Mexican Peso Case Study
1. Take a look at Mexico’s balance of payments over the past few years. Use the schedule I have attached to the case – it is in the same format as we used to examine the U.S. balance of payments. What do the trade and current account balances suggest about the likelihood of a potential devaluation of the peso? Why?
a. It suggests that because Mexico is importing twice as much as they are exporting that there is a strong chance that the peso will lose value to counter the constant increase in imports. It is also important to point out that the exports in 1974 and 1975 are practically the same. The current account balance is negative 4 billion U.S. dollars which is 4 times larger than it was in 1972. All this leads me to believe that the peso needs to be devalued in order to raise the amount Mexico exports.
2. What does the private capital account suggest about the need for a devaluation of the peso? Why?
a. The private capital account is a positive 3 billion which indicates that there are a lot more imports than exports suggesting that Mexico is either borrowing a larger portion of money or selling some of its assets. Consequently there is a need for the devaluation of the peso.
3. What does the private transactions balance suggest about the valuation of the peso and whether a very large devaluation was imminent? Why?
a. By looking at the private transactions balance it suggest that there was not a dire need for a very large devaluation because it is a positive 172 million where as it has been no larger than 222 million and no smaller than 39 million. That is not to say that the peso did not need to be devaluated however.
4. Take a look at Exhibit 5 in the case – Mexico’s international reserves. What has happened to Mexico’s total foreign exchange reserves since 1970? How would you interpret this trend in terms of evaluating the strength or weakness of the peso in the foreign exchange market? Would you conclude that the peso was likely to be
a. It suggests that because Mexico is importing twice as much as they are exporting that there is a strong chance that the peso will lose value to counter the constant increase in imports. It is also important to point out that the exports in 1974 and 1975 are practically the same. The current account balance is negative 4 billion U.S. dollars which is 4 times larger than it was in 1972. All this leads me to believe that the peso needs to be devalued in order to raise the amount Mexico exports.
2. What does the private capital account suggest about the need for a devaluation of the peso? Why?
a. The private capital account is a positive 3 billion which indicates that there are a lot more imports than exports suggesting that Mexico is either borrowing a larger portion of money or selling some of its assets. Consequently there is a need for the devaluation of the peso.
3. What does the private transactions balance suggest about the valuation of the peso and whether a very large devaluation was imminent? Why?
a. By looking at the private transactions balance it suggest that there was not a dire need for a very large devaluation because it is a positive 172 million where as it has been no larger than 222 million and no smaller than 39 million. That is not to say that the peso did not need to be devaluated however.
4. Take a look at Exhibit 5 in the case – Mexico’s international reserves. What has happened to Mexico’s total foreign exchange reserves since 1970? How would you interpret this trend in terms of evaluating the strength or weakness of the peso in the foreign exchange market? Would you conclude that the peso was likely to be