The Mexican Peso’s Appreciation: A Double-Edged Sword
The resounding appreciation of the national currency, which has raised it to a seven-year high, is held by the Government as an award for its economic success, but on the other side of the medal, exporters and recipients of remittances are feeling the effects of the “super weight” and they fear more blows.
A Strong Performance in 2023
After revaluing almost 5% last year, the Mexican peso has emerged as one of the currencies that has had the best performance in 2023 against the dollar with an appreciation of 12%.
Continued Good Run Expected
The expectation is that the good run continues as long as the flows of resources to the country continue seduced by the attractive yields offered by the local debt after a series of increases in the key rate of the central bank.
Impact on Mexican Exports
According to experts, the rapid increase this year from 19.50 pesos/dollar to around 17 units would be making Mexican exports less competitive, which in 2021 represented two fifths of the Gross Domestic Product (GDP).
Declining Exports and Concerns
Only in April, the value of those exports, which capped a record $577.735 million in 2022, fell 2.9% year-on-year, marking its second month of decline of the year and a shock to an outward-oriented economy.
Concerns for the Mexican Economy
“I definitely feel that a prolonged appreciation of this ‘super weight’, might affect a little more than it might help (at the Mexican economy), because we have a lot of activity abroad, a lot of exports, a lot of tourism,” said Guillermo Mateos, director of derivatives at Banco Base.
Impact on Mexican Industries
The super weight also impacts the competitiveness of the Mexican industry, whose unions have warned that sectors such as textiles, footwear, machinery, and others compete with products imported from Asia. In the first quarter, local imports grew 4% year-on-year after soaring 20% in all of 2022.
Remittances and Purchasing Power
Regarding remittances, which in 2022 hit records, a weaker dollar seriously affects their purchasing power, especially in an environment of high inflation. Banco Base estimates that remittances could lose more than 10% of their purchasing power if the exchange rate remains the same.
Potential Impact on Tourism
The tourist activity, which in 2021 contributed 7.5% of the national GDP, although it has not yet suffered the currency strength. In the first four-month period – the arrival of international tourists to the country grew by 13.7% year-on-year – analysts do not rule out that it could make a dent in the industry in the future.
Adjusting Travel Preferences
“If an exchange rate remains at these levels, it could be an important catalyst to adjust the preferences of travelers to come to Mexico or go elsewhere,” said Jonathan Zuloaga, an analyst at the Columbus de México consultancy.
A Sign of a Healthy Economy?
For many Mexicans, a heavyweight remains a sign of a healthy economy after decades of painful devaluations. President Andrés Manuel López Obrador boasts of the recent appreciation of the currency but without referring to the opposite effects on remittances, which he usually celebrates.
Fluctuations and Global Events
But since the country adopted a free-floating exchange rate scheme in 1994, the currency has emerged as one of the most liquid among its emerging peers and its fluctuations respond mainly to global events, seen as an escape valve in the face of any type of external or internal shock.
Speculative Bets and Improved Forecasts
On the Chicago Mercantile Exchange (CME), speculative bets for a stronger weight have grown since March. Last week, the positions in favor of the currency climbed to 78,809 contracts, the highest amounts since the beginning of 2020. Thus, a survey of Citibanamex Financial Group revealed that analysts improved their forecast of the exchange rate to 18.32 per dollar for the end of the year from 18.70 units previously.
The Mexican peso has appreciated significantly, reaching a seven-year high. While the government sees this as a sign of economic success, it has negative implications for exporters and those receiving remittances. The peso has had a strong performance in 2023, appreciating by 12% against the dollar. This trend is expected to continue as long as resources flow into the country attracted by high yields on local debt. However, the rapid increase in the peso’s value makes Mexican exports less competitive and has led to a decline in exports. This decline is a concern for the Mexican economy, which relies heavily on exports and tourism. The appreciation of the peso also hampers the competitiveness of Mexican industries, particularly against imported products from Asia. Additionally, the weakening of the dollar negatively affects the purchasing power of remittances. Overall, while the peso’s appreciation may be seen as positive in some aspects, it presents challenges for exporters and those reliant on remittances.
What are the negative implications of the peso’s strong performance on those receiving remittances
The strong performance of the peso can have negative implications for those receiving remittances. Here are some of them:
1. Reduced purchasing power: When the peso is strong, the value of remittances received in other currencies, such as the US dollar, decreases. As a result, the purchasing power of those receiving remittances is reduced, making it harder for them to afford goods and services.
2. Diminished economic impact: Remittances are an important source of income for many individuals and families in developing countries. However, when the peso is strong, the value of remittances in local currency decreases, resulting in a reduced economic impact on the receiving country.
3. Increased reliance on remittances: In countries heavily dependent on remittances, a strong peso can exacerbate the reliance on these funds. As the local currency gains strength, the need for remittances may increase, putting individuals and families in a more vulnerable position.
4. Difficulty in saving or investing: With reduced purchasing power, those receiving remittances may find it harder to save money or invest in their future. This can hinder long-term financial planning and limit opportunities for economic advancement.
5. Inequality: A strong peso can widen the wealth gap within a country. Those receiving remittances may struggle to meet their basic needs, while others benefiting from a stronger currency may enjoy increased purchasing power and financial stability.
6. Economic slowdown: In countries heavily reliant on remittances, a decrease in the value of these funds can lead to an overall economic slowdown. This is because remittances often contribute to consumption, investment, and economic growth.
Overall, while a strong peso may have positive implications for the country’s economy as a whole, it can negatively affect individuals and families who rely on remittances for their livelihoods.