The following is one thought on the situation. Reprinted from Baja Insider and written by Tomas:
The Mexican peso (MXN) has fallen 12% since June against the dollar. So far the economy has remain resilient, but the question remains which will break its free-fall first, the price of oil or the Mexican economy. But for tourists, parts of your Mexico vacation maybe on sale for 10-15% off.
I’ve been traveling to Mexico for many years and during that time, like many folks, the quick calculation in my head for the exchange rate was to move the decimal place one to the right when converting dollars to pesos. (10:1 for those bad at math visualizations) Today, one really needs to be thinking 15:1 and that is expected to continue to slide through mid 2015. This is a fantastic ‘discount’ for US tourists traveling to Mexico where now your dollars and loonies go further. But for those of us living and doing business in pesos it has been a severe hit in the pocketbook.
Why is this happening?
The Mexican economy, like the rest of the world, is coming back up to speed from the depths of 2007-08. What drives the pesos, or all money markets for that matter, is some fact and something ethereal, much like the stock market.
The major influence is the price of oil which is one of Mexico’s top 5 exports and makes the country the 9th largest in the world. Oil has gone from $110 per barrel December, 2013 to $70 today. Saudi Arabia and the United States are having a price war, driving down prices. For the first time in decades the US produced more oil than it used and us was down for the first time in 30 years. Saudi Arabian oil is inexpensive to produce and OPEC wants to make the US oil shale production unprofitable. Although it isn’t a huge affect, ISIL (the Muslim upstart) didn’t pay for the development of the oil they have usurped, and they are dumping oil on the black market for a fraction of market price.
Many also suspect it is a collaboration of the US and Saudi Arabia to punish Russia and Iran, two other economies that are petroleum driven. It is raising hell with the Russian economy and, other oil producers like Mexico, are collateral damage in this price war. Low oil prices affect the earning power of the Mexican economy, so the pesos falls.
The ethereal part comes to play in the confidence in the government. Even the US dollar can fall in political crisis or around election time when “change” may be imminent. With all the noise being made against the government of Pena Nieto and security problems in states like Guerrero, confidence in the peso has fallen. It isn’t like there is going to be a revolution or even an impeachment, so this economic driver, although very real, almost rates in the ‘silly’ category.
What this means for Mexicans
The pesos has dropped precipitously against the dollar since June with a change of 12% in six months. This is a distinct advantage to travelers to Mexico buying domestic products (like fuel) that, despite the dramatic rise in the price at the pump, has actually fallen for tourists when calculated in dollars. For us living in pesos the relative price of regular gas is equivalent to over $4 a gallon. Products imported from the US have jumped in price, some far more than the change in exchange. Oscar Meyer sandwich ham for example has gone from $67 pesos to $81 pesos. Other basics, including staples like toilet paper have also increased substantially.
The official 2013 Mexico inflation rate was 4.17%. I find that a little difficult to believe, as fuel alone rose 12% each of the last two years, affecting everything down stream in the economy. This was because Mexico ended its subsidies to Pemex and wanted to raise prices “to encourage conservation”. I haven’t researched which items Mexico disallows from its inflation index, perhaps like the US, fuel prices are not part of what you spend each month – according to ‘them’. With this decline of the peso in the last half of 2014 real inflation to the consumer will be much greater.
Two of the hardest hit products on my shopping list have been beef and chicken. These products are now cheaper to sell to the US market, so more has been exported, raising the domestic price. In July a New York steak from Sonoran beef cost $160 pesos per kilo (about $6.20 a pound) Today the same product costs $230 pesos per kilo (about $7.70 a pound in December pesos, but $8.91 in June pesos)
What this means for Tourists
Some things, like fuel, labor and some other domestic products have become relative bargains for tourists. Some travel industries still price in pesos and have not yet taken into account the exchange change. This is true to a greater extent on the mainland where products require less transportation than here on our three sided island of Baja and are less connected to the US economy. Here in La Paz and Cabo San Lucas many businesses are just happy to see tourists again, after Hurricane Odile, so they haven’t adjusted prices – yet. But I think in the next few months you will see more restaurant menus with little paper stickers over the old price. Major Hotel chains and resorts think in dollars, so those prices may change more quickly, to reflect the drop in the peso
So do Tourists really win?
I think the short answer is a definitive “yes”. How much in part depends on you and where you make an exchange. For example, today the rate at my bank to buy pesos is 14.21 pesos for your dollar and 15.11 to buy dollars, the interbank rate is 14.71, the price banks pay. The banks are maintaining a large spread of 9 points because of the volatility of the pesos. It may take them several days to process and sell your transaction, so they need to cover the spread, should the peso change while they are “holding the bag”. In addition to the exchange there is a flat fee service charge which varies greatly from bank to bank. Banks are even greedier in Mexico than the US, so it often makes sense to exchange larger amounts at one time. (Credit card interest rates for example are often over 50% per year, plus a large annual maintenance fee!)
According to Mexican monetary policy it is illegal to do trade in Mexico in anything but pesos. (this is true of a majority of countries) This is flagrantly ignored and as the pesos falls you will find many merchants hedging their bets and will to take your tourist dollars. Just be aware of the current exchange rate and know they should be giving you at least the interbank rate or more.
A recent article in a US paper advised that “Casas de Cambio” (Exchanges Houses) are a better deal than the banks, because they are more competitive. I’m not so sure that is true in Baja Sur, as we just don’t have that many Casas de Cambio to call it competition. They all work from the interbank rate, regardless of the amount of competition, so my advise is to exchange where you feel most comfortable, unless you are exchanging substantial amounts of money a few 10ths of a percent won’t break you.
Check with your bank before leaving home as to what fees are charged when using your bank card in Mexico. My US bank for example does not charge out of network, or out of country fees and the exchange rate is very close to the interbank rate, plus $0.50 for the transaction.
So where does this all lead?
The Mexican government has yet to use the artificial technique of buying back or supporting the peso as do China, Japan and the US. Without government intervention free-fall is going to continue.
Oil is currently trading around $70 a barrel, down from $110 a year ago. Saudi Arabia and OPEC have stated the support price is $40. Analysts predict the bottom to be $50 a barrel, sometime this spring. Prices are expected to begin to rise again in the early summer. So, we can expect the peso to continue to decline through summer, at least. Economists predicted 16:1 a few months ago to be the bottom for the peso, now some are looking at as much as 17:1 before it all turns around again.
There are a number of factors that could propel the peso lower, including the snowball effect, affecting both the real GDP and the ethereal confidence. If you are a money market investor anything past 16:1 might be a good time to buy into pesos. It will eventually recover and is likely to settle back between 12 and 13 to one.
When you are back home in the states you will also receive a benefit, particularly through these winter months. Mexican products abroad become cheaper and agricultural products are consistently in the top 10 of Mexico’s exports. Mexico also is a leading exported of electronics, plastic products, and is the #3 car manufacturer in the world. So all of these products become cheaper on international markets when the pesos falls. Mexican exports are thus likely to soar in early 2015, causing growth in the economy and in turn help the resurgence of the peso.
Another devaluation of the peso is unlikely. During the last devaluation (1994) Mexico was a one political party country. (PRI) Salinas, the president that did that devaluation was so despised he was exiled from Mexico. Today the PRI still holds sway in the congress, but had lost the presidency for 12 years to PAN, and the whole system is much more competitive today and no party wants to be the one to devalue the pesos – again.
If your life is lived in dollars or loonies come on down and visit us, you are likely to enjoy Mexico “on sale” this winter, with a 10-15% discount!
For original story go to: http://www.bajainsider.com