Wracked by inflation and its worst recession in 40 years, Mexico watched its floating peso sink sharply on world money markets yesterday after the second major devaluation this year.
Bankers in Mexico City quoted the price of the peso as high as 90 to the dollar at the start of trading--the equivalent of a 46 percent devaluation. The peso traded officially Thursday at 49 to the dollar. The currency started the year at 27 to the dollar but was devalued to 45 per dollar on Feb. 17.
Analysts at major banks hope that the government's decision to establish a two-tiered system of exchange will cut spending and spur savings.
The 40 percent devaluation in February was not enough to stem the drain on the country's money reserves. The double exchange system will give a subsidized low exchange rate for essential imports and other key products.
Mexico doubled its foreign debt to a record $80 billion during the past two years, and foreign bankers recently appeared reluctant to approve new loans.
Reaction on the street to the devaluation ranged from anger to resignation. It followed last weekend's sharp price increases for bread, tortillas and gasoline. The combined measures could push inflation far above the current 60-percent-a-year rate.
"I don't know what will become of us if money doesn't pay for anything," said Eva Chacon, 54, a shopkeeper in the center of Mexico City. "It's all the fault of the government, which wants to rob us more every day."
The country's revenues dropped sharply after prices of crude oil and other major exports such as silver and coffee fell, forcing it to stop short an ambitious development program that was designed to turn Mexico into an industrial power by the end of the century.
Economic growth dropped two points to 6 percent last year, and is expected to reach zero by December.
To keep the country from spending more than it earns, Treasury Secretary Jesus Silva Herzog announced the unprecedented two-tiered exchange system late Thursday.
One tier will offer a preferential rate, set by the Bank of Mexico, the nation's central bank, and financed through oil revenues. The rate is intended to keep down the import price of food and key industrial products, as determined by the Commerce Ministry. That rate, expected to change slightly every day, was set yesterday by the bank at 49.13.
The other--a floating rate--has been set free to seek its own level based on supply and demand. It fluctuated sharply yesterday from 68 to 90 pesos to the dollar.
Chile also floated its peso currency Thursday night. The currency's value dropped from 39 to 47.04 pesos to the dollar. "Foreign currency will be bought and sold at prices determined by the market," announced Chilean Finance Minister Sergio de la Cuadra.
Along the U.S. border, businessmen expect to be hurt seriously by the Mexican peso devaluation because Mexican consumers will have less buying power to purchase American products.
Major banks in Arizona suspended trading in pesos yesterday pending clarification of the situation, as did banks in San Antonio.
On other markets, the dollar racheted to new high levels yesterday.