For the moment, the Mexican peso is plunging rather than floating but there is still reason to believe our neighbor to the south has a strong economy that will flourish as free market forces and the North American Free Trade Agreement spur exports and the growth of an industrial sector. Turmoil in the financial markets, with the dollar now buying as many as five pesos, compared with three and a half last Friday, will subside as the peso finds its proper level.
This is not to say, however, that the handling of this currency crisis by the new government of President Ernesto Zedillo has been anything but ham-handed. Mexican authorities will be a long time recovering their credibility. They first tried to blame a recent flight of foreign capital on insurrectionary troubles in Chiapas when the truer explanation lay in an unsustainable current account deficit as high as 8 percent of gross domestic product. The overvalued peso was creating a serious trade imbalance. Then the government tried to hold the fall of the peso at 15 percent by massive purchases of the currency, a move that helped drain reserves to a frightening $6.5 billion -- as compared with $24.5 billion at the start of the year.
Now that the peso is floating for a period of 60 days, the markets will be watching to see if the government can continue to keep wage and price increases under the previously agreed 4 percent annual level. Inflation pressures will grow with the import of higher-priced goods. The United States and the International Monetary Fund are doing their bit by releasing a $6 billion currency stabilization fund. Indeed, the IMF described the float as "an appropriate response to recent market developments." American investors who have poured billions into the emerging Mexican economy may feel less charitable. Losses have been huge. Stock markets are down sharply not only in Mexico but throughout Latin America.
Because President Zedillo is a Yale-trained economist with extensive experience as a budget director in the previous government of President Carlos Salinas, it had been expected ++ that finance would be his strong suit. His problems were believed to be elsewhere -- in the Chiapas troubles, the tainted investigation of two political assassinations and the social tensions associated with growing gaps between rich and poor. But the peso crisis has clouded his reputation, less than a month after he took office. And Washington has to worry about NAFTA's future. Not exactly a good beginning.