Shortly after taking office, President de la Madrid allowed the establishment of private brokerage houses with wide latitude to conduct financial transactions in domestic capital markets. That action laid the foundation for the first significant stock market in Mexican history, the Mexican Stock Exchange (Bolsa Mexicana de Valores--BMV). Following several years of dynamic growth, the BMV's leading index fell sharply as a result of the October 1987 United States stock market crash. The BMV recovered slowly in 1988, then surged ahead from 1989 through 1991. By the early 1990s, the BMV had become one of the world's fastest growing stock exchanges. During 1991 the index of traded stocks rose 128 percent in new peso terms and 118 percent in United States dollar terms. Analysts attributed the stock market's buoyancy to increased confidence in the economy and to expectations of lower interest rates and approval of NAFTA.
In 1992, 199 companies were listed as trading on the stock exchange. A total of 11 trillion new pesos were traded, and the exchange had a total capitalization of US$139 billion and a price-to-earnings ratio of more than thirteen. The total value of stocks traded increased by US$191 billion between 1987 and 1993. Treasury bills, bank acceptances, and commercial paper were the most common instruments traded. At the end of 1993, Mexican investors held about 75 percent of the equities traded. Although the value of Mexican-owned stocks rose by about US$143 billion between 1987 and 1993, only 0.2 percent of all Mexicans had brokerage accounts at the end of 1992.
The BMV's market value stood at about US$200 billion at the end of 1993. Analysts attributed the rise partly to expectations of higher profits resulting from a 1 percentage point reduction in the corporate tax rate, lower energy prices for industrial users, and euphoria over the passage of NAFTA. Despite a setback induced by the January 1994 Zapatista rebellion in the state of Chiapas, the BMV continued its strong growth in early 1994. Beginning in March, however, the market was buffeted by a series of political shocks--including two high-profile political assassinations, revelations of high-level corruption in President Salinas's entourage, and continued unrest in Chiapas--that contributed to its high volatility throughout the rest of the year.
The stock market was further buffeted by the collapse of the new peso in early 1995, causing the stock index to fall to less than 1,500 points in February of that year. The main stock index gradually recovered to just under 3,000 points by the end of 1995 and had reached 3,300 by September 1996. Mexican stocks gained 24 percent in dollar terms during the first eight months of 1996. Mexico's stock market had a US$70 billion capitalization in September 1996, according to Morgan Stanley Capital International indices.
From December 1982 until November 1991, the Mexican peso had two rates of exchange against the United States dollar--the controlled or "official rate" and the "free rate." The controlled rate applied to income from most merchandise exports, to funds used by maquiladora
(see Glossary) assembly industries for local expenditure other than fixed assets, to nearly all import payments, and to principal and interest payments and other credit expenses. The free rate applied to most other transactions, such as tourism and profit remittances.
In November 1991, the government eliminated all exchange controls, thereby unifying the various peso exchange rates. The regime freed the peso to float within a band, the bottom of which was fixed at 3,051 pesos per dollar and the top of which was devalued by 0.2 pesos per day. Renewed pressure on the peso forced the authorities in October 1992 to raise the average daily depreciation to 0.4 pesos per dollar, increasing the peso's annual rate of devaluation to less than 5 percent. The peso continued to appreciate in real terms, however, because Mexico's inflation rate exceeded that of the United States by some 8 percentage points. The government was reluctant to devalue the peso to the full extent of the inflation differential with the United States because it feared that a large devaluation would exacerbate domestic inflation and undermine public confidence in the stability of the government's macroeconomic policy. It preferred to compensate for the less competitive position of the peso by increasing productivity within Mexico. In January 1993, the government introduced the new peso, worth 1,000 of the old and divided into 100 centavos, to simplify foreign exchange.
Intense international demand for Mexican stocks and high-yielding two-year treasury certificates, known as cetes
, kept the new peso at a stable level of 3.1 new pesos per dollar for most of 1993. Uncertainty about NAFTA's passage drove the new peso down to 3.3 per dollar in November 1993, although it soon rallied to 3.1 per dollar as interest rates rose and NAFTA's prospects of ratification appeared to improve. By late 1993, the capital influx had overvalued the new peso against the dollar by some 30 percent, leading some investors to avoid Mexican currency for fear that the new peso's overvaluation would compel the government to impose a large devaluation that would sharply reduce the dollar return of cetes
. Some leading private-sector figures favored devaluation, expecting it to help reduce the trade deficit, Mexico's need for foreign capital, and thus interest rates.
Political considerations deterred the government from imposing a devaluation that would lower living standards, jeopardize investor confidence, and promote capital flight in the months prior to the August 1994 presidential and congressional elections. The slowdown of capital inflows exerted steady downward pressure on the new peso throughout the year. By late 1994, the government was drawing heavily on international reserves to prop up the new peso.
The almost complete disappearance of Mexico's reserves forced the new Zedillo government to bolster the currency's value. On December 20, 1994, the government raised the ceiling on the exchange rate band from 3.4 to 4.1 new pesos per dollar. However, continued pressure on the new peso, combined with mounting investor concern about the government's intentions, forced the administration two days later to let the currency float. The new peso ended 1994 at 5.3 per dollar. It continued to weaken during early 1995, as investors doubted the government's ability to repay the US$29 billion in short-term tesebono
debt that would fall due during that year. In 1995 the exchange rate fell to 6.5 new pesos per dollar, and in January 1996 it stood at 7.4 new pesos per dollar.
The average monthly interest rate on twenty-eight-day cetes
rose from 14 percent in 1995 to 49 percent in 1996. When the new peso came under heavy speculative pressure in late 1995, Mexico's monetary authorities reacted by raising interest rates sharply. Mindful of the need to restore investor confidence in Mexico's early economic recovery, the authorities allowed interest rates to fall at the end of 1995.
Data as of June 1996