Mexican Peso Falls to a Record on Outlook for Economy, Rates

By Michael J. Moore

Oct. 7 (Bloomberg) -- Mexico's peso fell to a record low on speculation the global credit crisis will stall domestic growth, forcing the central bank to cut borrowing costs.

The peso was the second-worst performer against the dollar today among Latin America's most-active currencies after the Brazilian real. The peso has dropped 12 percent since Sept. 30, its worst five-day stretch since March 1995, when Mexico was in the midst of a financial crisis caused by the peso's devaluation.

``What we've seen with the Mexican peso and most Latin American currencies is that fear imposes a lot of pressure on exchange rates,'' said Alfredo Coutino, a Latin America economist at Moody's Economy.com in West Chester, Pennsylvania. ``Investors are contaminated by global fear.''

The peso dropped 4.1 percent to 12.3146 per dollar at 4:15 p.m. New York time, from 11.8050 yesterday. The currency touched 12.3669, the weakest since 1993, when the government introduced a new peso equivalent to 1,000 old pesos. It was the second straight day the currency dropped to a record.

President Felipe Calderon is preparing an economic package with the Finance Ministry to soften the impact of the global credit crisis, Central Bank Governor Guillermo Ortiz said today in an interview on Radio Formula. The currency won't continue to weaken like it has so far this week and won't depreciate like it did during the 1995 banking crisis, when it fell 51 percent over a three-month period, he said.

Mexico will still see ``high'' inflation in the next several months, while the U.S. inflation rate will slow more than expected, Ortiz said.

No Growth

The global credit crisis has already reduced some expectations for growth in Mexico, curbing demand for pesos. The slowdown in the U.S. will hold growth in Mexico to zero next year, wrote Gray Newman, chief Latin America economist at Morgan Stanley in New York, in a research note yesterday. The firm cut its 2009 economic growth forecast for Latin America to 1.5 percent from 3.5 percent, citing reduced demand for the region's commodities.

Slower growth will lead Mexico's central bank to reduce its 8.25 percent target lending rate by 2.25 percentage points over the next year, starting with a quarter-point cut in November, analysts at Citigroup Inc.'s Banamex unit led by Sergio Luna Martinez wrote in a research note yesterday. The gap between Mexican and U.S. rates is 6.25 percentage points, the widest since 2005.

Bolsa Tumbles

Economists cut the 2009 growth forecast for Mexico to 2.5 percent from 2.9 percent, according to the average of 33 estimates in a central bank survey released Oct. 1.

The finance ministry will revise its forecasts for economic growth, inflation and the assumed export price for oil in its 2009 budget proposal before Oct. 20, Deputy Finance Minister Jose Antonio Meade Kuribrena said today. The Mexican government currently forecasts the economy will expand 3 percent in 2009.

Mexico's Bolsa stock index dropped 4.0 percent today while the yield on the benchmark government peso bond due in 2024 jumped 5 basis points to 8.62 percent. A basis point equals 0.01 percentage point.

The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations. The U.S. is the biggest buyer of Mexican exports.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net