I suppose a weakening peso is helpful to miners that earn their money in US dollars and pay salaries and many expenses in pesos, but a sagging peso and ballooning country deficit could be more than problematic for everyone down the road.

As the article points out further down, Ramirez is in the minority today with his prediction; nevertheless, he is no slouch when it comes to predicting.

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http://www.bloomberg.com/apps/news?p...

Worst Mexican Peso to Tumble 17% as Deficits Grow, Says Ramirez

By Valerie Rota

March 9 (Bloomberg) -- Mexico’s peso, the worst performer among the world’s most-traded currencies in the past six months, will weaken another 17 percent by year-end as the nation’s twin deficits swell, said Rogelio Ramirez de la O, the economist who predicted the 1994 devaluation.

The peso will slide to 18.2 per dollar from 15.1941 on March 6, said Ramirez, the partner at Mexico City-based economic research firm Ecanal and former chief economic adviser to 2006 presidential candidate Andres Manuel Lopez Obrador. The peso tumbled 31 percent in the past six months as the recession in the U.S., the buyer of 80 percent of Mexican exports, deepened.

The currency will keep falling as oil output drops at the fastest pace since 1942, the current account deficit grows almost three-fold and President Felipe Calderon boosts spending ahead of July congressional elections, said Ramirez. Banco de Mexico spent $19.5 billion since October to stem the peso’s decline, reducing international reserves 5 percent.

“We have foreign reserves that are finite and we are soon going to see that the external account will be in deficit this year and next,” said Ramirez, a 60-year-old Mexico City native who earned his PhD in economics at Cambridge University. “The political climate doesn’t contribute to a stabilization of the currency.”

The peso declined more against the dollar than any of the 16 most-traded currencies, according to data compiled by Bloomberg. South Korea’s peso had the next-worst performance, weakening 28 percent in the past six months.

‘Emperor Has No Clothes’

Last year’s 20 percent drop was the biggest since the December 1994 devaluation drove the peso down 55 percent by the end of 1995. Ramirez was the only analyst “who maintained an outright sell on Mexico” throughout 1994, according to a May 1995 article in Institutional Investor magazine titled “Why Wall Street Missed Mexico.”

In 1994 “nobody dared to say what they were thinking,” Ramirez said in a March 6 telephone interview. “But if you see that the emperor has no clothes, well you should say the emperor has no clothes and look at his belly.”

Ramirez is in the minority today.

The peso will strengthen to 14.1 per dollar by year-end, according to the average estimate of 30 economists in a central bank survey published March 2. Morgan Stanley predicts it will rally to 12.8 while Bank of America forecasts 13.25, according to data compiled by Bloomberg.

‘Lopez Obrador Guy’

Ramirez’s forecast is politically motivated because of his affiliation with Lopez Obrador, said Jorge Suarez, who helps manage $500 million at Global Plus Investment Management in New York. Calderon defeated Lopez Obrador by less than 1 percentage point in 2006.

“He’s a Lopez Obrador guy,” said Suarez, who predicts the peso will end the year at between 16 and 17 per dollar.

Ramirez says politics don’t influence his forecasts and that he first began expressing concern that a drop in oil prices could sink the peso during the 2006 campaign.

“Even though I was Lopez Obrador’s adviser, I have nothing against Calderon and my forecasts are based on hard data,” Ramirez said.

Ramirez says he sees similarities between today’s crisis and the one that triggered the 1994 devaluation, mainly in the widening current account deficit, the broadest measure of a country’s trade in goods and services. Declines in exports, migrant remittances and tourism pushed the deficit to $6.1 billion in the fourth quarter, the widest since 2000.

The deficit will reach $41 billion this year, bigger than the $29.7 billion gap in 1994, Ramirez predicts. The average forecast in the central bank’s survey is $21.7 billion. The government forecasts the budget deficit will widen to the equivalent of 1.8 percent of gross domestic product this year from 0.1 percent last year.

Mexico will end 2009 “with these problems,” Ramirez said. That will lead investors “to undervalue the peso,” he said.

To contact the reporter on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net

Last Updated: March 9, 2009 02:00 EDT