The peso has strengthened this week amid signs that the Dubai World crisis will not transmit contagion throughout emerging markets. The Mexican currency has rallied more than 7% against the dollar over the past two months, leading the 16 major currencies tracked by Bloomberg. At 12.85 pesos to the dollar, the peso is now up 21% over its March lows.
Recent data showing increased factory orders and a mild recovery in the US housing sector promise a recovery in Mexico’s battered export industries. As the US is the recipient of the vast majority of Mexico’s exports, economic recovery in the US is a prerequisite for Mexico to return to positive growth.
While turnaround in the States has contributed to the peso’s recent climb, the Mexican economy faces an uncertain 2010. Congress has approved tax hikes that analyst’s feel may lead to accelerating inflation next year. To stave off inflationary concerns the central bank may be forced to raise interest rates, tempering the economy as it tries to pull out of recession.
Add to this Fitch downgraded Mexico’s credit rating last month. Reduction to BBB status hasn’t prevented Mexico’s short-term rebound, but the particulars point to structural economic problems. Flagging revenue from state-owned oil sector isn’t likely to recover, and given oil is the largest source of government income a fundamental reorientation is needed.
The government needs to recognize the heyday of easy oil money probably will not return. The peso’s strength could possibly rise over recent months based on little more than the fact that it has been so pummeled over the last year. Let that not be taken as signal of lasting economic recovery. Without change, the Mexican economy may muddle along for years to come.
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