A recent bout of currency volatility in Mexico reveals that, despite solid economic performance, the country it is not immune to pre-election tremors. With Mexico's July 2nd presidential poll the most hotly contested in recent history, fears of post-election unrest are growing. In Washington on a state visit at the time of the market outburst, the president, Ernesto Zedillo, insisted that the sound foundations of the Mexican economy laid since the crisis that followed his own election in 1994 would guard against instability. Indeed, given the real appreciation of the peso over the last year, the recent weakening, in itself, is not cause for alarm.
Economic fundamentals are relatively healthy.
Although the current-account deficit is uncomfortably wide, the fiscal deficit is under control, the peso is generally solid and inflation is lower than had been expected. Nonetheless, investors do have some reason to be nervous about the potential fallout from the balloting, although this is unlikely to spark a full-blown crisis of the kind that has accompanied Mexican elections for the past 30 years. The peso adjustment came in response to comments by Mr Labastida, who warned that the opposition would be reluctant to accept his victory unless it was by a wide margin. Moving quickly, Mr Ortiz said such volatility was an understandable sign of pre-election jitters. He added that he expected the market to settle after the vote, which he was confident would take place in full accordance with the law.