Economics: Manufacturing exports face complicated prospects with a strong MX peso and a stalling economy

MEXICO - Report 21 Feb 2023 by Mauricio González and Francisco González

The peso has performed strongly since last July, rallying almost 23% from its weakest pandemic level to an average 18.7/USD pesos in the first half of February. While the government has claimed credit for this relative strengthening and tried to position the currency as an indicator of economic strength and confidence in Mexico, key sectors of the economy are expected to stall or contract this year, nor is there any expectation of the sort of significant upturn in gross fixed investment needed to break out of the historical lows of recent years.

It isn’t difficult to discern the reasons for this firming of the peso. Remittance inflows have continued to scale new record highs, and a resurgent tourism trade remains a major source of foreign currencies. However, the main catalyst of peso appreciation since 2022 has been the historically wide monetary policy rate differential between Mexico and the US.

Non oil exports have represented a source of foreign currency in the private market, together with FDI attracted by the nearshoring trend that has been increasingly evident since the end of 2020. But we expect manufacturing exports to suffer from a US slowdown/recession, a problem exacerbated by the prospect that the peso may retain its current strength throughout 2023.

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