The Peso’s Uphill Battle
Today is January 14, 2016, and just about every currency hit a 2 year low against the US Dollar today. The peso is now off right around 40% from just 20 months ago.
Mexico is an oil producing and exporting nation; economists blamed the falling price of crude oil for the Peso woes and currency imbalance of 2014-2016. But the health of a nation’s economy has become internationally interwoven, and what seems to be an immediate boon for the US and oil consumers, could actually put us on the fast track to implosion. But for right now US consumers can enjoy riding the wave of the strongest dollar worldwide in recent history.
So there are distinct benefits that you; as a tourist, traveler or retiree in Mexico, in the current situation can glean. Although most of this article refers to the US dollar, and despite losses of the Canadian Loonie against the dollar, Maple Leafers too will see their money go further in Mexico this year.
What is the currency issue?
This entire imbalance in worldwide currencies began on a specific date, June 1, 2014. The Peso was then 12.84, today the Peso closed at 17.87 after crossing the 18:1 mark earlier in the day. My heart sinks as I now have to say I can see 20:1 coming before June 2016.
In May of 2014, a short 20 months ago the Peso was 12.84 per Dollar. Today the Peso will close very close to 18:1. So in Mexico Pesos, a Dollar costs 40% more than it did in June of 2014.
Here is a list of trading partners and the rise of the dollar again these major currencies as of close 1/14/16:
Russia, (128%), Brazil (81%), Canada (40%), Euro (27%), Iran (22%), South Korea (20%), British Pound (19%) India (15%) a relative winner and China (10%) despite heavy government support, the vast majority of that loss coming in the last 3 months. Japan is holding tough at a change of just 6%. A really scary one and a US trade partner, Argentina. Losing slow and steadily against the Dollar with just a 22% change as of December 16th, that loss more than doubled the next day and today the close (ARS) represents a 74% change.
Since the price of a country’s currency affects the price of their products on world markets, the currency’s exchange rate can have a big effect on national exports and costs of imports. Many economists claim we are in the midst of an economic world war and it is not without its collateral damage. But like real war, there are some real casualties developing and like a wounded animal, economic pressures regularly lead to conflict. We have already seen Russia annex the resources of the Crimean. Saudi Arabia and Iran are on a razor’s edge.
For decades countries did not interfere with the float of their currency on the world markets, it was considered a ‘party foul’. Today nearly every solvent country is either buying or selling currency to maintain market position and support or devalue their money.
In August of 2015, The Bank of Mexico announced it would join the fracas and began supporting the Peso, hoping to break the free fall which started in late 2014 and took another dive in the fall of 2015. BdeM (correct abbreviation for the Bank of Mexico) has allotted $8.6 billion USD to support the Peso by buying Pesos with their reserve of dollars. Eventually, the bank will deplete this resource and either allocate more or the market will sense the end and the Peso will take another dramatic plunge.
When World oil prices went freefall
Price per barrel of oil needed for these countries to balance the budgetFew economists expected the low fuel prices to stay much past Memorial Day, 2014, with the advent of the US Summer Driving Season. Despite all the predictions, oil prices continue to fall. As of January 14th another Rubicon had been crossed, as Brent Sea, Crude prices fell below $30 a barrel, down from well over $100 a barrel in late 2013.
Market watchers forecast a 1 year/2016 rise to about $50 a barrel as of the end of 2015. Unless something significant changes I think a rise of anything close to $50 is almost laughable. (Although a Saudi/Iranian skirmish would more than do it overnight) So, it is likely the Peso will only continue the downward trend until someone turns off the oil spigot.
Drug Dealer Marketing Tactics
One of the reasons were given for the diminishing oil price was Saudi Arabia’s desire to “hang on to market share”. I never quite understood this, because the Saudi’s sell just about every drop of oil they put on the market. The “share” I think they are referring to is in respect to the renewable energy sources. By keeping fossil fuels cheap the conversion to long run solutions like solar and wind power becomes relatively more expensive. With temporarily low fuel prices the “herd” runs out and buys a less fuel efficient car and hybrids become silliness. Fuel conservation once again becomes a distant memory, because it is so cheap (compared to two years ago) why bother? Another whole 10-year cycle of petrol addicts is hooked a simple drug dealer marketing tactic.
