Although the peso lost some ground midweek (it was trading at 12.40 to the dollar at Wednesday’s close), Mexico’s often-maligned currency has been on a roll recently, bringing with it both positive and negative fallout.
When the peso touched 12.07 to the dollar on April 11, the rate was at its lowest for 20 months.
On the plus side, a strong peso will reduce inflationary pressure in Mexico thanks to cheaper imports. Firms that import much of their raw material – plastics are a case in point – are being favored by reduced manufacturing costs. Significantly, only 10 percent of firms in Mexico’s plastics sector export their products.But it’s a double-edged sword: Companies reliant on exports receive fewer pesos for their products, but many still have the same expenses.
Analysts say an overvalued peso could cause problems for the nation’s economy in the long term by affecting the nation’s competitivity with the rest of the world.
Although Agustin Carstens, governor of the Bank of Mexico (the nation’s central bank), has stressed the strong pesos presents no risk to the economy, analyst Jonathan Heath said reduced income from the sale of oil could create an unbalance. He also warned that investment might start to slow down as exporters’ profits fall.
In addition, Mexican families who survive on remittences from abroad (largely the United States) will be affected as they receive fewer pesos to the dollar. Money sent home from migrant workers supports thousands of families living in small towns and rural communities.
Some analysts say that continued strengthening of the peso could lead to some form of government intervention to halt the trend.
Recently published export figures (excluding oil) confirm the state of affairs: February’s numbers were 2.8 percent down in dollar terms compared with December 2012. The only sector not affected was the automotive sector, in which exports were up by 1.4 percent during the same period.
The situation is of some concern to Jalisco’s flourishing electronics sector, which accounts for 56 percent (1.5 billion dollars) of the state’s exports, largely thanks to firms such as Jabil, Sanmina and Flextronics. Despite expectations for growth of 10 percent this year, the strong peso is certain to affect the performance of these companies. They say they will now be forced to increase productivity to offset the drop in income.
Banamex analysts reckon the peso will end the year at around 12.30 to the dollar.