The Mexican Peso Crisis Essays -- Economy Economics Mexico Essays

The Mexican Peso Crisis This paper argues that the Mexican peso crisis of declination 20 should have been expected and foreseeable. In the year preceding the crisis, in that location were several indicators suggesting that the Mexican economy and peso were already under positive pressure. The economy bubble was b onlyooning to burst so much so that it was simply a crisis waiting to happen.Evidences Signaling the Crisis1.Decreasing Current account Deficit versus Increasing Capital Account BalanceMexico was running an increase current account deficit from US$7.5 billion in 1990 to US$23.4 billion in 1993. This indicates an excess of underground investing 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 surplus in 1993. The deficit in current account was financed through enceinte currency from abroad resulting the not bad(p) account to increase from US$8.4 billion in 1990 to US$33.8 billion in 1993.The over-dependent on foreign capital flows had do the Mexican economy very vulnerable to any sudden and major(ip) flux 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 come up to investment (FDI) had also worsen the situation. The ratio of portfolio capital to FDI had increased easily 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 primordial bank of Mexico has built up at high level of worldwide reserve. The huge reserve was the result of the Mexican government?s polity of exchange intervention to prevent large fluctuation 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, flagging tr igger-happy light that the exchange mechanism had been pushed to the limit and the government can no longer hold on to the pegged peso to US clam. 3.Increasing federal official Rate but Decreasing Mexican Interest Rate national 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 meliorate between March and September 1994Conclusion The decreasing current account, increase 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. dally and the others should have expected this crisis. But they based their decisions on surface reading and market sentiments that had over -valued the market potential. References The Mexican Peso Crisis the Foreseeable and the SurpriseNora Lustig, Brookings Institution, June 1995Mexico 1994 versus Thailand 1997Thailand festering Research Institute, 1997Exchange-Rate Regimes, Speculative Attacks and Currency CrisisUniversity of EssexAn Early Warning System for fiscal CrisisDominic Barton, Roberto Newell and Gregory Wilson, Mc Kinsey & Company, 2003The Impact of the Mexican Crisis of 94-95 on the Maquiladora IndustryPaul Cooney, promote CollegeWhat NAFTA Brought to Mexicans?Jim Callis, March 1998