With the Peso Appreciation, Is Mexico Getting ‘Too’ Expensive? Travis Bembenek - Mexico News Daily
go to original July 11, 2023

The peso was considered one of the best-performing global currencies in 2022 and has also strengthened rapidly so far this year against the US dollar. (MND)

Update: ‘Super Peso’ Strikes Again, Reaching 16.82 to the US Dollar (Mexico News Daily)

There is a lot to celebrate with the recent strength of the Mexican peso. Mexicans have increased buying power to purchase imported goods and their peso takes them further on travels abroad. Multinational companies from countries like the U.S., Germany and Japan that have invested in Mexico show more profits when reporting in their home currency to headquarters. Mexican companies are able to buy equipment, machinery and raw materials from abroad at a lower cost.

However, there are some serious risks to the broader Mexican economy with such a rapid peso appreciation, especially in light of recent high inflation. Businesses and investors first and foremost require stability and predictability to continue to invest and grow. The accelerating strength of the peso this year has caught many businesses and individuals off guard. Any business that sells products in US dollars – and there are many – has been suffering as the peso appreciates against the greenback.

Let’s review a simple example to illustrate. Imagine your unit price for a good or service is US $100. Your cost in pesos at a 20 pesos to 1 US dollar exchange rate is US $90, leaving you an anticipated profit of US $10 (or 10%). But with the peso appreciation, your cost today is US $103.50, meaning that if you don’t increase your prices, you’ll lose money. Add to this the significant inflation of the past few years, and your costs are actually closer to US $120. To have the same 10% planned profit, you now need to charge customers US $132 – a total increase from US $100 to $132! This has all happened very quickly, and it feels like it’s making Mexico more expensive, almost overnight.

What problems can this cause? Businesses can handle relatively slow moves in inflation or currency exchange rates quite easily. They can make adjustments internally to reduce costs or slightly increase their prices. But when inflation or currency changes happen quickly, businesses often do one of two things, both of which are bad for the economy: they either increase prices very quickly to compensate, or they stop all further investment until things improve. In Mexico, there actually has been a double shock to businesses – first the high inflation, and then the peso strengthening.

Read the rest at Mexico News Daily

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