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PESO DEVALUATION.   Term Paper ID:26019 Click to get this paper

Essay Subject: Assesses Mexican economic crisis, monetary policy & its effects, debt issues, oil revenues, recommendations. Tables.... More...

7 Pages / 1575 Words 8 sources, 10 Citations, APA Format $28.00 Return to List of Papers

Paper Abstract: Assesses Mexican economic crisis, monetary policy & its effects, debt issues, oil revenues, recommendations. Tables. Paper Introduction: CURRENCY DEVALUATION & OIL REVENUES: A POLICY ASSESSMENT Introduction Devaluation of the peso is being considered in the wake of the economic crisis that developed recently in Brazil and which is exerting negative impacts on the Mexican economy and placing increasing pressure on the peso in international currency markets. The pressure on the peso continues to be exacerbated by low-level of global demand for petroleum, which, in turn, affects adversely both Mexico’s balance of trade position and the fiscal position of the national government in Mexico. The proposed policy to devalue the peso is assessed through this research. The primary intended audience for this policy assessment of the President of Mexico and his advisers. Mexico’s Current Position Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. As aconsequence, in early-1999, Mexican stock prices have dropped more thanfive-percent on average, the peso have lost more than 25 percent of itsexchange value, and interest rates have risen dramatically (Trotta, 1999). All of these economic shocks have cause a currency flight from Mexicothat began in the last-half of 1998 and which continues in early-1999.Deposits by Mexican nationals in American banks increased by 12 percent in1998, to a total of US$38.9 billion. Economic News & Analysis on Mexico, 3. (1998 September). This policy would provide a long-ternsolution, References Banco Nacional de Mexico. The government of Mexican President Salinas renegotiated the country'shuge foreign debt, initiated economic reforms that boosted the country'sprestige with the OECD countries, and negotiated entry into the NorthAmerican Free Trade Agreement (NAFTA) with Canada and the United States.Nevertheless, a severe crisis ensued in 1994 with the crash of the peso. Devaluing the peso in a planned strategy will allow the government toretain some degree of control over the value of the currency and to planfor the adverse impact of devaluation. The total amount of Mexican depositsin American banks at the end of 1998 was 48.7 times greater than the totalamount of funds budgeted by the national government in Mexico for socialprograms in 1999, which is US$799 million. Economic indicators. Reviewof the Economic Situation of Mexico, (9), 3-6 . This real currency depreciation caused real wage levels in Mexico toplunge, which, in turn, prompted multinational corporations (MNCs) toattempt to establish bases of production in the country to exploit the lowreal wage levels (Dornbusch & Fischer, 1986). % ||1995 |37.2% | .8% |36.5% ||1996 |27.8% |4.7% |23.1% ||1997 |22.8% |8.4% |14.4% ||1998 |2 .9% |7.6% |13.3% | Source: Banco Nacional de Mexico, 1999.Table 2Public Sector Revenues Derived from Oil [Pesos in millions]|Entity |1997 |1998 ||Public Sector |3 ,612 | 4,217 ||National Government |12, 63 |-6,596 | Source: Banco Nacional de Mexico, 1998. he news,The News (Mexico), 1. Third World debt.Science, 234, 836-841. Further, the total amount ofMexican deposits in American banks at the end of 1998 was 5.3 times greaterthan the revenues generated for the national government of Mexico by thestate-owned oil company in 1998, which were US$7.4 billion. Trotta, D. Olson, M., Jr. Conversely, each US$1 increase in the world price foroil results in an increase in such revenues of US$8 on an annual basis(Malkin, 1998). Recent Experiences A major economic development in Mexico prior to 199 was the emergenceof the country's huge external debt in the early 198 s. Rather,the government should seek a policy alternative that will serve the averageMexican, business, investors, and the national government, while providinga long-term solution. Mexican economy comes down withBrazilian flu. (1996 Spring). Joining the GATT committed Mexico to theimplementation of tariff reductions and to the introduction of policiesthat would lead a more open economy (Dornbusch & Fischer, 1986). Journal of Economic Perspectives, 1 , 3-24. Banco Nacional de Mexico. Lower oil prices translate into lower revenues for the nationalgovernment and a widening trade gap that puts pressure on the peso.Although oil accounts for only 1 percent of Mexico's exports, PetroleosMexicanos, the state-owned oil company, generates 38 percent of nationalgovernment revenues. From 1982 to 1986, the Mexican government reduced expenditures andraised taxes to be able to pay the interest on the country's external debt. (1999January 13). A substantial proportion of theincrease in Mexico's external debt during this period was linked to anexodus of capital by residents of Mexico. Economic indicators.Review of the Economic Situation of Mexico, (9), 3-62. This action has further weakenedsupport for the tight fiscal policy implemented by the national government(Fineren, 1998). (1998 October). A summary of Mexico's recentdebt record is presented in Table 1, which may be found on the followingpage. Mexico's Current Position The tight monetary policy imposed by the central bank, together withthe tight fiscal policy pursued by the national government, has caused somedecrease in domestic demand. As a consequence of the debt crisis accompanies by capital flight, theMexican government resorted to "inflationary finance"-printing money(Dornbusch & Fischer, 1986, p. (1998 March 3 ). Inflation, at 17 percent, was higher in 1998 than the 12 percent thathad been projected at the beginning of the year. Malkin, E. As a consequence, real wage levels decreased by 4 percent (Dornbusch &Fischer, 1986). Olson(1996), however, possessed the acumen to point-out that economic logic isnot the only logic that is at work in any country or globally, and that ifsocial logic does not also underlie such initiatives they likely willstumble at best and fail at worst. The proposed policy to devalue the peso is assessed through thisresearch. (1999 January 13). Lastly, thetotal