What does it mean for Mexico’s High Fuel Prices?
A couple years back Mexico revised how the price of Pemex fuel would be computed nationally and over a period of 16 months the cost of gasoline and diesel rose dramatically to be higher than US prices for the first time in decades. The price of fuel was scheduled to rise by the rate of inflation (3%) in Mexico, but with oil prices falling worldwide Mexican producers wanted to reap the benefit of lower prices. Thus, prices of all grades of gasoline fell January 1 by 41 centavos per liter or 3% to 13.16 for Magna. This price will be reviewed by a government commission monthly to float more with the international price of oil. BUT the commission will not permit the price to vary by more than 3% per period.
What does it mean to you?
If you earn in dollars, Mexico is on sale to you at up to 40% off, sort of. This is a big boon for US retirees stretching Social Security checks. However, for travelers the benefits may be moderated, with most larger tourist resorts and travel destinations floating their price in dollars. Food is a universal commodity and with the sliding Peso and recovering US economy’s demand for Mexico’s now less expensive Agricultural produce, our prices have risen. American made products are literally priced out of competition. Although I love my Farmer John bacon, it now costs 3x the price of the Mexican brand.
Unfortunately, if you look at a commercial home development you will probably not find big savings in real estate in the exchange as most set prices in dollars years ago. Both private real estate transactions of which I am personally aware did result in a decent dollar to peso savings. But that is certainly not a scientific sampling.
How to win at the game
The in-country bank exchange rate is set by the Bank of Mexico each morning, and banks set their fees on top of that. Although the market rate changes, the Mexican daily bank rate does not. This is what the Bank of Mexico charges the banks of Mexico to change their dollars. To take advantage of the exchange rate, you must make your exchange at the most “reasonable” location.
The first step is to know the current Interbank exchange rate. This is the price the banks pay to transact currency, and it goes without saying, your results may vary. For example, today the IBXR is 17.92:1. That would usually get you around 17.39 Pesos for your dollar, but one dollar would cost close to 18.4 Pesos, netting the bank half a percent in each direction.
The banks don’t lose either with an additional transaction fee, which varies dramatically from one bank to the next and can really hurt on smaller exchanges. Banorte usually offers the best rates on everything from exchanges to account fees, they are also the pickiest about who is their customer and many seasonal visitors may not qualify to open an account. Bancomer usually has the highest fees and least favorable (to you) exchange rate.
If you are spending time in Baja you need to do some advance research. Find a bank that doesn’t take you to the cleaners on exchange fees. Unless you are moving a lot of money it is the additional fees at either or both ends that will make or break the value of the transaction, not the exchange rate.
1) Bad Idea – In years gone by, businesses were anxious for Pesos but today changing dollars to Pesos at a point of purchase is usually a very bad idea and a good recipe for Gringo Abuse. Our banking laws now make it more difficult for businesses to get rid of dollars and the underground trade in dollars is a fraction of what it was. I saw a Pemex in La Paz offering 15.75 for the dollar, which can be described as nothing less than exchange rate sodomy. OXXO convenience stores usually offer one of the best PoP exchange rates with Walmart/ Bodega Aurrerá stores a close second.
2) Good idea – Probably the best idea for travelers is to use a credit card. It usually nets you something very close to the interbank rate and means no wad of cash in your pocket. Because of our new tax laws, most legitimate businesses have cell phone connected transaction machines. (You need to know your cards PIN number when you travel to Mexico!) Card fraud always seems to find tourists the easiest, so check your statements within 30 days of your trip to limit your exposure to rip-offs.
