Gulf of Mexico Oil Spill Blog Mexico Food Inflation

Mexico Food Inflation

Agustin Carstens

Agustin Carstens

Mexico Official: Food Inflation Not a Risk Yet

By ANJALI CORDEIRO

Contrary to many other emerging markets, food inflation is not yet a concern in Mexico, but the government is watching corn prices and can afford to implement a food-subsidy program similar to one in 2008, if needed, Finance Minister Ernesto Cordero said Thursday.

The Mexican government has long had support programs to smooth out effects on the tortilla supply chain when prices of corn fluctuate, Mr. Cordero said in an interview. In 2008, when food prices rose sharply, the government increased certain poverty alleviation programs.

Mexico has not put any special measures in places at the moment to handle the rise in global food prices as the country hasn’t felt inflationary pressures yet, Mr. Cordero said. But he didn’t completely rule out moves or subsidy programs in case of a big jump in food costs in the country.

“Right now we don’t see any evidence that there is an increase in the price of food in Mexico,” he said, noting that January had the lowest inflation rate for the month in two decades.

Oil is an important component of government revenue and as commodity prices rise, the government also stands to benefit from higher oil prices. Mr. Cordero said the government is seeing results from an increase in investments in Mexico’s state-owned oil company Petroleos Mexicanos, or Pemex. While production has fallen from 2004, the government has been able to stabilize output at 2.5 million barrels a day, he said.

Mr. Cordero expects crude production to stay stable for the next 18 months and then “take off again.” Some oil fields in which the government has been investing have begun showing results, he said.

Mexico’s government is aiming for a balanced budget by 2012 or 2013, the minister said. The federal government’s deficit as a percentage of gross domestic product was 0.7% in 2010. “We don’t need the fiscal consolidation that some other countries have. There is no need for cutting spending in Mexico.”

Mexico is benefiting from a recovery in the U.S. economy, he added, but it is also paying attention to future monetary and fiscal policy coming out of the U.S. “Like the rest of the world, we are paying attention to what is going to happen when the U.S. decides to consolidate fiscally…that is going to have an impact everywhere,” he said. Mexico’s economy is closely tied to the U.S. because of its proximity and close trade relations.

Mr. Cordero said Mexican policy makers are meanwhile capitalizing on the existing strength in the economy, through efforts like job creation and encouraging lending in the banking sector. “We have to advance in that way and be ready when some adjustments are going to be done on the fiscal side in [the U.S.],” he said.

Down the line as developed countries start tightening their monetary policies, emerging markets may have to be prepared for outflows of money, he said. The developing world has seen large flows of investments as investors have put more money into these higher yielding parts of the world and as interest rates have stayed low in developed economies.

“Everybody should be paying attention to the outflows, and that is going to happen someday when some countries begin tightening their monetary policies and the differential in interest rates reduces,” Mr. Cordero said. Mexico has been building its reserves to bolster itself against any future outflows. “We understand that when that happens, the currency is going to move but the best way to absorb external shocks is to have a floating exchange rate.”

Mexican policy makers have so far said that they will allow market forces to determine the value of the peso. Mr. Cordero reiterated that stance on Thursday, saying that Mexican exporters have other advantages, including their proximity to the U.S., besides the exchange rate.

Mr. Cordero said that the country’s problem with drug traffickers is restricted to some states and isn’t a nationwide one, which is why the economy grew last year at a rate that he estimated at 5.5% despite the widely disseminated images of gang violence.

He urged people to look beyond problems in cities like Ciudad Juarez, whose murder rate is among the highest in the world, and consider the national statistics instead. On that base, the homicide rate in Mexico is lower than Detroit and some U.S. cities, Mr. Cordero said. “We have a problem of security. And we are facing it, and we are solving it,” he said. “I don’t have any evidence that nationwide this has been a deterrent for investment in Mexico.”

Write to Anjali Cordeiro at anjali.cordeiro@dowjones.com

source: Mexico Official: Food Inflation Not a Risk Yet – WSJ.com

Carstens’ Reserve Accumulation Comment Signals Mexico Not in Currency War

By Jens Erik Gould and Andrew J. Barden

Mexican central bank Governor Agustin Carstens’ comments that his country has accumulated more foreign reserves than policy makers expected signal it won’t join Brazil and South Korea in a so-called “currency war,” said Gabriel Casillas at JPMorgan Chase & Co.

Carstens said in an Oct. 8 interview that strong oil exports and more debt sales had helped the country build more reserves than anticipated, and that policy makers will soon discuss “the speed at which it accumulates reserves” using a policy to buy as much as $600 million a month through options.

