Sending money back to Mexico has become a growing challenge this year due to the strengthening of the Mexican currency, known as the “super peso.” The peso has reached its strongest levels against the U.S. dollar in almost eight years, resulting in a significant impact on households in Mexico who rely on remittances from abroad. The surge in the peso has led to a decrease in the purchasing power of these households, as the value of their remittances has diminished. With inflation also on the rise in Mexico, the buying power of remittances is expected to decline this year for the first time in a decade.
The amount of money sent in remittances to Mexico in the past 12 months exceeded $62 billion, according to Banco Base. However, the Mexican peso has simultaneously appreciated by more than 15.6% over the same period, coupled with an annual inflation rate of 4.64%. As a result, the spending power of remittances is predicted to decline by 9.9% this year, marking the largest percentage fall in 13 years.
The surge in the currency has proven to be detrimental to those sending money to Mexico from the U.S. Individuals are now forced to increase the amount of money they send in order to match the previous value. For instance, during the peso’s peak in July, someone wanting to send 1,000 pesos to Mexico would have had to send approximately $60. In comparison, a year earlier, it would have only required around $49. This increase in contributions has placed a financial burden on individuals like Eric Vasquez, a 44-year-old busboy in New York City, who has had to send more money to cover his family’s expenses in Mexico City.
The rise in the exchange rate and higher costs in Mexico have forced individuals like Melchor Magdaleno to increase the amount of money they send back home. Magdaleno, who previously sent $100 every two weeks to his wife and five children, now sends $120 per month. This adjustment is necessary to cope with the impact of the exchange rate and increased household expenses. While Mexico’s inflation has eased slightly in recent months, it still remains at 4.45% on an annual basis.
Dilip Ratha, a World Bank economist specializing in remittances, notes that the surge in money transfers into Mexico in recent years has been driven by a strong U.S. economy. However, the appreciation of the peso, linked to factors such as the near-shoring of manufacturing from Asia to Mexico and economic strength in both countries, could potentially harm Mexican households dependent on remittances for their household budgets. Ratha believes that some families may have to cut back on certain expenses in order to cover fixed costs like rent or mortgages. The situation could have significant welfare effects as individuals experience eroding purchasing power against the backdrop of slowing economies and rising inflation.
Mexico ranks as the second-largest recipient of remittances globally, with these transfers constituting around 4% of the country’s gross domestic product (GDP). While remittances are projected to hit a new record this year, economists anticipate that the rate of growth will slow down due to the challenges faced by both senders and recipients in dealing with inflationary pressures. Mexican households in the U.S. and their relatives back home are both confronted with higher inflation rates, while wage growth in both countries has failed to keep pace. The impacts of this situation will undoubtedly be felt on both sides of the border.
The surge of the “super peso” has presented significant challenges for individuals sending money back to Mexico. The appreciating currency has diminished the purchasing power of remittances, leading to a decline in the amount that households can buy. Alongside inflation at home, these factors have resulted in the first decrease in remittance spending power in a decade. The strain is not only felt by senders in the U.S., who must now contribute more to maintain the value of their remittances, but also by recipients in Mexico, who experience higher costs and eroding purchasing power. The impact of these changes is widespread and will continue to have far-reaching consequences for both senders and recipients in the future.