Dan AtkinsonNorth America’s third major currency has been having a hard time of it lately.
Mexico’s peso was trading this morning at $0.042 against the US dollar. One month ago, on 29 February, one peso was worth $0.051, meaning a devaluation of more than 17% in just a few weeks.
There is an immediate reason for this and a longer running set of causes. The former is the effect of the coronavirus, the later comprises existing economic and social weaknesses in Mexico.
Sources of support for peso
While the virus has hit parts of the United States severely, notably New York, it has also had the effect of burnishing the dollar’s reputation as a safe-haven currency, an internationally acceptable medium of exchange and store of value.
During normal times, currencies such as the peso can be attractive to investors and traders because it offers higher returns than do dollar assets, in return for what have historically been higher risks. Furthermore, the deal in December 2018 among President Donald Trump’s administration, Canada and Mexico to establish a reformed version of the North American Free Trade Agreement (NAFTA), the Clinton-era trade arrangement criticised for costing US jobs, should have removed a key source of economic uncertainty for Mexico, given there was no guarantee that Mr Trump would put anything in NAFTA’s place.
Coronavirus affects markets
Another source of support for the peso ought perhaps to have been the reduced rhetoric from the White House about building a wall along the US-Mexican border, and in November, in its most recent Article IV health check, the International Monetary Fund (IMF) wrote: “The authorities’ commitment to fiscal prudence is strong, monetary policy has succeeded in bringing inflation to target, and financial sector supervision and regulation remain robust.”
All this, however, was before the full impact of the virus in the west became evident, sending capital flowing back into reserve currencies such as the dollar. But even without the coronavirus, Mexico had deep-seated problems that have acted as a drag on the economy and on society.
Along with praise for Mexico, the IMF noted that it encouraged the authorities to recognise “the need to reduce corruption, labour informality, and [to] enhance the rule of law”. The reference to labour informality refers to Mexico’s vast hidden economy, which, according to America’s Central Intelligence Agency, employs at least half the workforce.
Oil price fall adds to problems
The CIA adds that Mexico’s problems include low productivity, high inequality and, as noted by the IMF, corruption and weak rule of law, not least in relation to drug-related gang murders. On top of all this, sinking oil prices have been bad news for Mexico, which is a major energy producer and a member of the so-called NOPEC group of oil producing countries that, while being non-members, are generally supportive of the 13-nation Organisation of Petroleum Exporting Countries.
