Not long ago Mexico’s currency was dubbed the superpeso. One of the world’s strongest performers in 2001, it seemed almost invincible, ending the year 5% stronger against the dollar than in January 2001.
This year, too, the peso continued to defy expectations of a weakening. While currency traders predicted a fall to near 11 to the US dollar in the face of a global recession, the peso remained steady at around nine.
But by the beginning of July the peso had lost some of its ability to soar. Between April and July 2, it fell by almost 10% to 9.98 to the dollar.
Analysts attribute the peso’s sudden dive partly to a weakening of the dollar against the euro, as well as investor concern about a stalemate in Mexico’s congress on key reforms such as that of the energy sector. The largely gas-powered electricity generation industry needs to double its capacity by 2008, energy analysts say.
But some say that the market had simply misjudged the peso’s strength. “The correction was long overdue,” says Miguel Palomino, currency analyst at Merrill Lynch in New York. “The peso is a good currency backed by a strong economy. But it is not the gold standard.” Palomino adds that traders this year had acted as if the level of foreign investment in 2001 that kept the peso strong was continuing at the same rate.
In May last year, Citigroup paid $12.5 billion for Mexico’s Banamex-Accival. The takeover was the largest financial services transaction in emerging-market history and brought a huge, one-off capital inflow, propping up the peso.
According to Benito Berber, economist with Ideaglobal, Mexico’s strong economic ties with the US have also meant the dollar’s weakness versus the euro has undermined the peso in recent weeks. “Ever since Mexico signed the North American Free Trade Agreement in 1994, it’s been accepted that the peso should trade with the dollar,” Berber says.
The dollar in early June hit a 15-month low against the euro, following investor concerns about corporate accounting scandals and rising violence in the Middle East.
The jury is still out on whether a weaker peso will boost Mexico’s economy, which contracted 2% year on year in the first quarter. Mexican exporters say a strong peso is hurting their businesses, as exporters receive fewer pesos for each dollar of goods they sell abroad, while making Mexican products relatively more expensive. But a weaker peso would mean higher prices for imported goods, resulting in higher inflation.
Neverthless, if the superpeso is down, it is not yet out. The currency strengthened again in July to around 9.70 to the dollar and many economists expect it to end the year at around 9.80.
Analysts say tight monetary policy, low inflation and a steady inflow of foreign investment mean the peso is unlikely to return to the dark days of late 1994 when a devaluation caused the “tequila crisis”, devastating confidence in Latin America’s economies.
