The Cost of a Strong Peso

Mexico is now famous for having one of the world’s strongest currencies. This phenomenon has boosted national self-confidence as the country’s ties grow stronger with the US, the giant neighbor that Mexicans once reviled and feared in equal measure.

The peso has climbed by more than 5% against the dollar this year. Rising levels of foreign direct investment, topped by Citigroup’s blockbuster $12.5 billion purchase in May of Banamex, Mexico’s second-largest bank, have boosted the peso. Mexico attracted $13 billion in foreign investment last year, $1.2 billion more than in 1999.

Firm oil prices, the government’s commitment to strict fiscal policies and an independent central bank have further reinforced investor confidence. Another factor contributing to strong peso demand is a perception that Mexico is immune from the turmoil plaguing Argentina and Brazil.

The 1994 financial crisis is a distant memory now. Prior to the crisis, a peso would buy 29 cents of a dollar. The government cut the peso loose from its peg during the crisis and allowed it to float. The currency’s slide was arrested in late 1998 and it has edged upward ever since even though inflation in Mexico has remained high. By September 2001, the peso bought only 11 cents, a decline of 63%.

The rise of the peso may be good for national pride, but it is jeopardizing Mexico’s export effort, making it increasingly difficult for the companies to hold on to their share of the US market, the country’s main trading partner. The sluggish US economy is cutting demand for Mexican goods, further aggravating the effects of the superpeso.

When the peso was weaker, it helped Mexican companies offset disadvantages such as high interest rates, inflation, and an inadequate infrastructure.

Grupo Dina, a troubled Mexican bus and truck manufacturer, blames its troubles on high inflation and a strong currency. Gamaliel García, Dina’s chairman, said, “These two factors have been completely negative for the company. If the exchange rate continues as it is, companies that export will either go bankrupt or close.”

Firm Grip
Business and banking leaders have repeatedly urged Banco de México, the country’s central bank, to lower interest rates and bring the peso down. The bank has relaxed monetary policy twice this year, once when the dollar dipped below nine pesos in May, but it appears firmly committed to its sound money policy.

Some Mexican executives argue that the superpeso is hurting more than just exporters because it is making nearly all Mexican manufacturers more vulnerable to import competition. They worry that the central bank’s main objective of maintaining price stability rather than maintaining a competitive exchange rate is hurting Mexican businesses across the board.

“[The government] seems to think that the superpeso is only affecting the exporters, but that’s not true,” says Eugenio Clariond, president and chief executive officer of Grupo Imsa, a Monterrey-based steel manufacturer. “The superpeso is affecting everyone that is producing traded goods because if your products are not competitive you stop selling them whether they are produced in the States or locally.” Clariond says few industries can escape the superpeso’s grip. He says The Grupo Imsa no longer prints its annual reports in Mexico. “Now we do it in Texas, because of their better service, better quality and better prices,” he says. “The superpeso is killing the printing industry in Monterrey.”

But there are those who see the strong peso as positive for Mexico. “I absolutely think it is a good thing,” says Ricardo Salinas, chief executive officer of Grupo Salinas, the retail and broadcasting company. “My friends in the business community and the exporters do not agree with me because they would like to see a much weaker peso. But that effectively reduces the wages of everybody and it makes us [providers of] cheap labor. And I do not know of any country that has been successful with a policy of cheap labor.”

He continues, “Successful countries like Japan, the US, Europe do not have a cheap labor policy. We should have a process of investment in technology, in training, and have a policy of increasing productivity.”