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Mexico finance minister not worried by peso volatility
May 30, 2012 / 7:58 PM / 5 years ago

Mexico finance minister not worried by peso volatility

MEXICO CITY (Reuters) - Mexico’s Finance Minister Jose Antonio Meade brushed off concerns about a slump in the peso to a six-month low on Wednesday, and said the currency would rebound once concerns about Europe’s debt troubles ebb.

Mexico's Finance Minister Jose Antonio Meade smiles and removes a microphone from his necktie after an interview for the Reuters Latin America Investment Summit in Mexico City May 30, 2012. REUTERS/Edgard Garrido

Mexico’s peso has shed more than 11 percent since mid-March, hurt by fears that Europe’s sovereign debt woes are worsening.

Meade said that once concerns about Europe calm down, the peso should retrace its losses to trade where it was before fears mounted that Greece might leave the euro zone. He also dismissed the need for a more active defense of the local currency.

“If this uncertainty disappears, we would expect the peso’s equilibrium would be very similar to the equilibrium we saw before these elements of uncertainty were in the market,” Meade said at the Reuters Latin America Investment Summit.

On Wednesday, the peso lost as much as 2 percent against the dollar to touch 14.1660, its weakest since the end of November. The peso had been trading stronger than 13 per dollar in February and March.

The Mexican peso is one of the most liquid emerging market currencies and its sharp slump has tracked a downturn in global markets due to concerns that debt troubles in the euro zone could spark another global financial crisis.

“What we have, and what will end up setting the value of our currency, is an economy where exports are growing, an economy where consumption and investment are growing,” Meade said.

Other emerging markets such as Brazil and India have resorted to ad hoc market interventions to defend their currencies.

Mexico, one of the biggest proponents of free markets among emerging economies, has a transparent auction mechanism to sell up to $400 million when the peso loses more than 2 percent from the previous day’s fix price, a mid-session reference.


Meade said that Mexico still believed European policymakers would avoid a messy breakup with Greece and prevent contagion from spreading to other weaker European countries.

But in case Europe’s troubles take a greater toll on the global economy, Meade said Mexico is in a strong position after tripling its emergency funds since 2008.

The central bank has amassed international reserves worth more than $154 billion and the country has the protection of a flexible credit line with the International Monetary Fund.

“We have solid structural conditions,” Meade said. “We are certainly better prepared to face (a global crisis) than we were when we did not have these elements of strength.”

Meade said the government’s projection of 3.5 percent economic growth this year was “very well anchored,” adding that U.S. growth was supporting Mexico. He said the growth outlook could be revised upwards if concerns about Europe fade.

“The environment that Mexico has today and the environment that surrounds us in the United States offer some bit of certainty,” he said. Mexico sends nearly 80 percent of its exports to its northern neighbor.

Still, in the event of a deeper global downturn, Meade said Mexico will not be able to provide much fiscal stimulus to the economy. But he said the central bank could lower its benchmark rate from 4.50 percent, where it has held since mid-2009.

“Surely, as in the rest of the world, there could be space within monetary policy to construct a more accommodative environment if a scenario occurs that threatens growth,” he said.

Mexico’s 2012 budget limits this year’s deficit to 0.4 percent of gross domestic product.

The finance ministry said on Wednesday that Mexico’s public sector ran a fiscal surplus of 8.2 billion pesos in April. The country has racked up a deficit of 43.4 billion pesos so far this year, keeping it on track to meet its budget limit, the ministry said.

Meade said concerns about the health of Spanish banks would not spill over into Mexico. Subsidiaries of Spanish banks BBVA (BBVA.MC) and Santander (SAN.MC) are two of Mexico’s top banks, but Meade said they were well capitalized.

Additional reporting by Krista Hughes and Ana Isabel Martinez; Editing by Phil Berlowitz

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