| | |  Editorials | Opinions | April 2009 
On Buying Dollars Cheaply
 Edgar Amador - The News
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U.S. novelist Raymond Chandler liked to say "killing is easy; it is what happens next that is difficult."
Mexicans will be offered a relatively cheap dollar for some time, but the truly big question is; what will happen next?
The central bank, or Banxico, resolved a dilemma by borrowing time and postponing a big decision.
The dilemma? The economy is collapsing to historic proportions, unemployment is rampant, and the U.S. economy will not be coming to the rescue in the near term, because this time the U.S. economy is the problem, not the solution. In order to water down the effects of this U.S.-induced recession, Banxico must lower benchmark interest rates aggressively, but in doing so, it risks a stronger peso and, therefore, higher inflation.
The only chance Banxico had to have its cake and eat it too - lower interest rates and a steady peso - was to have a few extra billion dollars in its international reserves vaults . lots of them. But since Banxico did not have enough dollars, it played its only hand available - it borrowed them.
The credit facility provided by the IMF to shore up international reserves, and the swap facility signed with the U.S. Federal Reserve are borrowed dollars; they don't belong to the central bank and must be repaid if used. But that was not only the sole available source of dollars in the short term, it was also the cheapest and the smartest.
The move by the central bank is no nonsense. It is far cheaper to borrow dollars from the IMF and via the Fed swap, than to face a sharp devaluation of the peso.
But the effect created by such a massive support for the peso may have some kind of "be careful what you wish for because you might get it" consequences.
During a global recession like the one we are suffering now, there is a natural impulse by economies to export their way out of the slump, either by making exports cheaper or by making imports more expensive. There is then a natural impulse to cheapen local currencies in order to sell more goods and services abroad.
If the Mexican currency strengthens from its lows against the dollar, beyond a level that makes Mexican-made goods and services non-competitive, then the economic recovery will take longer than is expected.
Worse than that is if the peso strengthens beyond its equilibrium level - that is, beyond a rate that it is incompatible with an economic recovery and steady prices. Then Mexicans may be tempted to hoard cheap dollars in excess of their needs.
The tricky question here is what is the proper rate for the peso? At what peso/dollar level will the Mexican economy recover without suffering inflationary pressures or substantial losses of international reserves?
The answer?
Nobody knows; we can only guess. That is a question for the markets to err upon, or nail. My gut feeling is that a peso between 14.5 and 15 is appropriate for medium-term economic equilibrium, but a peso significantly below 14 for longer than six months will create incentives to hoard dollars at the expense of Banxico's international reserves.
As long as the peso remains solid by living on borrowed international reserves, there is the risk that a major external financial shock (and can anyone looking at the Eastern Bloc countries rule out that possibility?) will leave the peso vulnerable again.
The peso is not strengthening because the Mexican economy is booming and everyone wants to be at the party by buying Mexican assets. It has strengthened because we borrowed dollars.
Sure, that was a very clever short-term decision, but as long as the local economy remains stagnant, there will not be real dollars coming in to support a solid peso, and we will continue walking on thin ice.
Beware then.
If the currency strengthens to 13 or lower, you may want to take advantage of cheap dollars courtesy of the central bank and start saving your U.S. money for a rainy day, especially since economic growth fails to pick up, which is something that this country and its government has forgotten to do of late.
Edgar Amador is currently deputy director general at Dexia bank and was previously deputy finance secretary for the Mexico City Council. |
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