The US Dollar, a Love-Hate Relationship

By Karen Ocampo

In Mexico there is a swinging love-hate relationship with the US dollar. For people living in Mexico, it is sometimes discouraging when changing savings into this foreign currency. On the other hand, if payments or salaries are made in dollars, the exchange can often be profitable.

According to Ricardo Garrido, current president of the Business Coordinating Council of San Miguel de Allende, (CCESMA) the preference of international traders for the US dollar goes beyond the monetary gains, “The dollar is the currency leader in business, providing more than any other currency can currently offer. It provides confidence.”

Lately, there has been a lurking question: How does the relationship change now with the great and continuous rise of the dollar? According to The Economist newspaper of August 27, this currency was sold at 17.41 pesos to banks in Mexico City, when at the beginning of the year, it was only 14.82 pesos (Banco de Mexico, 2015). The consequences of this rise will be different for each person, company, or sector. So who will hate or love this new dollar more?

The reason

There are many debates about the increases. Here are a few: Some sources indicate that China is the epicenter of a global market meltdown (Luke Kawa, 2015); Forbes Magazine explained that the situation in Mexico is due to Greece’s debt to its creditors combined with the rate hike by the Federal Reserve (Fed). Some say it is related to low oil prices and low economic growth in Mexico. Instead, Garrido says the devaluation of the Mexican peso against the US dollar is not related to economic mismanagement in Mexico, but to a situation of supply and demand. He explains: “In my opinion, there is a nervousness, so investors with liquid money buy dollars to feel safe.” He mentioned that one of the first reactions when there is change in the stock market is to seek shelter in the strongest currency—in this case the US dollar.

International business loves it?

It is considered that the first to love this rise in the dollar value are the industries that export goods and services. According to studies by the World Trade Organization (WTO), this situation can propel Mexico through its dynamism and production capacity. But like all bittersweet relationships, there is a difficult part. If the exporting side wins, the importing side loses. Imported products in Mexico have increased their prices. For example, in Guanajuato, due to the growth of some raw materials imported for shoes, this industry has predicted an increase of up to 14 per cent in the consumer price of footwear starting in September.

A loving relationship with tourism

President Enrique Peña Nieto said that the devaluation of the peso against the dollar will benefit us in the tourism sector. Although this comment led to unfavorable reactions toward the president, according to the World Tourism Organization, extra dollar input is expected since Mexico has 29 million tourists a year based on this year’s ranking. It will be interesting to see what the results will be in San Miguel de Allende.

For real estate, it’s a complicated relationship

According to Lic. Gabriel Rubiera, vice president of the Mexican Association of Real Estate of San Miguel de Allende AMPI, the real estate sector should move with caution. In this city, at least 90 percent of the housing market is bid in US dollars but it should be really in pesos because with prices in dollars it would be perceived, for some, as an opportunity to invest in a property now (paying in dollars), hoping that in a few months the exchange rate will decrease, thus allowing selling in pesos and expecting profits. Rubiera said that the economy  is difficult to predict at this time because it is too volatile and is likely to be counterproductive for inflation or continuing devaluation of the peso.

 

A recommendation to the real estate sector is to adjust the prices, which are in dollars, because although the property value increased, it was not due to a capital gain but only to the exchange rate. This will limit the reach to possible customers.

According to Fernando Figueroa, public and financial accountant from the Instituto Tecnológico Autónomo de México (ITAM,) this can be helpful for a person who wants to buy property only if the property is valued in pesos, has savings in US dollars, can pay in cash, and has no other financial obligations as debts and credits.

Lic. Rubiera invites all service providers in the real estate sector to approach advisors or more institutions or organizations who can provide advice on how to proceed with this situation in the best manner.

In what scenario will all who live in Mexico probably hate this relationship?

Engineer Garrido said that if the strengthening of the dollar persists in Mexico, there may be inflationary effects. In this scenario, the extra pesos gained in the export business or the pesos saved when buying real estate in dollars will increase because of the cost of all that we consume, and if the Mexico Central Bank does not make proper economic forecasts and take timely actions, this will impact all sectors. And in the words of Garrido, “Inflation is the worst tax that may exist.”

 

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