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Mexico's Peso Tumbles Anew on Rumors of Coup, Economic Fears : Latin America: Government calls talk baseless, but currency approaches a record low. Some analysts say it will fall further.

November 04, 1995|From Times Staff and Wire Reports

The Mexican peso fell to an eight-month low Friday, hurt by rumors of political and economic instability and a growing lack of confidence that the 10-month recession will end any time soon.

Analysts said the troubled currency could still fall further.

Rumors on Friday of military unrest--even of a coup in the making--sent the peso as low as 7.725 to the dollar, approaching the record low of 7.75 set March 9. The reports were dismissed by the government as baseless. The peso closed at 7.365, down from 7.265 on Wednesday.

U.S. financial markets reflected Mexico's worries, as the dollar slipped against most currencies. The peso threw the dollar off because of the close links between the United States and Mexico and the Clinton Administration's sizable commitment to help its southern neighbor recover economically. U.S. stock prices, however, finished generally higher.

The Mexican government denied speculation that it is mobilizing troops in the southeastern state of Chiapas or that there are any conflicts between President Ernesto Zedillo and the country's armed forces. The speculation about a feud between Zedillo and the military even elicited a denial from the White House on Friday.

The Mexican stock market's 37-share IPC index rose 4.12 points at Friday's close, or 0.18%, to 2,310.04 points, though declining shares outnumbered gainers. The index had earlier slipped as low as 2,289.73 as the peso tumbled on the feud rumors and speculation that Finance Minister Guillermo Ortiz had resigned.

"The stock market didn't reflect the nervousness as much" as the peso market, said Esteban Rojas of Arka brokerage, adding that the recovery of the Bolsa reflected low post-holiday volume--just 38.36 million shares were traded. Markets were closed Thursday for Mexico's Day of the Dead.

In any event, pessimistic economists say the peso still has a way to fall. Rudi Dornbusch, a professor at MIT, predicts the peso must go as low as 9 to the dollar by the end of 1995 if Mexican exports are to be more competitive in world markets, essential in improving Mexico's foreign trade.

The peso has continued to fall despite a government plan unveiled Sunday aimed at boosting investment and economic growth. The plan includes a series of tax incentives as well as wage and price increases. The plan was designed to help lift Mexico out of its worst recession in almost a decade, with its gross domestic product expected to contract 5.5% this year.

The plan helped boost investors' confidence Monday when the peso and stock prices rallied. But since Monday, the peso slid 8% while overnight bank interest rates have risen 7 percentage points to close the week at 50%.

"This is a problem of confidence," said a trader at Banco Nacional de Mexico, the country's largest bank. "It isn't about interest rates. It isn't about the foreign exchange."

While the plan has been praised by most businessmen, investors are still unclear about what the government is focusing on: stimulating growth, controlling inflation or strengthening the peso, analysts said.

On Tuesday, Mexico's armed forces, represented by Defense Minister Enrique Cervantes Aguirre, said they backed Zedillo's new economic pact, known as the Alliance for Economic Recovery.

"The idea of any kind of difference [between the military and Zedillo] is totally baseless and groundless," a presidential spokesman said.

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