By Francisco Peyret
We Mexicans are not used to seeing the peso’s behavior in appreciation mode. Throughout the last century and so far this century, we have had a long history of devaluations and financial misfortunes. In fact, since 1970, the change of president of the Republic has been accompanied by a devaluation. But to our surprise, the Mexican peso appreciated a little more than 5% in 2022 and has reached around 19 pesos per dollar so far in 2023. There is talk of a super peso! Some see this as a sign of the federal government’s economic success, but others take a different view.
In Mexico there is often confusion between the terms devaluation and depreciation. This is because the government has traditionally controlled the exchange rate. According to Carlos Alberto Gómez, «In a strict sense, devaluation should be understood as a deliberate decision by the monetary authorities to increase the exchange rate, which in turn is possible as long as a fixed exchange rate system operates. A depreciation, on the other hand, occurs when the exchange rate increases as a consequence of an increase in the demand for foreign currency (and which also manifests itself immediately), which usually occurs when the exchange rate policy is flexible.»
Having explained this, we can now understand why in Mexico, with an exchange rate controlled by the government, every change of government we experience such abrupt economic situations. Today, with a more flexible exchange rate policy, we are facing a surprising appreciation of the Mexican peso.
An appreciation of the exchange rate has advantages and disadvantages. The point is that the overall performance of the economy cannot be evaluated solely on the basis of the behavior of the exchange rate. Exchange rate stability or appreciation is compatible with a good or bad performance of the national economy. Today some analysts argue that the appreciation affects exports and tourism with an expensive peso, but current trends are not proving this to be true, since exports and tourism are recovering pre-pandemic levels.
During the 20th century, Mexicans learned to relate the performance of the national economy to the exchange rate, which is why we are somehow obsessed with the exchange rate, and with good reason. The economic downturns related to the great devaluations prove us right; the Mexican economy cannot forget years like 1982 and 1994.
Taking a brief historical tour we go to the first great devaluation of the Mexican peso in the 20th century. It was with Porfirio Diaz when for the first time the peso went from one peso per dollar to two pesos, the reasons for this were related to the balance of trade, basically a balance between imports and exports. These arguments remained constant in the subsequent devaluations until 1976.
One of the most memorable devaluations was that of 1976 under President Luis Echeverría, when the peso went from 12.50 to 20 pesos per dollar, an adjustment that marked the end of an era of post World War II economic stability called stabilizing development. Another unforgettable devaluation for Mexicans was that of 1982, when López Portillo blew up public finances, thinking that we were going to swim in oil forever, and the peso was devalued to 70 pesos per dollar.
By the 1980s, even when very harsh budgetary austerity measures were applied, the peso reached 2,300 pesos to the dollar by the end of Miguel de la Madrid’s administration in 1988. On June 22, 1992, the government decided to remove three zeros from the currency denomination, and by 1994 the devaluation reached 7.80 pesos to the dollar—of course without the corresponding minus three zeros. So we can thus determine the dimensions of the Mexican economy’s stumbling blocks.
It is much more complex these days to measure the performance of an economy. Not everything is about the exchange rate. We must be attentive to the recovery of the economy in other dimensions: exports, imports, tourism, energy prices, commodities, and the way in which foreign direct investment is currently moving.
