A blackboard shows exchange rates for Mexican pesos and U.S. dollars in Mexico City, Mexico, March 13, 2023.

Raquel Cunha | Reuters

People sending money back to Mexico this year face a new challenge: the “super peso.”

The Mexican currency hit its highest level in almost eight years against the US dollar in the summer.

The soaring peso has weakened the purchasing power of households in Mexico that rely on remittances from abroad. The rise in the currency means that each dollar sent home yielded fewer pesos than before.

Lea is this article Here in Spanish.

According to Gabriela Siller Pagaza, chief economist at Banco Base, combined with domestic inflation, the purchasing power of remittances will fall year-on-year this year for the first time in a decade.

“What really matters to recipients of remittances is not the amount they receive in dollars, but how much they can use it to buy in Mexico,” Siller Pagaza said.

People sent more than $62 billion worth of remittances to Mexico in the 12 months ending in August, according to Banco Base. During the same period, the peso rose by more than 15.6% and the annual inflation rate was 4.64%.

Siller Pagaza estimates that the purchasing power of remittances in Mexico will fall by 9.9% this year, the first decline in a decade and the largest percentage decline in 13 years.

The peso has fallen from highs of less than 17 pesos to the U.S. dollar in July and was last at around 18 pesos to the dollar this week. At the beginning of the year, each US dollar was worth 19.46 pesos.

The currency’s rise has put more money out of the pockets of those sending U.S. dollars to Mexico. People who wanted to send money to the country from the United States were forced to increase the amount to keep up.

For example, a person who wanted to send 1,000 pesos to someone in Mexico had to send about $60 when the peso peaked in July. A year earlier it cost around $49.

Eric Vasquez, a 44-year-old waiter at a New York restaurant, is among the people who have had to increase their contributions for his wife and three children, who live in Mexico City.

“I used to send $100,” Vasquez said outside a money transfer shop in the Corona neighborhood of Queens, New York. “Now I have to send $130, $140 to cover the costs.”

These cash transfers include school fees for his children, food and transportation.

Vasquez said he’s been sending home nearly $200 a week lately: “The older my kids get, the more money I have to send.”

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Purchasing power of remittances in Mexico

Banco de Mexico, Grupo Financiero Base

Melchor Magdaleno, 33, said he has been sending $120 a month back to his wife and five children in Tlapa de Comonfort in Mexico’s southern Guerrero state for the past three to four months. He used to send $100 every two weeks, he said, but this year he increased the amount because of the exchange rate and higher costs in Mexico.

Inflation in Mexico has fallen in recent months but is still 4.45% higher than last year, according to the latest data.

Dilip Ratha, a World Bank economist who focuses on remittances, noted that remittances to Mexico have surged in recent years, due in large part to the strong U.S. economy.

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But the peso’s appreciation, tied in part to the shift of manufacturing from Asia to Mexico and economic strength in both the U.S. and Mexico, could hurt Mexican households that use remittances for household budgets.

Ratha said some families may cut certain expenses to cover fixed costs such as rent or mortgages.

“People will continue to send money, but the fact that the economy is slowing, inflation is rising and their purchasing power is eroding,” Ratha said. “The welfare effects of the situation will be quite significant.”

Mexico is the second largest recipient of remittances in the world after India. The transfers account for around 4% of the country’s gross domestic product.

While remittances are expected to hit a record again this year, the growth rate is likely to slow, economists say, as senders and recipients struggle with inflation, putting pressure on household budgets.

And the effects were felt in both the United States and Mexico.

“Mexicans in the U.S. and their relatives back home are both facing higher inflation, and wage growth has not kept pace in both countries,” Ratha said. “Consumption has to adapt.”

Source : www.cnbc.com

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