Mexico’s Grounded Super-Peso Syndrome
Mexican authorities sloughed off the currency’s rise through the 12 to the dollar barrier and reiterated their free-float stance without resort to capital controls, after lining up an additional 2-year $70 billion IMF flexible credit to back foreign reserves which already employ a regular “smoothing” facility. Exporters complain that they will be unable to sustain the 30 percent expansion that brought 5 percent GDP growth last year, but look to salary restraint and productivity gains to keep their position. The central bank in its inaugural public minutes release pointed to a reduced minimum wage hike of 4 percent this year as a competitive goad also keeping inflation tame, despite food price prodding in particular from the staple tortilla with maize at a 3-year high. The CPI methodology was recently revised and although agriculture is 30 percent of the basket, the 2011 final figure is put at around 3.5 percent, with monetary policy now at “neutral.” With US recovery, auto shipments which were up 50 percent last year should remain strong, and private construction and manufacturing along with public infrastructure projects could repeat another 5 percent output spurt. The state-owned development bank has embarked on road and sanitation projects which are also designed to enhance appeal as an energy partner, as Pemex taps new fields and ventures. Social spending beyond commercial financing scope has assumed priority with the anti-drugs fight as the 2012 presidential race starts to take shape with six state governorships already in play. At this stage, the opposition PRI looks set to return to power with a 20 point lead in opinion surveys, with Mexico state head Pena Nieto the likely standard-bearer. The PAN party of President Calderon is a distant third and the leftist PRD is split between followers of Lopez Obrador who narrowly lost in 2006 and Mexico City mayor Ebrard, who claims to have improved air quality and service delivery there.
The contest will be in contrast to the smooth handoff to President Rousseff in Brazil who maintained her predecessor’s top economic officials but has also absorbed urgent pleas to tighten fiscal and monetary policy after inflation hit 6 percent and the primary surplus missed the goal. The Finance Minister has signaled budget cuts equivalent to over 1 percent of GDP, and has also redirected “currency war” rhetoric away from the US and toward China urging appreciation there as well in the interest of bilateral partnership and the global monetary system. IPO fever that had accompanied the transition has also proven lukewarm after a series of faltering retail and industrial flotations to deflate the pre-carnival mood.
