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A U.S., Canadian Line of Credit Aids Mexico’s Battered Currency

January 9, 1995

MEXICO CITY (AP) _ The value of the peso rose slightly Monday as Mexico began drawing on a bailout package from its North American free trade partners, United States and Canada.

The government, meanwhile, released figures on the state of the country’s foreign currency reserves, apparently seeking to deflect criticism that it was too secretive before the peso began to free-fall.

The Banco de Mexico, the nation’s federal reserve, said it made the first withdrawals of $500 million and $83 million in Canadian dollars ($59 million) from the Bank of Canada under the so-called North American Framework Agreement.

The loan agreement, set up in April 1994, was expanded Dec. 22 to $9 billion from the United States and $1 billion from Canada. Previously, the United States had offered $6 billion and Canada had offered $1 billion.

In New York, the the U.S. Federal Reserve also said it was buying pesos and selling dollars at the request of its Mexican counterpart. But the bank, the arm of the U.S. central bank that conducts market activities, did not disclose the size of its intervention.

As a result of the supporting measures, the peso in Mexico City trading opened at 5.2, compared with 5.7 to the dollar on Friday.

The Mexican currency has lost nearly 40 percent of its value against the dollar since the peso crisis erupted Dec. 20, barely three weeks after President Ernesto Zedillo took office for a six-year term.

The crisis, largely the result of big trade deficits and declining foreign investment, was touched off by Mexico City’s decision late last month to scrap its defense of the currency and let the peso freely float in world currency markets.

On Monday, the Banco de Mexico said foreign currency reserves dropped by $602 million since the crisis erupted _ from $6.148 billion at the end of 1994 to $5.546 billion last Friday. The bank said it mostly spent the money to make payments on short-term debt.

Monday’s announcement appeared to be part of a new Zedillo policy to be more open with government information. During the first days of the peso’s plunge in December, U.S. investors and economists bitterly complained about Mexico’s secretiveness.

The Banco de Mexico said that from now on it ``will announce on a regular basis the amount of its international reserves.″ Until now, the bank detailed reserves around twice a year.

It said Friday’s reserves figure did not include money from the North American bailout package or from another $18 billion stabilization fund being put together by the United States and the international financial community to stabilize the peso in the longterm.

The efforts are coupled with a newly announced package of austerity measures, including a cap on wage increases at 7 percent in 1995, to combat inflation that is expected to soar following the peso’s plunge.

Inflation is estimated to be 19 percent for 1995, up from 4 percent originally projected and economic growth is now estimated to be at 1.5 percent for this year, down from 4 percent. Inflation in 1994 was around 7 percent.

Such inflation will prompt heavy government budget cuts, a possible recession and certainly more unemployment.

As well, credit has virtually dried up and interest rates are now sky high _ up 35 to around 50 percent on credit cards, for instance. Many small and medium businessmen, who took out dollar loans when the North American Free Trade Agreement came into being Jan. 1, 1994, say they may go broke.

Mexicans have seen their purchasing power erode nearly 60 percent in such crises since 1982 and their share of the pie is getting smaller. Mexico’s population grows 1.9 percent annually, and half of its 90 million people are 18 years or younger.

This means an estimated 1 million youths enter the job market every year, and the country has only been able to provide around 600,000 to 700,000 new jobs annually in recent years.

Prices of staples have already gone up, angering Mexicans such as Victoria Barcenas, a 50-year-old housewife and mother of three children.

She and her husband, a carpenter, used to make the peso equivalent of $144 a month _ slightly more than the minimum wage. With the devaluation, this is now worth about $90.

So if prices continue going up, ``it can unbalance the family’s budget,″ she said.

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