Monday, 16 February 2009

Mexico, the IMF and the Debate Over the Currency Market Intervention. So Far, the Government's Winning

The International Monetary Fund commended Mexico for its policies to deal with the crisis. Fiscal spending appeared adequate (the government plans to spend the equivalent of 1.5 percent of gross domestic product to fight the economic downturn) and said Mexico has room to do more if needed. The IMF also commended the recent policy of intervention in the currency market as an effective way to address liquidity shortages. Banks including French giant BNP Paribas see the peso as fundamentally cheap, but recovery is limited to the health of the global economy. Summarising, the peso will stay cheap for quite a while. BNP expects the peso to weaken to 15.50 pesos to the dollar in coming months before staging a recovery late in 2009. Banco de Mexico's intervention should help contain the peso from plunging further, no matter its stance on interest rates.

As you might remember, Fitch raised the flags in relation to this issue of currency intervention a week ago. It actually threatened to revise its ratings on Mexico if it finds the actions damaging to the nation's fiscal equilibrium and for the climate of business.

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