The best that the government can do today is to let the peso float freely and hold on to dollars for feasible goals. The world has learned a lesson in this global crisis, which is that the dollar can become scarce for prolonged periods.
The global crisis hasn't had "temporary" effects as the government says. The most important ones are permanent. That's why you can't count on the United States pulling Mexico out of the crisis, nor on the peso being at a sustainable level through the adjustments to come.
Thursday, October 8, 2009
Ramírez de la O on Mexico's Currency
Rogelio Ramírez de la O says that Mexico's currency stabilization is principally due to a decline in imports leveling off the trade deficit, and owes less to the government's intervention in the currency market (thus far it has auctioned off $28 billion in foreign reserves to stabilize the peso). The danger, according to Ramírez, is that the recovery will stimulate demand for imports, which will once again skew the deficit toward Mexico's trading partners, and will sink the price of the peso. If the government continues to try to maintain the value of the peso despite the unfavorable context, it runs the risk of repeating Salinas' errors in 1993 and '94, which of course led to a meltdown in the opening weeks of the Zedillo administration. His proposed solution: