The government has spent over 7 billion dollars in order to defend the Mexican peso. This kind of action will not achieve to contain the exchange rate towards the dollar, which by September will exceed 17 pesos per dollar. Shortly the “convenience” of the devaluation will be declared.
The economic driving of Mexico has been a failure. This is said in the assumption that someone is internally of the administration responsible of a country in the midst of a crisis. For every adverse newsfeed, external or internal, there is an increase of the uncertainty and an aggravation with the decay of the expectations around the objectives of the current administration that no one remembers anymore.
Enrique Peña Nieto says that his neoliberal reforms are the best shield for the economy, the best way to protect it in an adverse context of the volatility of the international financial markets and the worldwide economic downturn, as they enforce the strengths and the comparative advantages.
Before this scenario the Commission of Changes (CC), made up by the Secretariat of Finance and Public Credit (SHCP) and the Bank of Mexico (Banxico), i.e. by Luis Videgaray and Agustin Carstens, who decides to reduce the rate of accumulation of international reserves during 3 months (a quarter of the net expected accumulation for the next 12 months will be sold in the markets) and to intervene temporarily and indirectly in the market, throughout of an auction of dollars (200 million with a minimal price, when the dollar rises 1 per cent or more and with the extension of the sale of that currency without a price, between 50 million and 200 million until September). This situation will be from the 31st of July until the 30th of September, even though the period could be extended if the volatility of the international markets and the pressure on the exchange rate remain.
These measures aim to try to warranty the liquidity of the exchange market and to avoid that the imbalance between the supply and the demand of currencies destabilize other financial markets (stock exchange and of securities) and the productive activities, and that it generates inflationary pressures.
The question remains: Which have been the results of the contingent exchange policy? Is this strategy adequate to confront the speculative dynamic that provokes the exchange rate volatility and the depreciation of the Mexican peso with regard to the US dollar? Is the instability only and exclusively due to the external factors or is it also related with internal causes? What will be the consequences of the depreciation of the currency?
The “strategy”
Often enough the politicians try to be funny, without success.
For example, recently Ernesto J. Nemer (former private secretary of Emilio Chuayffet, former operator of Eruviel Ávila (now Governor of the State of Mexico), and related to the Del Mazo family), then promoted to Assistant Secretary of Rosario Robles in the Secretariat of Social Development, said: “The welfare policy has been left behind, it merely serves as an aspirine”. This happens despite that the political establishment uses the aspirine of the IMF-based welfare programs, of the right-wing populism to manipulate politically the poor and miserable ones.
The expected benefits of the exchange policy of the CC are equal to the ones provided by the painkillers such as the aspirine. They attend temporarily the malaise due to the volatility and exchange depreciation. The dollars sold are some kind of anti-depressants for the paranoid investors terrified by any news, let it be minimal or favorable for the economy (for example, the reduction of the unemployment rate), that could affect their earnings and lead to a convulsion of the financial markets. They represent the welfare policy of the careworn speculators. However the placebo effect fades away rapidly, once the dollars have been auctioned. In the best of the cases, they revalue, contain and diminish for a time the pressures and the rhythm of depreciation of the peso, but they do not eliminate it.
The Commission of Changes forgets, or if you prefer, considers them unchangeable, insofar the structural factors that generate the financial volatility, they stimulate it and produce an exaggerated reaction. They are associated to the architecture of the neoliberal economic model: the deregulation of the local financial markets (of currencies, of stock markets, and of securities); the external trade openness and of the capital accounts of the balance of payments (the entry of direct foreign investment and of short-term financial-speculative investment, the investment of Mexicans abroad); the subordinated integration into the world economy; the purchase and issuance of securities that operate simultaneously in any given market worldwide that meets the requirements of the latter ones (in the case of the US stock market, the companies issue securities known as ADR, American Depositary Receipts); the free flow of capitals.
This architecture was designed and imposed on a worldwide scale since last century by the International Monetary Fund (IMF), the World Bank (WB) and the World Trade Organization (WTO), with their stabilization programs of structural adjustments, of the liberalization of the trade in goods and services or the protection of foreign investment (warranties against non-commercial losses such as expropriation, currency inconvertibility, exchange transfers, civil wars and unrest). These counter-reforms that later on were known as the Washington Consensus and that were implemented during the government of Miguel de la Madrid until Enrique Peña.
Without the correction of these structures the nations is doomed to suffer the recurrent speculative cycles and external chocks, internalized by the adopted model, also known as the monetary model of the balance of payments or for an open economy.
The elimination of the internal and external, economic and financial regulations, especially those of the capital accounts (as states the Chilean economist Ricardo Ffrench-Davis, renegade of the Chicago School- he was one of the first Latin-American Chicago Boys offsprings of this school and which further on, not himself, worked manu militari with the criminal Augusto Pinochet- and who was director of Studies of the Central Bank of Chile -1990-1992- and regional Advisor to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), among other positions) is the main responsible for the entry and exit of short-term capitals, of its stabilizing effects, of the exchange volatility, of the burst of financial speculative bubbles. The external chocks are transmitted throughout exchange, stock markets and securities circuits. However with the integration of the world market, the chocks stop being foreign and become strictly in this sense internal.
Ffrench-Davis and a great number of economists have studied this logic, whose first crisis date back to the 1980’s, with the bankruptcy of the US savings banks and the crash at Wall Street in 1987. The Mexican crisis is another manifestation of this kind of dynamic of the neoliberalism. The systemic collapse initiated in 2007 is its most savage expression ever since.
This is something known to Enrique Peña Nieto, Luis Videgaray and Agustín Carstens, but they prefer to cling to the orthodoxy and to succumb to it.
The massive entry of capitals, especially the speculative one, that seeks to take advantage of the quick yields leads to the exchange appreciation or set-backs, the cheapening of the dollar, the reduction of the import contributions, of the inflation, the interest rates and the fiscal deficit, that allow the desired price stability by the ultra-orthodox Carstens and Videgaray. This cycle phase, as long as it lasts, could be considered the phantasy of the borrowed richness.
Nevertheless it is not the macroeconomic stability, nor the strength of the economy what is aimed as pretend Videgaray and Carstens.
The cheapening of the dollar has among other costs, the entry of imported goods (the “upgrading of the cabinet”, how the Chilean economists Fernando Fajnzylber) compete disloyally with the local production, they displace it and disincentives the exports and provokes the economic stagnation, and the lack the capacity to generate the necessary formal employment, furthermore it delays the comprehensive progressive fiscal reforms.
What is created is a destabilizing deflation, the economic stagnation, the imbalance of the trade balance and the chronic dependency to external financing, which explains the counter-reforms of Peña, completely useless to stimulate the growth.
This is also known to Enrique Peña, Videgaray and Carstens. But they prefer the economic suicide before freeing themselves to the neoliberal dogma, by the way profitable to the plutocracy. Therefore they imposed this economic model; the “crony capitalism”, according to Joseph Stiglitz. Between 1983and 2014 the Gross Domestic Product (GDP) grew with a real mean rate of 2.4 per cent, less than half of what was registered between 1950 and 1982 (slightly above 6 per cent). The worst part is that during the Peña administration this rate has fallen to 1.8 per cent in 2013-2014, and it will be unlikely that this level is surpassed in 2015-2016 and for time remaining of the current government.
This is even so when the bet of the re-privatization of the oil industry has been ignored by the big oil companies and will compel them to misuse the hydrocarbons.
The collapse of the economic policy
The reversion of the capital influx induces the contrary effects.
The economist Paul Krugman and Lance Taylor have explained the effects of the devaluations.
Without a doubt it brings along a scarcity of capitals, the downturn of the Mexican peso against the dollar, the fall of the stock and money market. It raises the prices of importations. The cheapening of the exports has a limited benefit, and in the best cases reduces temporarily the worsening of the trade balance and the current account, which over time raises again. It makes more expensive the access to foreign resources to finance the balance of payments. It makes more expensive the cost of financing of the foreign indebtedness (payment of interest rates). It inhibits the private consumption. It generates an ambience of uncertainty that paralyzes the private investment and the growth, while the difficult ambience passes by.
The rebuilding of the expectancies will depend on the time that endures the exchange instability and the level that the relation peso-dollar is at.
Inasmuch it creates inflationary pressure that makes the Mexican Central Bank tremble, who hastens to announce the next raise of interest rates, in case that the price raise becomes reality, and there aren’t any reasons to expect that phantom will not become reality. The businessmen have already warned, due to the increase of the production costs, in particular of imported items, and their speculative temptations. They will transfer those raises to the final price and inevitably the population will pay the costs. The demand will be reduced and this will affect the production and the growth. The raise of the yields additionally will have the negative effects over credit, consumption, investment and local indebtedness.
The cuts of public expenditures in 2015 and 2016 will bring the growth and the government of Peña to the collapse
The increase of the yields will be another failure of the current government.
Originally the SHCP estimated that the 3.7 per cent goal for 2015 and of 4.9 per cent for 2016. In August the Central bank reduced its prediction from 2-3 per cent to 1.7-2.5 per cent for the first year and from 2.5- 3.5 per cent for the second. But the bid was a true failure. Out of the 18 billion dollars expected, barely 2,600 billion were invested.
The economic downturn of 2015 puts into show, additionally that the telecommunication, labor, fiscal and financial reforms haven’t seduced the investors neither.
Over and over, this story starts to become analytically tedious
Meanwhile the price of the dollar decreased nominally (-6.4 per cent from 2009 until 2010, from 13.50 pesos for a dollar, as an annual mean, to 1,42 pesos for a dollar in 2011; and -1,7 per cent from 2012 until 2013, by dropping from 13.17 pesos for a dollar to 12.77 pesos for a dollar), the government hasn’t said a word.