3) The backup plan – Pulling your cash out $300 (or your max) at a time from the ATM usually gets you the interbank exchange rate, but many banks hammer you with international transaction fees. Know your bank’s fee policy before assuming this is your best option. There are limitations to how much you can take out this way in a month.
4) And maybe this will work – Mexican bank rates vary by brand and the spread between buy and sell is often as much as a whole point, with the banks covering themselves in the daily fluctuations. But SURPRISE – many, Mexican banks will no longer do a currency exchange for non-accountholders. Others do not allow stateside transfers without an account.
5) And recommended by some – Casas de Cambio or Exchange Houses were lauded by one travel magazine as an effective way to change dollars to Pesos. However on one given day in October 2015, I found their exchange rate in La Paz to be a wee bit higher than the average bank. On my last trip to the Los Cabos airport, I had just happened to be familiar with the daily exchange rate and found the rate offered by the airport facility to be an obscene insult.
5) Way down the preference line – Your home bank can make exchanges, many US banks don’t stock Pesos and you may need to ‘order’ them in advance. It also means that you are carrying a large roll of “rob me, I’m a rookie tourist” in your pocket.
6) Excuse me while I stop laughing – Traveler’s Checks (Do they still sell them?) Except for some of the larger hotels and restaurants I’ve never found Baja to be traveler check friendly, even less so now, with most Mexican (legitimate) businesses offering online credit card processing at the cash register, due to our new income tax laws requiring electronic accounting and reporting. You are usually caught cashing TC’s in at the bank and subject to all of the ill’s mentioned above about banks.
What it means for Mexicans and other impacted countries
For those of us that earn in Pesos, it has not been an easy 16 months. Mexico is the US’s third largest trading partner. That means that many of our products are US labels. A package of Oscar Meyer sandwich ham, for example, has gone up 42% in 19 months. Medicines made in the USA have jumped 25% and more. With at least 20% of my weekly purchases made in or imported from the USA, I find it hard to figure how the Mexican government claims we have just 3.5% inflation. Remember that most toilet paper is made in North Carolina and we all use it here in Mexico as well, costing up to 40% more than last year.
But it is a boon for the US that just can’t last. With no one abroad able to afford US products, US companies will not only lose today’s sales but permanently lose market share that will have to be earned back.
So stay tuned while the Mexican Peso does a dramatic…
Recovery or swan dive? Mexico is doing well economically, with a steady growth rate two times greater than that of the US economy. With positive reports coming out at the end of the year the Peso really shouldn’t be taking this kind of beating. But there are obviously greater forces at work.
A dramatic flying face plant is a more distinct possibility. If oil falls out the bottom, I said l less than $40 a barrel for an extended period just three months ago, we will see several emerging economies go bust, Venezuela, Brazil, Argentina, Russia and some African oil producing nations where oil is more expensive to produce than Saudi Arabia. It is said that even the US oil is being sold at below recovery costs. Now we’re looking at oil prices hitting almost half of what many economists thought would be a breaking point. While bankers loaning money to upside-down nations love this, a growing number of countries will run out of rope, a large number of them well ahead of any real threat to the Mexican economy.
Could the Peso be devalued again?
Well, 20:1 was the magic number 21 years ago when the Peso was devalued 10:1. It also earned the then president expulsion from the country (amongst other crimes) and lead the way to the end of the PRI’s longstanding hold on Mexican politics. Devaluation really wouldn’t solve the problem either, because Mexico’s national debt level is relatively low. Devaluation would certainly be the remediation of last resort and a hugely unpopular domestic move; I don’t think any political party has enough sway to endure a move like that in Mexico anymore
Wrapping it up
Under the rules of free market trade and capitalism, you would think this would moderate itself back out. But either through either greed or political motivation, or both, the persons with their hand on the oil production valve are the real ones with their hands on the throat of the world economy and Mexico can do little to resolve that. And however it shakes out it will probably land squarely on the shoulders of a new US president in the first months of office 2017.
But for right now you can make your dollar go further by living or traveling in Mexico.
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