Weak U.S. dollar means Mexicans can send less home

Currency decline brings opportunity for others across the border, though.
By Jeremy Schwartz

MEXICO CITY BUREAU


Monday, June 30, 2008

BEJUCOS, Guerrero — In this remote village in the mountains of central Mexico, where almost everyone lives off money sent home from relatives working in Austin, the value of the U.S. dollar has become a source of angst.

With the greenback reaching a five-year low against the suddenly robust Mexican peso, the value of those remittances has fallen about 5 percent compared with a year ago. When that decline is combined with an overall decrease in money sent back from the United States, which is blamed on the faltering U.S. economy, the result is economic pain for families throughout the Mexican countryside.

Sixto Martinez Aguirre, who runs a small remittance business in Bejucos, said the falling value of the dollar has cut an average of 100 pesos (about $10) from remittances in recent months.

"That was enough to buy some beans, some vegetables," Martinez said. "It's a big difference."

A year ago, a dollar was worth 10.8 pesos. Last week, it was worth about 10.3. The effect on Mexico, the United States' third-largest trading partner, is being felt by everyone from poor rural families to exporters to Mexico's mammoth nationalized oil company, Pemex.

But it's not all bad news: Importers, especially those in the retail and heavy machinery sectors, are getting great deals because of the weak dollar, analysts say. High-end travelers and cross-border shoppers are also reaping the benefits.

The strong peso is being hailed as a signal of Mexico's resilience in the face of the U.S. downturn. With economic growth rates higher in Mexico than in the United States (predictions for this year are 2.6 percent and less than 1 percent, respectively) and the nations' inflation rates mostly similar, analysts say Mexico is becoming more attractive to foreign investors.

"We have passed through periods of weak dollar before," said Luis Flores, an economic analyst with IXE Bank in Mexico City. "But this year, Mexico is in a better situation to take advantage of it."

When it comes to remittances, though, the weak dollar has had a powerful effect. The strengthening peso means that the $7.3 billion that was sent home in the first four months of the year was worth about $366 million less than it would have been last year, based on numbers from Mexico's central bank.

But the dollar's biggest impact in Mexico may be on Pemex's oil profit. Oil money is crucial for Mexico because it accounts for 40 percent of the federal budget.

Officials blame the weak dollar, the currency in which Mexican crude oil is sold, for eating into what should be windfall profits. Partly because officials didn't plan for the declining dollar and partly because of declining production and a hefty gasoline subsidy, they say, Mexico might not enjoy the billions of extra dollars that many expected from record oil prices.

The dollar is also sending shudders through Mexico's exporters and renewing cries for Mexico to better diversify its export destinations. The United States accounts for the vast majority of Mexico's exports, meaning that a soft dollar cuts into the profits of almost the entire sector.

Mexico's dependence on the U.S. market has slackened somewhat. In the past seven years, the portion of all Mexican exports that go to the United States has dropped from 92 percent to 81 percent. Analysts expect the current exchange rate to continue spurring the push to diversify, possibly into regions such as Asia and South America.

"Mexican companies are beginning to save themselves from the situation," Flores said. "For Mexican exporters, the lesson is flexibility."

On the flip side, importers are enjoying lower prices, most notably retailers and construction companies bringing in heavy equipment that is used to build roads and bridges, analysts say. Such positive outlooks helped increase U.S. imports 13 percent from March to April, according to Mexico's central bank.

Shoppers and vacationers stand to benefit as well. At the Prime Outlets mall in San Marcos, merchants expect the exchange rate to spur more shoppers from Mexico over the summer months.

"Absolutely, we see this as having the potential to generate even more sales and traffic" from Mexico, said Celena McGuill, marketing director for the outlet mall.

Mexican travel agents expect a surge in American visitors this summer as a result of the dollar's weakness against the euro, which has made Europe a prohibitively expensive vacation for many. While the peso has strengthened against the dollar, the euro has soared.

"We're forecasting more visitors this summer, and most will be coming here instead of Europe," said Noe Elizarraga, president of the Mexican Association of Travel Agencies.

So how long will the strong peso last? Analysts expect exchange rates to remain stable until the Federal Reserve increases interest rates to curb U.S. inflation, a move that strengthens the dollar. But experts say that Fed rate increases could be mirrored by rate increases by Mexico's central bank, which could keep the peso strong for the foreseeable future.

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