The weakening was due partly to Mexican companies raising money at low peso interest rates and buying greenbacks to pay down dollar-denominated loans. Rates on 28-day Cetes were 7% on June 5, but had recently touched an historic low of 5.28%. The Central Bank's recent modest easing of monetary policy signaled that a slightly weaker peso would not aggravate inflation, now at 4.4%.
The decline relieved worries that an overly strong peso might eventually face an abrupt correction, spooking investors. The "super peso" was clobbering the export-driven economy: Over the past year, Mexico lost 350 factories and 240,000 jobs in the maquiladora assembly industry, which produced half of its $158.5 billion in exports last year.
Economic recovery hinges on a U.S. rebound. The U.S. takes 88% of Mexico's exports. After shrinking 1.4% last year, Mexico is expected to grow 1.8% in 2002. While the economy shrank 2% in the first quarter, April brought promising signs: Exports and imports both rose above year-ago levels for the first time in 11 months.
The cheaper peso could kick-start foreign direct investment, which last quarter was down $300 million from a year ago. Investors are waiting for Mexico's divided Congress to decide on opening the electricity sector to private investment and on new loan-collection rules to encourage bank lending, which has slumped badly since the 1995 peso crisis.
Buyers may also trickle back to stocks. Foreigners invested $150 million in stocks and bonds through March, compared with more than $550 million in the first quarter of 2001. The Mexican bolsa gained 10% in dollar terms in 2001. It is up 4.1% this year, and a correction may be inevitable. Mexican equities would then look very attractive to investors with dollars to spend. By James C. Cooper & Kathleen Madigan
By Geri Smith in Mexico City