Analysts agree that the federal government’s actions have a direct impact on the fundamentals of the national economy so that its actions have a direct effect on the exchange rate.
The Mexican peso has depreciated almost 50% against the dollar in the administration of Enrique Peña Nieto.
The analysts consulted by Forbes Mexico agree that the federal government’s actions have a direct impact on the fundamentals of the national economy, which has a direct effect on the exchange rate, especially through fiscal policy and Inflationary effects.
From December 1, 2012, when EPN took office, as of August 31, 2018, 3 days after its sixth government report, the dollar went from 12.93 to 19.13 pesos per unit, making it 47.88% higher.
Raymundo Tenorio, an economics analyst and associate professor at Tec de Monterrey, explained that fiscal policy has affected the exchange rate because “the policy that promotes a growing deficit makes the currency have pressures.”
Sergio Negrete, a former IMF official, and professor at ITESO, added that inflation had a direct impact on the exchange rate, because “if as a government you allow prices to advance, this, in the end, is reflected in the exchange rate”.
But this point could generate a vicious circle because, in turn, a depreciation of the exchange rate could generate inflationary pressures.
“That is why Banco de México has acted in the exchange market so that the exchange rate does not create second-degree pressures,” Negrete explained.
The exchange rate had remained more or less stable between 2010 and 2014, floating between 12 and 13 pesos per dollar.
But everything changed in 2014, when the price of oil began to decline, the effect of which extended until 2016. Only between August 2013 and January 2016, the Mexican export mix went from 100 to 23.9 dollars per barrel.
“But after oil came the ‘Trump factor’, which has had a lot of influence on the exchange rate. And of course, there are other factors, but the most important have been Trump and oil, “Negrete added.
Double effect on investments
Both analysts agreed that, to some extent, it is desirable that the exchange rate remains stable for investments to flow.
“If you as a foreign investor are going to invest in Mexico, you want the exchange rate to remain stable because if it depreciates too much, your income in dollars will go down. This could make it less attractive to invest in the country, “Tenorio said.
But not everything is negative in this area because “if the currency depreciates, investors can invest more money in the country,” exemplified Negrete.
Thus, direct foreign investment went from 26,528 million dollars between 2007 and 2011 to 32,343 between 2012 and 2017, although other factors, such as the opening of the oil sector, also explain the increase.
“The exchange rate damaged Peña a lot. People take into consideration two prices of the economy, the dollar, and gasoline. That the two have increased in their period explains much of the electoral rejection of the PRI in past elections, “said Negrete.
“The management was disastrous, seen from the exchange rate,” Tenorio added.
Source: Forbes Mx
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