Nuevo Tequila Crisis? Ay, ay, ay!
Bloomberg reports an alarming development south of the border:
Jan. 30 (Bloomberg) — The steepest decline in Mexico’s peso
in 13 years blindsided everyone … After weakening 20 percent last year, the currency fell to a
record closing low of 14.2431 per dollar this week.
Mexico’s central bank says the economy may contract as much
as 1.8 percent this year. Gross domestic product expanded 1.5
percent last year, after 3.2 percent growth in 2007.
Sales to the U.S., which buys about 80 percent of Mexico’s
exports, tumbled 21 percent in November, the biggest decline
since at least 1993, the U.S. Department of Commerce’s most
recent trade report shows.
Oil, which funds more than a third of the Mexican
government’s budget, plunged 72 percent from a record $147.27 a
barrel on July 11. Expatriate Mexicans sent home 3.6 percent
fewer dollars last year, the first annual decline in remittances
since at least 1995.
In a 2001 book titled The Volatility Machine, Michael
argued that emerging market crises are driven as much by the rich
countries’ liquidity cycle as by their own policies. Russia has just
experienced a large ruble devaluation, as the price of its energy
exports was slashed. Mexico rhymes with Russia in this respect, as it
is losing both production volume and pricing power. So if you’re
dumping rubles, it’s entirely logical to treat the Mexican peso as
‘the North American ruble.’
Mexican currency crises tend to occur in roughly a 12-year rhythm,
which could be related to its 6-year presidential term. Before the 1994
Tequila Crisis, Mexico’s previous bust-up had occurred in Feb. 1982. As
energy prices began sliding in 1981, Mexico lost export revenues. The
peso began to tumble, and capital flight began. The US was obliged to
ride to the rescue. Arguably, Mexico’s crisis is what forced then-Fed
chair Paul Volcker to back off from hardball monetary targeting and
reopen the liquidity taps.
Well, in broad outline, it’s all happening again … and it’s 2
years overdue. Like Russians, Mexicans are experienced with currency
crises. Via capital flight, the Mexican elite can make currency
weakness into a self-reinforcing process, as more and more people catch
on that it’s time to bail. Locals can only buy gold and silver. It
doesn’t really pay to hedge with corn meal, as tortilla prices are
Joe Biden spoke of a ‘test for Obama.’ A Mexican crisis, when the
U.S. itself is dead broke, would sure qualify. Enter the IMF! Is this
what gold has been smelling? Would you feel safer in pesos, dollars, or
your hands and feet inside the roller coaster, folks. This could be a
scary ride. Come to think of it, I could use a margarita now.
Well, a month has gone by. This week the Mexican peso fell below 15
to the dollar — Bloomberg shows it closing at 15.24. Having broken
that psychological barrier, the peso is likely to slide faster as
capital flight accelerates. The chart is ugly —
is facing a perfect storm of falling energy production, falling
exports, and falling remittances from expatriated Mexicans in the U.S.
Long term, I don’t know how they’re going to fix it. Like us, maybe
they are just screwed.