Economy, Currency and Banking

Mexico’s currency is the peso. The U.S. dollar is widely used in Mexico, due primarily to geographic proximity and extensive American tourism. The peso is currently allowed to float freely (measured in terms of its value to the dollar) and has fluctuated between 5 and 8 pesos to the dollar since 1994. In 2000 the exchange rate averaged 9.46 pesos per U.S.$1.

The Mexican government has instituted a number of peso devaluations since the 1970s. These devaluations reduce the rate at which the peso is exchanged for foreign currency. A peso devaluation is usually prompted by an economic situation in which the cost of goods and services in Mexico, measured in U.S. dollars, exceeds their actual value, thereby discouraging foreign tourism and the purchase of Mexican goods on the global market. Peso devaluations generally produce an increase in exports from Mexico, while bringing about higher prices for Mexican citizens. The peso was officially devalued by the Mexican government in December 1994, prompting a 45 percent drop in the value of the peso against major world currencies. The steep drop in the value of the peso induced many domestic and foreign investors to withdraw their money from the country, which brought on a severe economic crisis in early 1995.

Mexico’s federal reserve bank is the Bank of Mexico, a government-owned central bank that was created in 1925. The Bank of Mexico is the nation’s bank of issue, meaning that it controls Mexico’s total money supply by monitoring the banking system’s reserve requirements and by allocating credit to other banks. Although all domestic banks were nationalized in 1982, the administration of Carlos Salinas de Gortari (1988-1994) sold them back to private investors. The bank nationalizations had given the Mexican government more control over the nation’s economy, angering many businesspeople in the private sector. The privatizations helped to alleviate the distrust of the Mexican government that had developed among many Mexican investors in the early 1980s. They also allowed the government to direct the revenue made from selling the banks toward a number of social spending projects.

Mexico does not allow foreign-owned banks to operate retail outlets in Mexico. However, as a result of NAFTA, Mexico will open its banking system to foreign competition and begin allowing retail branches of foreign banks to operate in the country. It is likely that some Mexican banks will not be able to withstand foreign competition and will go out of business. Mexico’s banks have been criticized for inefficiency. Many major banks have exceedingly high levels of debt because their clients cannot repay their loans. Mexico has a stock exchange (Bolsa de Valores), located in Mexico City, and some of the stock of companies on this exchange is also traded on the New York Stock Exchange.