Currency Devaluation & Oil Revenues in Mexico

CURRENCY DEVALUATION & OIL REVENUES: A POLICY ASSESSMENT

Devaluation of the peso is being considered in the wake of the economic crisis that developed recently in Brazil and which is exerting negative impacts on the Mexican economy and placing increasing pressure on the peso in international currency markets. The pressure on the peso continues to be exacerbated by low-level of global demand for petroleum, which, in turn, affects adversely both Mexico's balance of trade position and the fiscal position of the national government in Mexico.

The proposed policy to devalue the peso is assessed through this research. The primary intended audience for this policy assessment of the President of Mexico and his advisers.

The tight monetary policy imposed by the central bank, together with the tight fiscal policy pursued by the national government, has caused some decrease in domestic demand. Inflation, however, is rising as the value of the peso decreases. Global oil prices collapsed in 1998 and have shown no signs of improvement.

Lower oil prices translate into lower revenues for the national government and a widening trade gap that puts pressure on the peso. Although oil accounts for only 10 percent of Mexico's exports, Petroleos Mexicanos, the state-owned oil company, generates 38 percent of national government revenues. National government revenues from Petroleos Mexicanos decrease by US$800 million on an annual basis for US$1 red

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en devastating. These effects, drawn through a comparison of the January-to-June period in 1997 with the January-to-June period in 1998, are presented in Table 2, which also may be found on the following page. Table 1 Mexico's External Debt As A Percent of GDP Year Net Debt Domestic Foreign 1994 31.8% 4.8% 27.0% 1995 37.2% 0.8% 36.5% 1996 27.8% 4.7% 23.1% 1997 22.8% 8.4% 14.4% 1998 20.9% 7.6% 13.3% Source: Banco Nacional de Mexico, 1999. Table 2 Public Sector Revenues Derived from Oil [Pesos in millions] Entity 1997 1998 Public Sector 30,612 4,217 National Government 12,063 -6,596 Source: Banco Nacional de Mexico, 1998. Recent Experiences A major economic development in Mexico prior to 1990 was the emergence of the country's huge external debt in the early 1980s. A large proportion of the foreign borrowing in which Mexico engaged in the late-1970s and early-1980s "was wasteful or unjustified in that it primarily financed consumption and government budget deficits rather than investment" (Dornbusch & Fischer, 1986, p. 837). A substantial proportion of the increase in Mexico's external de

Category: Foreign - C