about $300 million less than expected.

On Friday, the peso closed at 9.65 to the dollar, compared with 9.00 in early April. Last week, the peso traded as low as 9.77 to the dollar, its weakest close in 15 months. Mexican stocks also have slid. The main stock index closed Friday at 7,031.64, down 4.5% on the week and 6% since the end of April.

The decline of the peso shows how Mexico’s currency and economy are increasingly synchronized to those of the United States. The peso’s weakening since April is roughly equal to that by the dollar in relation to the euro over the same period, said Guillermo Estebanez, a currency strategist with Bank of America in San Francisco.

“As the peso strengthened last year it was seen as a bet on the U.S. recovery, that there would be a very short recession with a sharp rebound. But that bullish outlook has started to unravel and the markets now have more doubts,” Estebanez said.

While the peso remained strong it wreaked havoc on Mexico’s all-important export manufacturing industry, making the country’s maquiladoras and other factories less competitive in the global economy.

But even now, economists here increasingly are worried that Mexican factories are not recapturing the tens of thousands of lost jobs, even though the U.S. economy is improving and creating greater demand.

“The maquila sector seems to be in a lot of trouble,” Heath said, adding that jobs lost in Mexico since the U.S. recession started may have moved to lower-cost countries such as China and Malaysia.

These troubles are what may have spurred the central bank in early April to take actions that increased liquidity in Mexico’s money supply and made credit more available, but at the cost of higher inflation and a devalued currency.

“It was a signaling mechanism,” Damian Fraser, a UBS Warburg analyst in Mexico City, said of the move. “The bank has described the peso’s decline as an ‘orderly decline.’ The markets took that as a positive description, that the bank was comfortable with it” and would allow the currency to devalue.

Heath of LatinSource said the peso could rebound over the course of the year if the U.S. recovery reverberates here. So far it hasn’t. Although the U.S. economy grew by more than 5% during the first quarter, the Mexican economy contracted by 0.2%.

Estebanez said he thinks the peso will devalue further, but he agrees its future ultimately is tied to the U.S. dollar.

“The dollar is still under pressure. There is less appetite abroad for U.S. assets, less money flowing into the United States this year. When the dollar goes up, the peso goes up. Now that the dollar is weakening, so is the peso,” Estebanez said.