amount of Mexican deposits in American banks at the end of 1998 was1.3 times greater than Mexico's foreign currency reserve of US$3 billionat the end of 1998 ("Mexican Deposits in U.S. National government revenues from Petroleos Mexicanosdecrease by US$8 million on an annual basis for US$1 reduction in theworld price for oil. The average Mexican, however, willsuffer, and the currency flight likely will continue. This agreement by the IMFwas for a period of 18 months extending through the end of 1987.Simultaneously, Mexico agreed to join the GATT (General Agreement onTariffs and Trade). Between 1979 and 1982, theestimate of capital flight from Mexico precipitated by residents of thecountry was US$3 billion (Dornbusch & Fischer, 1986). The pressure on the pesocontinues to be exacerbated by low-level of global demand for petroleum,which, in turn, affects adversely both Mexico's balance of trade positionand the fiscal position of the national government in Mexico. A realistic appraisal ofthe situation will conclude the such control already is effectively inWashington. The currency flight from Mexico will accelerate.Pegging the peso's value to the value of the United States dollar willsacrifice some degree of American sovereignty, as control over the value ofthe peso will largely be lodged in Washington. Three principal alternatives that the government mayconsider are as follows: (1) devalue the peso further in a plannedstrategy; (2) continue to allow the peso to find its own level through theworking of market forces; and (3) pegging the peso's value to the value ofthe dollar. The recommended policy decision is to peg the value of the peso to thevalue of the United States dollar. Inflation, currency devaluation, decreased oil revenues forthe national government, and other factors combined to cause the nationalgovernment to reduce the subsidization of the price of the tortilla, thecountry's principal staple, in 1998. The Mexican peso took a beating in the wake of the late-1994 financialcrash in the country. Banks Increase to US$38.87Billion, 1999). In early-1999, the peso is trading above 12.5 tothe dollar. Dornbusch, R., & Fischer, S. The increased inflationrate was largely a consequence of the devaluation of the peso towards theend of 1997. In the 199 s, Mexico's political and economic leadership found that,frequently, the world simply does not work as economists postulate that itwill. Inflation higher than expected. The effect of lower world oil prices on the Mexican nationalgovernment and the public sector generally in Mexico has been devastating.These effects, drawn through a comparison of the January-to-June period in1997 with the January-to-June period in 1998, are presented in Table 2,which also may be found on the following page.Table 1Mexico's External Debt As A Percent of GDP|Year |Net Debt |Domestic |Foreign ||1994 |31.8% |4.8% |27. Deposits by Mexican nationals inAmerican banks in 1995 totaled US$24.6 billion. The peso was trading at the level of 3.34 pesos toone United States dollar in May 1994. A large proportionof the foreign borrowing in which Mexico engaged in the late-197 s andearly-198 s "was wasteful or unjustified in that it primarily financedconsumption and government budget deficits rather than investment"(Dornbusch & Fischer, 1986, p. Mexico slips in an oil puddle BusinessWeek, (3571), 54. Big bills left on the sidewalk: Why somenations are rich and others poor. Mexico's national debt has decreased dramatically since the peso crashof 1994; however, at the end of 1998, the country's total debt remained at2 .9 percent of gross domestic product (GDP). Inflation, however, is rising as the value ofthe peso decreases. banks increase to US$38.87 billion. Fineren, D. Recommended Policy Position The national government in Mexico should not repeat the mistakes ofthe past, nor should the government react to the current situation in sucha way that the mass of the country's population will be penalized. Mexican deposits in U.S. Mancur Olson (1996), writing in the Journal of EconomicPerspectives, defined the economic logic that must underlie the initiativesof government in efforts to create and effective market economy. By January 1995, the trading levelhad risen to 5.76 pesos to one United States dollar, and by January 1996,the trading level had risen to 7.54 pesos to the United States dollar. Reuters New Wire, 1. As a consequence, the Mexican pesoexperienced a huge depreciation in real terms from 1982 to 1986-28 percent. ByMay 1998, the trading level had increased further to 8.68 pesos to oneUnited States dollar. Allowing the peso tofloat will deprive the government of control over the value of the peso andwill not permit the government to plan effectively to deal with the adverseimpacts of devaluation. (1999 January). Peggingthe peso to the dollar will facilitate governmental planning to deal withthe effects of the policy, and currency flight should end as a large scaleactivity. Pegging the peso to the dollar will tend to protect theaverage Mexican, business, investors, and the national government. 839). Global oil prices collapsed in 1998 and have shown nosigns of improvement. 837). Currency Devaluation & Oil Revenues: a policy assessment Introduction Devaluation of the peso is being considered in the wake of theeconomic crisis that developed recently in Brazil and which is exertingnegative impacts on the Mexican economy and placing increasing pressure onthe peso in international currency markets. The economy of Mexicowould benefit if the funds deposited by Mexicans in American banks wereinstead deposited in Mexican banks. The shock to the Mexican economy delivered by the economic crisis inBrazil in late-1998 was doubly unfortunate in that it hit the Mexicaneconomy at a time when Mexico already was in the midst of a plannedslowdown in economic growth and because the country had already been hit bythe unexpected and precipitous drop in the world price of oil. The primary intended audience for this policy assessment of thePresident of Mexico and his advisers. (1986 November 14). In July 1986, the International Monetary Fund (IMF) agreed to provideadditional credit to Mexico in the amount that the country would lose as aconsequence of falling world crude oil prices. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.