Sending money back to Mexico has become increasingly challenging this year due to the unprecedented rise of the Mexican currency, known as the “super peso.” With the peso reaching its strongest levels against the U.S. dollar in almost eight years over the summer, the purchasing power of households in Mexico who rely on remittances from abroad has significantly eroded. This surge in the peso means that every dollar sent home now yields fewer pesos than before, affecting the overall value of remittances.
Gabriela Siller Pagaza, the chief economist at Banco Base, emphasizes that the real importance for recipients of remittances lies not in the dollar amount they receive but in how much they can buy with those pesos in Mexico. Unfortunately, this year’s inflation coupled with the soaring peso is set to cause a decline in the buying power of remittances. Siller Pagaza estimates a 9.9% drop in the spending power of remittances, marking the first decrease in a decade and the largest percentage fall in 13 years.
The peso’s appreciation has significantly impacted both the senders and recipients of remittances. For those looking to send money to Mexico from the U.S., the rising peso has forced them to increase the amount sent in order to maintain the same level of financial support. For example, when the peso reached its peak in July, individuals wanting to send 1,000 pesos to someone in Mexico had to send approximately $60, compared to around $49 the previous year.
This rise in the amount sent has put a strain on individuals like Eric Vasquez, a 44-year-old busboy in New York City, who now has to contribute more money to support his wife and three children in Mexico City. Vasquez states that he used to send $100 but now has to send $130 or $140 to cover expenses such as school fees, food, and transportation. Similarly, Melchor Magdaleno, 33, has had to increase his monthly remittance from $100 to $120 to support his wife and five children in Tlapa de Comonfort, Mexico, due to the exchange rate and higher costs in the country.
The appreciation of the peso has created a challenging situation for Mexican households that heavily rely on remittances for their household budgets. Dilip Ratha, an economist at the World Bank specializing in remittances, explains that although money transfers into Mexico have increased due to the strong U.S. economy, the peso’s appreciation could have detrimental effects on these households. Ratha suggests that families may need to cut back on certain expenses to cover fixed costs such as rent or mortgages.
This situation can be attributed to the slowdown of economies, rising inflation, and the erosion of purchasing power. As a result, both Mexicans in the U.S. and their relatives back home are facing higher inflation, while wage growth has not kept up in both places. This implies that the effects of the situation will be significant and may impact the welfare of individuals in both countries.
Mexico is the second-largest recipient of remittances globally, following India, with remittances accounting for approximately 4% of the country’s gross domestic product. Although remittances are projected to reach record levels this year, economists predict a slowdown in the rate of growth as senders and recipients grapple with inflation and the squeeze on household budgets. This situation not only affects Mexico but also has impacts on the U.S., as Mexicans and their relatives in the U.S. face higher inflation and stagnant wage growth.
The rise of the “super peso” poses significant challenges for Mexicans sending money back to Mexico. The erosion of purchasing power and increased cost of remittances have put financial strain on both senders and recipients. As the peso appreciates and inflation rises, Mexican households must adjust their budgets, potentially leading to cutbacks in discretionary spending. This situation not only affects individual households but also has broader economic implications for both Mexico and the U.S. as a whole.
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