Monthly Article

August 2015 Monthly Article – The Decreasing Purchasing Power of Mexican Consumers on the Border

By Jerry Pacheco

Every business school student is taught that when the value of the U.S. dollar rises against other world currencies, several effects occur. First, the purchasing power of Americans who buy foreign goods made in a currency that has depreciated against the dollar is increased. For example, if the dollar gains strength against the Japanese yen, Japanese-made automobiles sold in the U.S. become cheaper for Americans. On the negative side, American-made products become more expensive when they are sold in Japan, thus making them less competitive against products from other countries.

Closer to home, on the U.S.-Mexico border, the shifts in the peso to dollar exchange rate can rapidly cause effects that are uniquely felt on the industrial, commercial and personal levels. When the peso falls against the dollar, production in Mexico’s maquiladoras (twin plants) generally ramps up because the products that are manufactured are based for the most part in peso-based labor. Maquiladoras still import on average more than 90 percent of the production inputs that go into these products. Most of these inputs are supplied by foreign companies, particularly those in the U.S., that produce everything from metal parts, plastic injection components, packaging, and lubricants that maquiladoras purchase for their production. In this sense, when this industry booms, so does the business for U.S. suppliers selling to these plants.

From a commercial standpoint, the falling peso also promises to curb the purchasing power of Mexican citizens who take their vacations, shop and visit relatives in the U.S. This comes on the heels of the 2013 hike from 11 percent to 16 percent in the value-added tax (IVA) that citizens on Mexico’s northern border region pay on goods. Because of this factor, many economists predicted that Mexicans would be purchasing more of their goods in U.S. border towns, which typically have much lower sales taxes. Indeed, Mexican spending on the U.S. side of the border has grown stronger in the past couple of years.

However, two years ago, the peso was trading against the dollar at a rate of approximately 12 to one. By the end of the third week of August 2015, the value of the peso to the dollar had fallen to nearly 17 to one – its lowest level against the dollar in history. Within the last twelve months, the peso has lost 19 percent of its value. This is in spite of continuing good economic indicators in Mexico, such as strong quarterly GDP growth, and relatively low inflation, as official Mexican sources have reported. To combat the fall, the Mexican government has begun selling the dollars that it holds in reserve on world markets, hoping to prop up the peso’s value.

Economists blame falling oil prices, a commodity on which a substantial portion of the Mexican economy depends, and the expectation of a Federal Reserve interest rate hike in the U.S., as two major factors for the peso’s devaluation. In periods of falling peso value, the situation is further exacerbated because Mexicans holding pesos will tend to trade them in for dollars to minimize their losses. This decreases demand for the peso and puts even more pressure on this currency to fall against the dollar.

The falling peso is a boon to Americans who buy products made in Mexico, such as food and liquor, and who cross the border to have medical or dental work done in northern Mexico border cities. One of my friends was ecstatic that she and her boyfriend had dinner at a fancy restaurant in Juarez consisting of a salad, an elegantly prepared main course, dessert, and wine for less than US$40.00. They then went to a movie for which the tickets cost 35 pesos, or a little more than $2.00. On the flipside, with their weaker Mexican peso, Mexicans won’t be able to buy as many U.S. products as was previously possible.

The worry in Mexico is that if the peso continues falling, this will cause inflation, which will mean even more decreased purchasing power by Mexican citizens, and more pesos will be needed to purchase the same products. It is not unusual for some U.S. border businesses to see one-third of their sales accounted for by Mexican shoppers. Just go to a Wal-Mart or Family Dollar store in a city such as El Paso, Texas, and count the number of Mexican plates in the parking lots. A falling peso will decrease the number of Mexican shoppers at these stores and the average amount spent also will go down. This could result in decreasing investment and job losses on the U.S. side.

The dance between the dollar and the peso and the associated effects are strong evidence how economically interdependent the U.S. and Mexico have become. What affects one side of the border affects the other side as well.