By emphasizing the accumulation of reserves through oil and debt, Carstens may be suggesting that the bank’s current policy of buying dollars to boost reserves is as far as it’s willing to go to intervene in the currency market, Casillas said. Carstens’ statements contrast with Brazil Finance Minister Guido Mantega’s Oct. 8 comments that emerging market countries should couple reserve accumulation policies with “direct control” of their currencies to stem the inflow of dollars.

“The downplaying of the options mechanism is a way of saying that it’s a market-friendly mechanism that isn’t interfering much with the currency market,” said Casillas, who is chief economist in Mexico City and who spoke from Washington. “There’s a global currency war and Mexico doesn’t want to be in it.”

Currency Controls

The benchmark government peso bond due in 2024 rose for a sixth day, pushing the yield to a record low 6.26 percent, according to Banco Santander SA. The yields have plunged 201 basis points this year.

The peso fell 0.1 percent to 12.4273 per dollar at 11:49 a.m. New York time. The currency has risen 5.4 percent this year against the dollar.

Governments from South Korea to Brazil are stepping up attempts to control their currencies as investors pour a record amount of money into emerging markets amid the prospect of easier monetary policy by the Federal Reserve. Developing economies in the Group of 24 said Oct. 7 that industrial nations’ low interest rates have left them vulnerable to exchange rate appreciation and overheating.

Brazil has stepped up intervention in the currency market in a bid to prevent the real from rallying, while regulators in South Korea will start an audit of lenders handling foreign- currency derivatives on Oct. 19 to curb volatility caused by capital flows. The Bank of Japan has sought to drive down the yen by unexpectedly easing monetary policy.

Foreign Reserves

Mexico has increased its foreign reserves to $108.4 billion in the week ended Oct. 1 from $90.8 billion in the week ended Dec. 31. Only $3.4 billion of the new reserves have come from the options mechanism, while $10.5 billion have come from revenue from the state oil company, according to the central bank’s website.

“At this stage we are happy with the rate, with the way the option mechanism has worked,” Carstens, 52, said in Washington, where he was attending the annual meeting of the International Monetary Fund.

“Nevertheless, we have been accumulating more reserves than what we anticipated based on strong oil exports and higher debt placements,” he said. “Therefore, in the context of the currency commission, relatively soon we will need to discuss this issue.”

The commission in charge of currency auctions in Latin America’s second-largest economy announced in February that it would buy dollars in a push to boost foreign reserves after last year’s tumble of the peso led policy makers to turn to the IMF for a $47 billion credit line. The peso has gained 5.3 percent against the U.S. dollar this year, the second-best performer in Latin America after Colombia’s peso.

Long-Held View

Mexico’s central bank sold $600 million in dollar options in September and received bids for $2.2 billion, according to its website.

Carstens’ comments on Mexico’s reserves reflect his long- held view that the country should have a floating exchange rate and keep intervention to a minimum in order to assure investor confidence over the long term, Casillas said.

“It’s a country that has a tradition of non- intervention,” Casillas said.

Regarding China, Carstens said global economic leaders are “being more outspoken” about the country’s currency policy because the effects of those decisions are felt more acutely than before the financial crisis.

China Consequences

“The major difference is that two or three years ago the world was in a much stronger situation, and therefore there were more possibilities to administer the pressures coming from China,” Carstens said. “And therefore, in the margin, the consequences of China are more severe to the rest of the world.”

China Premier Wen Jiabao said Oct. 7 that China will stick to its policy of gradually increasing the currency’s flexibility and lashed out at European Union leaders for teaming with the U.S. to pressure the Chinese government.

China has capped the yuan’s rise at about 2 percent since relaxing a dollar peg in June, leading to criticism that it is stunting the recovery in the industrial world by shielding its market from U.S. and European imports. China held the yuan at about 6.83 per dollar two years prior to shield its exporters from the global crisis.

Carstens, who was IMF deputy managing director from 2003 to 2006, led Mexico’s response to the global financial crisis as Finance Minister from December 2006 to December 2009. As result of the recession in the U.S., which buys about 80 percent of Mexican exports, the economy plummeted 6.5 percent last year, the biggest drop since 1932. Carstens has a doctorate in economics from the University of Chicago.

To contact the reporters on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net; Andrew Barden in Washington at barden@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

source: Carstens’ Reserve Accumulation Comment Signals Mexico Not in Currency War – Bloomberg

editors note: Mexico does not import any oil, as it is a net exporter of oil. Therefor it does not need dollars to buy oil.

As Bernanke floods the world with dollars, oil goes up, and food costs go up and people whose economies use the dollar as their reserve currency experience inflation exported from the U.S.

The dollar as the world reserve currency must end.

Bernanke is now developing that Henry Paulson stammer. Next he will start shaking, like a dog shitting peach pits.

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