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Mexico: Exchange Rate
Country Study > Chapter 3 > The Economy > Financial System > Exchange Rate

EXCHANGE RATE


From December 1982 until November 1991, the Mexican peso had two rates of exchange against the United States dollar -- the controlled or "official rate" and the "free rate." The controlled rate applied to income from most merchandise exports, to funds used by maquiladora assembly industries for local expenditure other than fixed assets, to nearly all import payments, and to principal and interest payments and other credit expenses. The free rate applied to most other transactions, such as tourism and profit remittances.

In November 1991, the government eliminated all exchange controls, thereby unifying the various peso exchange rates. The regime freed the peso to float within a band, the bottom of which was fixed at 3,051 pesos per dollar and the top of which was devalued by 0.2 pesos per day. Renewed pressure on the peso forced the authorities in October 1992 to raise the average daily depreciation to 0.4 pesos per dollar, increasing the peso's annual rate of devaluation to less than 5 percent. The peso continued to appreciate in real terms, however, because Mexico's inflation rate exceeded that of the United States by some 8 percentage points. The government was reluctant to devalue the peso to the full extent of the inflation differential with the United States because it feared that a large devaluation would exacerbate domestic inflation and undermine public confidence in the stability of the government's macroeconomic policy. It preferred to compensate for the less competitive position of the peso by increasing productivity within Mexico. In January 1993, the government introduced the new peso, worth 1,000 of the old and divided into 100 centavos, to simplify foreign exchange.

Intense international demand for Mexican stocks and high-yielding two-year treasury certificates, known as cetes, kept the new peso at a stable level of 3.1 new pesos per dollar for most of 1993. Uncertainty about NAFTA's passage drove the new peso down to 3.3 per dollar in November 1993, although it soon rallied to 3.1 per dollar as interest rates rose and NAFTA's prospects of ratification appeared to improve. By late 1993, the capital influx had overvalued the new peso against the dollar by some 30 percent, leading some investors to avoid Mexican currency for fear that the new peso's overvaluation would compel the government to impose a large devaluation that would sharply reduce the dollar return of cetes . Some leading private-sector figures favored devaluation, expecting it to help reduce the trade deficit, Mexico's need for foreign capital, and thus interest rates.

Political considerations deterred the government from imposing a devaluation that would lower living standards, jeopardize investor confidence, and promote capital flight in the months prior to the August 1994 presidential and congressional elections. The slowdown of capital inflows exerted steady downward pressure on the new peso throughout the year. By late 1994, the government was drawing heavily on international reserves to prop up the new peso.

The almost complete disappearance of Mexico's reserves forced the new Zedillo government to bolster the currency's value. On December 20, 1994, the government raised the ceiling on the exchange rate band from 3.4 to 4.1 new pesos per dollar. However, continued pressure on the new peso, combined with mounting investor concern about the government's intentions, forced the administration two days later to let the currency float. The new peso ended 1994 at 5.3 per dollar. It continued to weaken during early 1995, as investors doubted the government's ability to repay the US$29 billion in short-term tesebono debt that would fall due during that year. In 1995 the exchange rate fell to 6.5 new pesos per dollar, and in January 1996 it stood at 7.4 new pesos per dollar.

The average monthly interest rate on twenty-eight-day cetes rose from 14 percent in 1995 to 49 percent in 1996. When the new peso came under heavy speculative pressure in late 1995, Mexico's monetary authorities reacted by raising interest rates sharply. Mindful of the need to restore investor confidence in Mexico's early economic recovery, the authorities allowed interest rates to fall at the end of 1995.

Data as of June 1996




Last Updated: June 1996


Editor's Note: Country Studies included here were published between 1988 and 1998. The Country study for Mexico was first published in 1996. Where available, the data has been updated through 2008. The date at the bottom of each section will indicate the time period of the data. Information on some countries may no longer be up to date. See the "Research Completed" date at the beginning of each study on the Title Page or the "Data as of" date at the end of each section of text. This information is included due to its comprehensiveness and for historical purposes.

Note that current information from the CIA World Factbook, U.S. Department of State Background Notes, Australia's Department of Foreign Affairs and Trade Country Briefs, the UK's Foreign and Commonwealth Office's Country Profiles, and the World Bank can be found on Factba.se.

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