The economy of the Southwest shares the problems of the rest of the nation -- inflation, high interest rates, weak farm prices, fallout from the decline of the auto industry -- but it also faces a great imponderable unique to this region: doubts about the value of the Mexican peso.
All along the 2,000-mile frontier from San Diego to Brownsville, Tex., Mexican money is vital to retail sales and real estate investment. Pesos and dollars are freely interchangeable, and are carried back and forth across the border by millions of people every day.
But the peso is overvalued by at least 25 percent, according to bankers in the border cities, and fear of devaluation is distorting the regional economy. Bankers say this fear is stimulating retail sales and real estate investment by Mexicans on the U.S. side of the border, providing useful aid to a recessionary economy. But by the same token, devaluation could cut off much of that trade, further depressing the local economy.
American bankers and merchants are happy to have the Mexican business but they routinely insultate themselves against inflation by unloading their peso receipts and deposits as soon as possible after they are received.
Elliott Pollack, economist for Valley National Bank, Arizona's largest, said he believes the peso will be devalued by 20 to 30 percent early in 1982. "We got burned in the last devaluation [in 1976], and we're not going to let it happen again," he said. "We accept peso deposits on a 'for collection' basis only" -- meaning that Valley National gives its peso depositors credit only for actual value received when the pesos are converted into dollars.
"Most border banks have a caveat in their depository agreements," said Robert Duffy, chairman of the Texas Commerce Bank in Brownsville. "You deposit pesos with us today and we make the conversion to dollars after we collect. We're used to operating in this environment, and we always advise our customers not to hold pesos."
The peso is considered overvalued because Mexico has an inflation rate approaching 30 percent and a staggering $48.7 billion in foreign debt, one of the largest debt burdens among developing nations. The Mexican government, recognizing the weakness of the peso but seeking to avoid the distortion that would come with a major devaluation, has been allowing the peso's value to drop in small increments, week by week.
At the end of 1980, the peso was trading at 23.17 to one U.S. dollar, so each peso was worth 4.32 cents. By the end of September, 1981, the peso was valued at 25.17 to the dollar, or 3.97 cents. At the end of the year, it was trading at 25.87 to the dollar, or 3.87 cents.
Opinion is divided about whether the Mexican government will continue that policy indefinitely, drop it in favor of a substantial quick devaluation, or do both, allowing the value to drift downward until after a new president is chosen next summer and then impose a substantial devaluation. That was what happened in 1976, the last time the presidency changed hands, and it has been traditional for each outgoing president to try to present a clean economic slate to his successor.
"Everyone suspects that at some point they will have to correct the imbalance," said an American economist who lives in Mexico City. "Their nonpetroleum exports and tourist industry are doing poorly and their current account balance of payments deficit is widening. But the government seems to have no policy other than letting the value of the peso slide."
"I think the peso will continue to devalue gradually, about 7 centavos a week, which is what it has been doing," said Jose Rios of El Paso National Bank. He said El Paso merchants, who routinely accept pesos, "have a thorough understanding of what might happen" and are careful to convert their pesos to dollars instead of holding them.
The U.S. and Mexican economies are so closely intertwined along the border -- Arizona alone reports more than 50,000 border crossings a day, and American firms routinely establish factories on the Mexican side to lower their labor costs -- that a false step by the Mexican central bank could cause serious disruptions of the regional economy, local experts say.
Accelerating the gradual devaluation, for example, could aggravate the flow of capital out of Mexican banks as Mexicans rush to protect the value of their assets. If the gradual devaluation proceeds too slowly, the distortion in relation to the dollar will increase, further stimulating the smuggling of imported goods into Mexico from the U.S. side as the cost of legal imports rises. If the devaluation is sudden and substantial, it is Mexican citizens whose purchasing power will be undercut.
While devaluation might hurt the retail merchants and real estate developers who are profiting from peso sales, it would aid the U.S. corporations that have assembly plants on the Mexican side of the border. They buy their raw materials and sell their finished goods for dollars, but they pay their workers in pesos, so cheaper pesos would reduce their labor costs.
Bankers on the Mexican side tend to play down devaluation rumors because fear of devaluation stimulates the flight of pesos out of their institutions. In the past six months alone, an estimated $4 billion in pesos has been invested outside Mexico, much of it in real estate developments such as South Padre Island, Tex.
On the American side, it is taken for granted that substantial devaluation will occur in 1982, the only question being whether it will be gradual or sudden. The determining factor may be the presidential transition in Mexico. A successor to President Jose Lopez Portillo is to be formally chosen in July, but he will not be sworn in until December. The government -- which has been imposing import restrictions and raising domestic energy prices in an effort to improve its fiscal position -- may decide to equalize the peso and the dollar before the inauguration.