MEXICO: THE INTRODUCTION OF A NEW MONETARY UNIT GUILLERMO ORTIZ Governor , Banco de México

1. MEXICO: THE INTRODUCTION OF A NEW MONETARY UNITGUILLERMO ORTIZGovernor, Banco de México IMI Conferences Turkey October, 2004

2. MEXICO: THE INTRODUCTION OF A NEW MONETARY UNIT • Introduction • Background: Stabilization in the Eighties • The New Monetary Unit (1992-1996) • Reasons to change the monetary unit • Main Concerns • Implementation • Information and Coordination Activities by Banco de México IV. Macroeconomic Convergence V. Conclusions

3. Introduction • From the end of World War I up to now, 49 countries have removed zeros from their currencies. • Brazil: six conversions between 1967 and 1994; • Hungary: maximum number of zeros removed (29) in the aftermath of World War II. • Sixteen countries: zero removal implemented more than once. • Given that there is a high fixed cost of introducing a new monetary unit and that it takes time to implement it, Mexico removed three zeros from its currency in 1993 once the stabilization program initiated in the late 80’s provided for low inflation levels.

4. Primary Balance As a Percentage of GDP Mexican Oil Export Price Dollars per barrel Source: Secretaría de Hacienda y Crédito Público Source: Pemex Background: Stabilization in theEighties • In 1982, the unraveling of the debt crisis induced a three-digit inflation level. • A stabilization program was implemented: • Fiscal effort • Privatization of public enterprises • Trade liberalization • Despite the progress in the program, a sharp decline in oil prices and the stock market crash severely hit the economy and inflation rebounded.

5. Background: Stabilization in theEighties Pact of Economic Solidarity (PES) and Pact for Stability and Growth (PSG) • The PES followed a three-pronged strategy: • Orthodox demand-management. • Income policies and nominal anchors. • Structural adjustment program. • The pact provided for a rapid decline in inflation. • The PSG, in 1989, established in addition: • Renegotiation of the external debt. • Additional privatization efforts.

6. Consumer Price Index Annual variation in percent Source: Banco de México. Note: The vertical lines represent the dates when currency conversions were implemented. II. Background: Stabilization in theEighties • The low inflation attained in 1992 and the favorable expectations for 1993 created the appropriate conditions for the introduction of a new monetary unit.

7. Background: Stabilization in theEighties • The introduction of the new monetary unit in an environment of declining inflation differed from the experience of Argentina and Brazil in the 80’s. Argentina: Consumer Price Index Annual variation in percent Brazil: Consumer Price Index Annual variation in percent 20,262.9% (III-90) Note: The red lines represent the dates when currency conversions were implemented.

8. The New Monetary Unit (1992-1996) Reasons to Change the Monetary Unit • Under an inflationary process the denominations of paper money had to be adjusted by issuing notes of higher values.

9. The New Monetary Unit (1992-1996) Reasons to Change the Monetary Unit • After inflation declined and stabilized, Mexico required a simplification of the values of quantities expressed in monetary terms: • Simplify transactions and arithmetic calculations. • Make a more efficient use of computer and accounting systems. • The reform would reflect what was already a common practice in daily life (elimination of three zeros).

10. The New Monetary Unit (1992-1996) Main Concerns Survey Results: Which will be the effects of the new currency unit? Source: Newspaper “El Economista”, 24/06/1992

11. The New Monetary Unit (1992-1996)

12. The New Monetary Unit (1992-1996) Steps Taken Before the Introduction of the New Monetary Unit • Design of the implementation strategy. • Proposal to Congress of the required legal changes. • Coordination: • Groups to coordinate activities with the financial sector, commercial retailers, certified public accountants associations, labor unions, etc. • Institutional changes: • Regulations, accounting and fiscal standards. • Computer and accounting systems. • New formats (e.g. credit card vouchers, checks, etc.). • Communication: • Communication campaign. • Surveys and focal groups to measure the understanding and progress of the change in different sectors.

13. The New Monetary Unit (1992-1996) Implementation of the New Monetary Unit • Definitions • The name of the Mexican currency would remain “Peso”. • To avoid confusion, the name “Nuevo Peso” (new peso) was adopted temporarily (3 years). • 1000 pesos = 1 new peso.

14. STAGE ONE(January 1st. 1993) 50,000 Pesos 50 Nuevos Pesos STAGE TWO(October 1st. 1993) 50 Nuevos Pesos 50 Nuevos Pesos STAGE THREE(January 1st. 1996) 50 Nuevos Pesos 50 Pesos

15. The New Monetary Unit (1992-1996) Implementation of the New Monetary Unit • Writing of Monetary Quantities • First step(January 1st. 1993):Quantities had to be written using the word “Nuevos Pesos” or its symbol “N$”. • Second step (January 1st. 1996): “Pesos” and its symbol “$” were used again. • These requirements applied to accounting systems, prices, checks, credit card vouchers, contracts, etc.