After all these were the happy years of the influx of currencies. Let it be for the increase of the international petrol prices (the mean price of the blend of exportation went from 57.40 dollars per barrel in 2009 to a maximum of 101.96 dollars per barrel in 2012; in 2013 it is of 98.44 dollars per barrel). Or by the circulation of capitals, the public and private external borrowing, the foreign investment and the money market (purchase of state securities), that improved between 2009 and 2013. Those last resources were enough to compensate the growing deficit of the current account, which went from 8.3 billion dollars in 2009 to 26.5 billion dollars in 2014.
The fall of the petrol prices (from 86 dollars for a barrel in 2014 and 49.92 dollars for a barrel in July 2015, even if in the first half of August fell to 39.69 dollars for a barrel), underscored a minor input of resources for the capital account and uncertainty generated by the Federal Reserve. The downturn of investments was notorious in the money market (that went from 46.6 billion dollars in 2012 to 28.7 billion dollars in 2014) and the contraction has sharpened this year.
In the first trimester of 2015, according to data from the Bank of Mexico (Banxico), the foreign investment fell by 47 per cent, in comparison with the same period of the former year (from 16.2 billion dollars to 8.6 billion dollars). The direct investment fell by 34 per cent (from 114 billion dollar to 7.7 billion dollars). In the money market went from an investment 4.5 billion dollars to a disinvestment of 326 million dollars (see box 1).
The latter point reflects the decrease of the interest rates of the state securities (Cetes and others) by a part of the foreign financial investors. In 2009 they demanded this type of papers for an amount of 325 billion pesos, 15.4 per cent of the total amount. In January 2015 they summed up 2.413 billion pesos, 45 per cent of the referred years. Starting from this moment the interest rates declined, and in July, the investment was of 2.134 billion pesos, 36.5 of the total amount. The contraction was of 280 billion pesos (see graphic 1).
Unless that the yields of the government securities are increased, in an similar or major degree to the expected adjustment by the referential interest rate of the Federal Reserve (maybe a quarter of a point percentage), the least input of capitals, the disinvestment of the non-residential official papers and the exit of resources will increase. By now the effects of the increase of the long-term US Treasury Bonds are being felt.
Generate reserves to later auction them
The extension of the auctioned dollars and the sacrifice of the international reserves come late and insufficiently and haven’t accomplished to contain the increasing tendency of the price of the US currency.
By the end of July 2014 the restriction of currencies started to be felt, the exchange pressures and the depreciation of the parity (above 13 pesos for a dollar), despite that the tendency intensified in September, when the public servants of the Federal Reserve announced the possibility of starting a raise of the interest rate by 0.14 per cent. When this should occur, it will be the first raise since March 2007. At the close of 2014 the relation reached 14.72 pesos for a dollar and on the 17th of August 16.40 pesos for a dollar (see graphic 2).
Everything goes before the parsimony of the CC, that decided to start putting dollars into the market with or without a minimum price starting from past March, a process which was reinforced in August with the extension of the latter.
For the time being this year, until the 14th of August 7,096 million dollars have been put in circulation, 773 million dollars at a minimal price, 7,869 million dollars without a minimal price. Only for August 373 million dollars of the first kind and 1,800 million dollars of the second kind have been auctioned.
The latter added to the fact that there is a lesser rhythm of accumulation the international reserves have declined by 196 billion dollars to 189.7 billion dollars between the 30th of January and the 7th of August. There has been a contraction of 6,292 million dollars (see graphic 3).
In spite of the extension of the sold currencies, the parity has passed of 16 pesos for a dollar to 16.40 pesos for a dollar, between the 31st of July and the 17th of August.
Nobody should be surprised by the ongoing volatility of the parity and that the price of the dollar has risen (above 17 pesos) until the moment in which the Federal Reserve has raised the interest rates, which could occur during the September Meeting.
The Peso will keep falling and the dollar will rise like a balloon
One aspect that has been neglected by the analysts is that the nominal adjustment in the value of the currency has partially corrected the real overvaluation of it, an inherent anomaly of the monetary policy (exchange rates in relation with 111 countries), that demands a cheapening of the dollar to reduce the price levels.
By the end of 2014 the Central Bank estimated a delay by 22 per cent. In May the overvaluation descended to 19.7 per cent. A real balanced parity would require at least 20 pesos for a dollar that would benefit the economy, given that it makes the imports more expensive.
But this is not the aim of Videgaray and Carstens.
In 1973, Luis Echeverría said”The public finance is handled from Los Pinos (the presidential residence)”.
In 1976 however, he decided to give away the management to the IMF, after the devaluation crisis, throughout a letter of intent that he signed with that organism.
The current fiscal adjustment is subsidiary to that loss of independence.
Now the monetary and exchange policy was also given up to the control of the speculators and the Federal Reserve. Videgaray and Carstens are subjected by them.
In a whole, the sovereignty over the economic policy is decided elsewhere.
Marcos Chávez M*, @marcos_contra
*Economist
(Translated by: Axel Plasa)
[TWEET: The Government spends more than 7 billion dollars to contain the fall of the peso. At the brink of a “devaluation”
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Contralínea 451 / del 24 al 30 de Agosto 2015
