• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Mexican Peso Crisis

Extracts from this document...

Introduction

The Mexican Peso Crisis 1994-95 : Case Study In the five years to the end of 1994, the Mexican government had built up a reputation for cautious economic management. Monetary and fiscal discipline was allied to control of wages and prices with the primary aim of reducing inflation to international levels, balancing the budget and creating sustained growth. By 1994, the strategy appeared to have been successful. Inflation had fallen from 20% in 1989 to 7% in 1994 and was forecasted to fall to 4% in 1995. Massive deficits had been eliminated and had been replaced, for the three years up to and including 1994, by a balanced budget. Economic growth averaged 3.5% p.a. from 1989 to 1992, although there was a sharp reduction in 1993 to 0.4%, the lowest rate for 7 years. In January 1994, Mexico acceded to NAFTA as a full member joining the USA and Canada. Together with membership of the OECD, this appeared to set the seal of international approval on the success of its development strategy. The Exchange Rate Anchor The anchor of monetary and fiscal policy for six years had been the establishment of a stable relationship between the Mexican peso and the US dollar by the Salinas Government. ...read more.

Middle

Accordingly on 20 December 1994, only 19 days after he had been sworn into office, Mr. Zedillo's Finance Minister Jaime Serra announced an immediate 12.7% devaluation of the Peso and the continuation of the crawling devaluation of Ps0.0004 per day. Aftermath of Devaluation The devaluation worked out disastrously wrong. Instead of reassuring markets that the re-alignment was a once-off adjustment, it aroused fears of further and deeper devaluations. The peso proved impossible to support at the new level. By March 1995 it had traded at over 7 pesos to the dollar, a depreciation of over 100% on its level at the outbreak of the crisi s in December. Domestic short term interest rates rose to 42% by January 1995 and the stock market (ZPC) index, which in the past had been butressed by massive inflows of money from foreign pension, investment and mutual funds, dropped 23%. A US investor saw a massive decline in the dollar value of a stock market investment in Mexico and was going to be very hard to entice back to the market. ...read more.

Conclusion

This forced a much weaker peso - and by extension a much higher inflation rate - than was objectively warranted by fundamentals. Strong "contagion effects" were evident in other South American and Asian markets, engendered by these same irrational market movements. Conclusion Whichever view is correct, it seems generally agreed that inflation: is set to rise from 7% in 1994 to as much as 45% or more in 1995. Investor confidence in Mexico has been dealt a severe blow. Another effect of devaluation was the severe impact of increased import and financing costs on the many foreign companies which had decided to establish in Mexico following the NAFTA Agreement. The depreciation of the peso has damaged trade, as theory would lead one to expect, and it could have created difficulties for NAFTA. Certainly such wild exchange rate fluctuations are not conducive to a healthy growth of trade and factor exchange. Fears have been voiced that the painfully built-up consensus in favour of competition, macro-stability and openness would also be undermined. Certainly it will be re-thought, but the Mexican government appears to be committed to continuance of a reformist, outward-looking strategy. Sources: R. Dornbusch and A. Weber " Mexico: Stabilisation, Reform and No Growth" Brookings Papers on Economic Activity 253-316 1994 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Case Studies and Analysis section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Case Studies and Analysis essays

  1. Unit 9: Marketing Strategy

    Celebrity chefs such as Jamie Oliver are constantly shown in the media, making healthy eating appear glamorous and fashionable. Government guidelines will also have an affect on the buying habits of families as school enforce a "healthy packed lunch" policy, banning foods with excessive sugar and fat.

  2. Unit 12 - International Dimensions of Business Task 1

    restrict the ambitions of their aims to around Europe now matter what the aim is regarding however because British Airways have a global image, in terms of location their aim can be anything they want it to be and that is how their international presences contribute to the differences in aims.

  1. PEST is a planning tool which is used by a business to evaluate and ...

    In the short term it will cost Ginsters a large proportion of their profits so they will not be meeting their aim of maximising profits, however in the long term they will eliminate any prosecutions if they do not meet the legal requirements, this means that they will be ensuring they meet their aim to maximise profits.

  2. The Impact of Migration on the Reduction of Poverty

    However, to the extent possible, it would also try to compare the results with atleast one another similarly faced country, which however would not be dealt at length. Poverty can be viewed both from micro and macro levels. In order to address the impact of remittances in mitigating the levels

  1. Fiscal and monetary policies

    The current members are: * Mervyn King, Governor * Charles Bean, Deputy Governor * Paul Tucker, Deputy Governor * Kate Barker * Tim Besley * Prof. David Blanchflower * Spencer Dale * Paul Fisher * Andrew Sentance Business will think twice about new investments reason being it will cost them

  2. The Theory of Scientific Management.

    Basic needs: For food, drink and shelter 2. Safety needs: Protection against danger, threat and deprivation 3. Social needs: The needs for belonging, acceptance and friendship 4. Self-esteem needs: Reputation and status 5. Self-actualization: The need for realising one's own potential for continual self-development "We move toward self actualization".

  1. Business plan for international restaurant on campus

    2 How data/information can be used to make better marketing decisions Data/information such as questionnaire data, can indicate the strengths and weaknesses of current competition or an organisation that may be loosing sales can discover reasons for the loss. Such data/information aids a company to strengthen its weaknesses, use strengths, find unpredicted ideas and find a niche.

  2. resession of 1989

    From 1990 to 1993 inflation was low and growing at a slowing rate. This slowing growth rate known as disinflation is typical in a recession. Disinflation is likely why at the end of the recession business where uncertain about the recovery, and not hiring in 1993.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work