16. The New Monetary Unit (1992-1996) Information and Coordination Activities by Banco de México • Information Campaign • The Central Bank used posters, leaflets, press releases, paid advertisements in newspapers, television and radio, appearances in interviews in television and radio, etc. • Information in native and foreign languages. • Communication in elementary schools. • 15 different spots aired before the introduction of the new monetary unit, and 7 afterwards.

17. The New Monetary Unit (1992-1996) TV SPOTS

18. The New Monetary Unit (1992-1996) Information and Coordination Activities by Banco de México • Coordination Efforts • Working groups were established: • Commercial banks. • Labor unions. • Professional accounting associations. • Retailers associations. • Working with all sectors of the economy served not only to have consistent interpretations of what should be done, but it was also a means to explain the reform and to gather the information necessary to detect and correct possible errors of implementation.

19. IV. Macroeconomic Convergence • After the 1995 financial crisis adjustments were made to restore macroeconomic stability. They have facilitated macroeconomic convergence with Mexico’s main trading partners. • Fiscal retrenchment • Tight monetary policy • Floating exchange-rate regime • Pro-active debt management

20. IV. Macroeconomic Convergence Mexico has achieved significant progress in fostering macroeconomic stability. Fiscal Deficit * (As a percentage of GDP) Public Sector Debt (As a percentage of GDP) Headline Inflation (Annual percentage Rate) ** * Economic Deficit. ** Projected. * Including PIDIREGAS.

21. IV. Macroeconomic Convergence • Monetary Policy is one of the macro-pillars that have experienced important institutional changes in the recent past: Central Bank Autonomy Inflation Targeting Monetary Framework • Absence of fiscal dominance. • Inflation target (3%, with a +/-1% interval of variation). • Accountability and transparency (Inflation Report, frequent presentations by Board Members, press releases at established dates, etc.). Observed and Target Inflation Rate (Annual percentage rate)

22. IV. Macroeconomic Convergence Another pillar has been the flexible exchange rate regime, which has allowed the economy to absorb external shocks in an orderly manner.This, together with prudent fiscal and monetary policies, has prevented the build up of external disequilibria. FDI and Current Account Deficit (Billions of USD) Exchange Rate Volatility (Coefficient of Variation: 60-day moving average ) Exchange Rate and Sovereign Risk Basis points Pesos per dollar

23. IV. Macroeconomic Convergence As a result of trade liberalization and NAFTA, Mexico’s export and FDI performance has been remarkable. *Excludes the Banamex-Citigroup transaction, which generated 12.45 billions of dollars Source: Secretaria de Economía. *Refers to the first semester Source: DOTS, IMF

24. IV. Macroeconomic Convergence The macroeconomic stability and the proactive public debt management strategy have contributed to the development of financial markets. As a result, domestic interest rates have decreased and the maturity of the yield curve has been extended up to 20 years. Inflation and Average Maturity of Domestically Issued Public Debt Government Bonds Yield Curve (annual %) 2003

25. IV. Macroeconomic Convergence Disciplined fiscal and monetary policies have allowed the Mexican economy to smoothly adjust to the last global economic downturn. Private Consumption (Index = 100 at the max.; seasonally adjusted) Gross Domestic Product (Index = 100 at the max.; seasonally adjusted) Gross Fixed Investment (Index = 100 at the max.; seasonally adjusted)

26. IV. Macroeconomic Convergence • Mexico and Turkey have attained significant progress in abating inflation. Amongst the key pillars are: • Central Bank autonomy and strengthening of its credibility by establishing inflation targets. • Exchange rate flexibility. • Decisive integration in the global market. • In this regard, timing for the introduction of a new monetary unit in Turkey seems appropriate. • Nevertheless, fiscal and monetary discipline are essential to maintain macroeconomic stability.

27. V. Conclusions • The introduction of a new monetary unit is characterized by short-term costs (modifying accounting and computing systems, prices, checks, credit card vouchers, contracts, etc.) that yield medium-term benefits that increase with macroeconomic stability.  • Although it is very difficult to estimate the benefits of the change of monetary unit, in Mexico there is a generalized perception that the introduction of the new unit permitted ample savings and considerably simplified monetary transactions. • The main ingredients of what is considered a successful monetary unit change were: • the preparatory activities • the wide information campaign • coordination efforts with different sectors of society

28. MEXICO: THE INTRODUCTION OF A NEW MONETARY UNITGUILLERMO ORTIZGovernor, Banco de México IMI Conferences Turkey October, 2004