Published on October 18, 2023,
In a twist that affects countless Mexican families, remittances from the United States to Mexico are hitting new highs, but a remarkable rise in the Mexican peso, reaching its strongest point against the U.S. dollar in nearly eight years this summer, is putting a strain on the buying power of these funds. This unprecedented scenario, coupled with domestic inflation, is set to lead to the first decline in remittances’ purchasing power in a decade, according to Gabriela Siller Pagaza, the chief economist at Banco Base.
“What truly matters for remittance recipients is not just the amount they receive in dollars, but how much they can afford in Mexico,” said Siller Pagaza.
Over the 12 months ending in August, more than $62 billion in remittances were sent to Mexico, according to Banco Base. However, during the same period, the peso appreciated by over 15.6%, and annual inflation reached 4.64%.
Siller Pagaza predicts a significant decline of 9.9% in the purchasing power of remittances in Mexico this year, marking the first drop in a decade and the most substantial percentage fall in 13 years. The peso has weakened slightly from its peak of less than 17 pesos per U.S. dollar in July, now hovering around 18 pesos per dollar, down from the 19.46 pesos per dollar at the beginning of the year.
The currency’s meteoric rise has led to an increased financial burden on individuals sending U.S. dollars to Mexico. To maintain the same standard of living for their loved ones back home, senders have been forced to send larger amounts.
For instance, when the peso peaked in July, a person wanting to send 1,000 pesos to Mexico had to send about $60, up from around $49 a year earlier.
Eric Vasquez, a 44-year-old busboy in a New York City diner, has had to increase his contributions for his wife and three children living in Mexico City. “Before, I used to send $100,” said Vasquez, who now sends $130 to $140 to cover expenses, including school fees, food, and transportation.
As for Melchor Magdaleno, he increased the money he sends to his wife and five children in southern Mexico due to the exchange rate and rising costs. This, combined with Mexico’s inflation of 4.45% over the year, has led to the necessity of increased remittances.
Dilip Ratha, an economist at the World Bank, pointed out that the recent surge in money transfers into Mexico has been driven by the strong U.S. economy. However, the peso’s appreciation, attributed to near-shoring of manufacturing from Asia to Mexico and economic strength in both the U.S. and Mexico, poses a challenge for Mexican households relying on remittances for their budgets.
