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Sunday, October 1, 2023

Super peso: Who wins, who loses, and how long will it last?

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Expats depending on income from abroad aren’t the only ones feeling the pinch of the “super peso.” Think of poorer families depending on remittances.

A US dollar bought 20 Mexican pesos a year ago. Now it’s down to around 17. The peso has become among the world’s best-performing currencies.

A combination of high interest rates, Mexico’s current financial stability, and foreign money flowing in have seen the Mexican currency post double-digit gains against the dollar in 2023.

Around 4.6 million households across Mexico receive remittances, which at US$58 billion last year, has been the country’s largest source of foreign currency.

In June, the Mexican peso reached its most robust levels against the greenback since 2016.

Analysts say the peso’s strength is partly due to Mexico’s relatively high interest rate, which is now 11.25 percent.

The lending rate has been raised to fight inflation but has also attracted investors seeking higher returns.

The peso is also boosted by the nearshoring trend of US companies like Tesla moving their production closer to home in Mexico instead of Asia, experts say.

In a country that has suffered significant currency devaluations in the past, the peso’s strength is chiefly hailed as good news.

President Andrés Manuel López Obrador calls it “the Mexican miracle” that has reduced Mexico’s foreign debt.

The “super peso” also reduces the earnings of exporters.

“But I would say a strong peso is better than depreciation or devaluation, in general terms,” López Obrador said.

Rogelio Garciamoreno, a farmer and vice president of the private National Agricultural Council, is both a winner and a loser.

“The prices of many inputs in dollars are falling. We hope to buy them at a better price,” he told Agence France-Presse.

The flip side is that the peso’s strength is bad for food exports.

“These products are priced in dollars. It hits us very hard because we received fewer pesos than we thought,” Garciamoreno said.

The United States accounts for 80% of Mexican exports.

The peso’s appreciation also impacts maquiladoras set up by US companies to manufacture products for the United States market.

“This big devaluation of the dollar is bad for the maquiladoras because they need more dollars to pay the payroll and taxes,” said Jesus Manuel Salayandia of the National Chamber of the Transformation Industry.

The super peso’s days could be numbered, however.

Financial analysts expect a slight depreciation in the Mexican currency, partly due to narrowing interest rate differentials.

While Mexico’s central bank expects to hold its key lending rate at the current level for “an extended period,” the US Federal Reserve has indicated it might raise interest rates another half percentage point this year.

One analyst told AFP that he expects the peso to return to around 19 per dollar toward the end of 2023.

The U.S. Federal Reserve looks likely to raise interest rates next month, which could also make the dollar appreciate against the peso.

That would be good news for Rosario Crisostomo, a woman in Puebla who receives remittances from her grandson in the United States while struggling with rising living costs.

“Everything’s going up. Food’s going up. But now we have less,” she told AFP.

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