Mexican Peso Crisis Case Study Questions With Answers

Case Study: Mexican Peso Crisis, 1994
From 1954 to 1976, Mexico had maintained a fixed exchange rate of Ps12.50/$. Even after the collapse of the Bretton Woods fixed exchange rate system in 1971/73, Mexico was able to hold this fixed rate.

Although the Mexican economy experienced rapid growth during most of the 1970s, it was progressively undermined by fiscal mismanagement in the form of large government borrowings (both home and abroad) which resulted in high rates of inflation and growing external indebtedness. As the international financial community’s concerns about Mexico grew, capital flight out of the country intensified................

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Instruction
1. Relate the exchange rate evolution during the crisis with the four factors that can affect the exchange rate; PPP, IRP, BoP, and foreign exchange reserve.
2. How would the happening affect the competitiveness of the country and the overall economic performance?
3. What risks do you see in the current Ethiopian economy in relation to the financial crisis discussed?
4. How would the risk affect operation of multinational companies’ operation in the country?
5. What are the ways to mitigate the risk you identified above (multinational operations)?

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