2. What Role Did Oil Price Changes Play in Mexico S Difficulties?

The Mexican Peso

The basic purpose of this case is to have you conduct an in-depth analysis of government macroeconomic policies on firms and banks doing business with Mexico. The vehicle being used is the Mexican peso. See Exhibit III 2.1 for statistics related to exchange rates and price indexes in the United States and Mexico for the period 1976–1997. Using these data, please address the following questions.

Questions

1. What are the causes of the continuing devaluation of the peso since August 1976? Analyze both the immediate causes (e.g., balance-of-payments deficits) and longer-term, more fundamental causes (e.g., inflation, the political and economic environment). Concentrate especially on the 1982 and 1994–1995 devaluations of the peso.

2. What role did oil price changes play in Mexico’s difficulties?

3. What indicators of peso devaluation prior to 1982 and 1994 were there?

4. What were the likely effects of the peso devaluation between 1976 and January 1982 on a. Mexican companies? b. Foreign firms operating in Mexico? c. U.S. companies in border towns catering to Mexicans?

5. Redo question 4, focusing on the effects of peso devaluation subsequent to February 1982 and prior to December 1994.

6. In August 1982, the Mexican government devalued the peso, froze all dollar accounts in Mexican banks, and imposed currency controls. What are the government’s objectives? How did these actions affect the black market value of the peso? Why?

7. How did the Mexican government’s expropriation of Mexico City real estate, following the September 1985 earthquake, affect the value of the peso and why?

8. Consider the trust factor with respect to Mexican policies. What have been the probable effects of trust or its lack on investment in Mexico, Mexican citizens’ investment choices, and the peso’s value?

9. Are dollar loans to the Mexican government and Mexican companies exposed to exchange risk? Explain.