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Remittance fact of the day: Mexico edition

Mexican remittances have reached their lowest level since February 2005, according to the Central Bank of Mexico.

The FT's Money Supply blog reports the news, in a post entitled "As the dollar slides":

The (remittance) payments were 14.4 per cent below their year ago levels, and more than 43 per cent below the high hit in October 2008. But the speed of the annual decline slowed to its lowest level since March as the US economy sheds fewer jobs.

Judging by their choice of title and subsequent content, the Money Supply authors think this fall has something to do with a combination of a weaker dollar and higher unemployment.

Alas, the former assertion makes no sense. Between January 2005 and September 2008, the dollar-peso exchange rate was relatively flat. Following the collapse of Lehman Brothers in September 2008, the peso weakened significantly. A weaker peso should mean higher peso-denominated remittances. Instead, remittances have fallen.

Looking over the past two years, the peso has gained against the dollar since March 2009. Yet it remians weaker today than in October 2008, when remittance flows were 42 percent higher.

Take a look at the 5-year and 2-year dollar-peso exchange rates:

Dollar-Peso2005-2010 Dollar-Peso2year

Something else must be at play.

The predominant cause of falling remittances is rising unemployment in the United States, which has had a disproportionate impact on migrants. As a sign of just how bad their situation has become, some unemployed Mexicans in the US are now dependent on receiving remittances from their families in Mexico.

Ironically, a weaker dollar may be exacly what migrants need, as it would stimulate American export growth, boost overall employment and, in all likelihood, result in increased remittance flows.

A weak dollar isn't the cause of declining remittances to Mexico, but it may be part of the solution.


Submitted by Sanket on
Dear Brian, I would disagree with the view that there is no relationship between exchange rate movements and remittances. For example, Mexico's remittance inflows jumped in October 2008 at the time when the Mexican peso depreciated. That “abnormal” jump was part of the reason why dollar-denominated remittances to Mexico declined by 36 percent in October 2009 on a year on year basis (see my post More importantly, the weaker peso is one of the reasons why Mexican migrants can afford to send less remittances—because they get more bang in pesos for the same buck! Indeed, remittances in peso terms actually increased slightly during January-November 2009 compared to the same period the previous year (contrary to what your blog post says). The weaker peso in 2009 compared to the average in 2008 has made it possible to maintain the purchasing power of remittances in pesos—at a time when dollar-denominated remittances have declined by more than 15 percent on a year-on-year basis. A weaker dollar/stronger peso, however, will make it more difficult for migrants to maintain purchasing power of the recipients in pesos when they send the same amount of dollar remittances. While continuing high unemployment rates in the US is part of the story, migrants and recipients do watch out for (and get affected by) exchange rate movements when they send and receive remittances. Regards, Sanket

Submitted by Brian Hoyt on
Dear Sanket, Thank you for your message. I also agree that there is an obvious relationship between exchange rates and remittances. A weaker peso/stronger dollar will allow dollar-earning migrants to send more pesos home, and vice-versa. Hence, the spike in October 2008, when the peso devalued precipitously. What doesn't seem clear is why exchange rates would influence the fall in remittances between October 2008 and October 2009. The average exchange rate in October 2008 was roughly 12 pesos per dollar (it jumped from 10.5 to 13.5 over October. See the chart on the right). Yet the average exchange rate for October 2009 is approximately 13.25. Thus the peso didn't significantly strengthen or weaken over this period. According to the Central Bank of Mexico, remittances in dollar terms in October 2008 were $2.636bn. In October 2009, remittances were $1.691bn. Since the the purchasing power of the dollar in peso terms hasn't changed, it seems unclear why exchange rates would influence this $1bn drop. Here's a link to remittance data (in dollars, and Spanish) from the Central Bank of Mexico§or=1&locale=es Cheers, Brian

Submitted by Sanket on
Dear Brian, Thanks for your follow-up. The reason for a seemingly large 36 percent fall in remittances to Mexico in October 2009--the largest ever on record--is an abnormal increase in the same month the previous year in October 2008, as migrants sought to take advantage of the weaker exchange rate in October 2008 (compared to previous months) to send more remittances. The higher "base" in October 2008 means that even though remittances have not fallen much on a month-on-month basis in recent months, they declined sharply on a year-on-year basis in October 2009. The fact that the peso was back at a similar level simply means that there were no *additional* incentive effects during that time. Hope that answers your question. Regards, Sanket

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