The Mexican Peso Crisis Essays -- Economy Economics Mexico Essays

The Mexican peso Crisis This paper argues that the Mexican peso crisis of December 20 should hold back been expected and foreseeable. In the year preceding the crisis, there were several indicators suggesting that the Mexican economy and peso were already under extreme pressure. The economy bubble was balloon to burst so much so that it was simply a crisis waiting to happen.Evidences Signaling the Crisis1.Decreasing Current neb Deficit versus Increasing Capital Account BalanceMexico was running an increasing current account deficit from US$7.5 billion in 1990 to US$23.4 billion in 1993. This indicates an excess of private investment over private savings. However, the country was able to maintain an improving fiscal account from US$3.6 billion deficit in 1990 to US$0.7 billion pointless in 1993. The deficit in current account was financed through capital funds from abroad resulting the capital account to increase from US$8.4 billion in 1990 to US$33.8 billion in 1993.The over-depe ndent on foreign capital flows had made the Mexican economy very vulnerable to any sudden and major intermix of this capital fund which was very much dependent on the investors? confidence level in the Mexican economy. The fact that majority of the capital funds was in the form of portfolio capital instead of foreign direct investment (FDI) had also worsen the situation. The ratio of portfolio capital to FDI had increased substantially from 11.3 in 1990 to 16.5 in 1993. Given the volatile nature, portfolio capital tends to respond with greater speed to changes in the environment. 2.Depletion of International ReserveThe central bank of Mexico has built up at high level of international reserve. The huge reserve was the result of the Mexican government?s policy of exchange intervention to prevent large mutant in the peso. In the beginning of 1994, the reserve amounted to US$26.4 billion but was depleted to a low US$6.7 billion in Mid Dec, nodding red light that the exchange mechani sm had been pushed to the limit and the government can no longer hold on to the pegged peso to US dollar. 3.Increasing provide Rate but Decreasing Mexican Interest RateFederal funds rate has risen the fifth time in 1994 on Nov 1994 and reaches 5.5%. This resulted in stronger dollar against peso as the quantity of US dollar reduced. This signaled problems for Mex... ...ssibility of a devaluation of the pesoAccording to Euromoney, Mexico?s ranking among borrowing countries improved between knock against and September 1994Conclusion The decreasing current account, increasing capital account, depleting international reserves, declining real GDP growth and increasing dollar-denominated tesobonos all pointed towards the vulnerability of the Mexican economy. In view of the repeated political unrests, Mr. Woo and the others should have expected this crisis. But they based their decisions on surface information and market sentiments that had over-valued the market potential. References Th e Mexican Peso Crisis the Foreseeable and the SurpriseNora Lustig, Brookings Institution, June 1995Mexico 1994 versus Thailand 1997Thailand Development Research Institute, 1997Exchange-Rate Regimes, Speculative Attacks and Currency CrisisUniversity of EssexAn Early Warning System for Financial CrisisDominic Barton, Roberto Newell and Gregory Wilson, Mc Kinsey & Company, 2003The Impact of the Mexican Crisis of 94-95 on the Maquiladora exertionPaul Cooney, Queens CollegeWhat NAFTA Brought to Mexicans?Jim Callis, March 1998