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Mexico remittances increase as the Peso weakens

Sanket Mohapatra's picture

The Mexican central bank's latest data release shows that remittances to Mexico increased by 13 percent in October on a year-on-year basis. This comes after a widely-reported 12 percent year-on-year drop in August and (less widely reported) flat growth in September. 

A recent AP article attributes this increase to the depreciation of the Mexican Peso against the U.S. dollar:

"The U.S. dollar has gained 34 percent against the peso since Aug. 1 as investors shed developing world assets and fled to the relative safety of the greenback. That stronger dollar means money sent home buys much more in Mexico...."

Such an exchange rate change can have a large impact on remittances received in local currency, helping to preserve the purchasing power of often poor recipients (noted in our latest brief on remittances).

It is interesting that this Peso depreciation comes after several years of currency appreciation that eroded the purchasing power of each dollar of remittances received (see chart).  Earlier this year we found that although remittances to Mexico, India and the Philippines increased substantially in nominal dollar terms between 2004 and 2007, after accounting for exchange rate changes and domestic inflation, the increases were much smaller for the remittance recipients. 

The slide in the Mexican peso and other currencies will provide a temporary respite to recipients, especially if remittances in dollar terms slow in the next year. It is an open question, however, whether the U.S. dollar will continue to remain strong if the current recession that began in December 2007 continues well into 2009.

 

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