The Dallas Regional Chamber along with our partners TechAmerica and The University of North Texas are hosting the U.S./Mexico Technology Summit September 30th (with an inaugural dinner on September 29), a forum that will focus on a bilateral partnership that drives innovation and increases economic prosperity in on either side of the U.S./Mexico border.
Today we would like to offer our readership a guest blog from our dinner keynote speaker and participant in the forum, Roberto G. Newell.
Newell is the CEO of the Mexican Institute for Competitiveness, AC, a privately sponsored, independent think tank in Mexico City whose mandate is to analyze and propose policies that will enhance Mexico’s competitiveness in the global economy. During 2003 he served as deputy secretary for agribusiness in Mexico’s federal government. Previously he served in the same administration as CEO of the Fideicomiso de las Empresas Expropiadas del Sector Azucarero. From 1984 to 2001, Newell worked for McKinsey & Company, retiring as director. At McKinsey he served clients in Mexico, the United States, Venezuela, Colombia, Peru, Ecuador, Argentina, Spain, Jamaica, Puerto Rico, and the Dominican Republic. He is the author of two books and has published many articles in journals and international professional publications. He currently writes weekly for the Reforma journal. Roberto earned a bachelor’s and master’s degree from Universidad de las Americas in Mexico and a PhD in economics from the University of Texas at Austin.
The points of view in this column are personal. These are not to be viewed as the position of or opinions of the Dallas Regional Chamber or its staff.
Liberal conviction
Peso Crisis
May 13, 2010
The crisis has been discussed by many analysts. What has drawn most of the attention is the impact it has had on economic growth, trade flows and employment. However, it has triggered other important events. One of them, which has not been discussed enough, is the impact on the commercial terms of trade.
Most analysts use the September 17, 2008 to mark the beginning of the financial crisis. That was the day that the U.S. Treasury intervened Lehman Brothers. Since then, everything changed.
In those days, one dollar bought 0.70 Euros, 6.83 Yuan and 10.69 Pesos. Those were the days of the super-Peso. The country’s currency was revalued on a sustained basis, compounding the problems of competitiveness for exporting companies and exposing thousands of local companies to the challenge of a hyper-competitive offer from China and other countries. All this has changed.
As can be seen in the table below, the crisis transformed trade terms dramatically. Today, the exchange rate helps competitively Mexican exporters and imported goods that reach the country are more expensive, no matter where they come from. The crisis gave a huge competitive edge to all companies which produce locally.
| Depreciation/appreciation post-Crisis(Period: 17/09/08 a 10/05/10) |
|
|
| |
Dollar |
Euro |
Yuan |
Peso |
| Dollar |
0 |
9.7% |
-0.14% |
16.9% |
| Euro |
-8.8% |
0 |
-9.0% |
6.6% |
| Yuan |
0.1% |
9.8% |
0 |
17.0% |
| Peso |
-14.4% |
-6.2% |
-14.6% |
0 |
| |
|
|
|
|
Source: International Financial Statistics, IMF.
Mexico has gained competitiveness compared with producers around the world, including China. With respect to these, the crisis improved the country’s competitiveness more than 14%. For companies that produce locally competitive improvement was even more significant: from their perspective, the effect was to make 17% more expensive the imports from China. In one stroke, the crisis caused thousands of companies to recover part of the competitive costs they had lost.
I highly doubt the peso will significantly rise its value in the years to come. Three of the major sources of revenue have lost its momentum: oil production is collapsing, remittances have dropped to reflect the employment situation of Mexicans living in the United States, and consumption of American families is depressed and will possibly not regain its pre-crisis level.
But come what may, the purpose of companies operating in Mexico must be to avoid losing the competitive edge afforded by the current exchange rate. To achieve this, is essential to improve the productivity of all factors used in production. Yes, it can be done: Over recent years, companies in the country have improved its energy productivity, today they consume less energy per unit produced than in 2000. Thus, despite the energy consumed in Mexico is more expensive,this has not affected the competitiveness of most businesses. In contrast, during the same period, the unit costs of labor progressed more quickly than import prices and labor productivity. The last one has been stagnant for years. Urgent actions are required on this front: Labour productivity is the Achilles heel of Mexican companies.
In any case, we are in a unique situation. Historically, the depreciation of the peso have been the result of errors in the management of fiscal and monetary aggregates in the country. This time, the depreciation of the peso is not directly attributable to the government or central bank. The peso lost value even when in general terms no mistakes were made in managing the macro-economy.
It is likely that the current level of the exchange rate reflects the market opinion regarding the general competitive situation in the country. The exchange rate reflects the fact that we are gradually healing of the disease in the Netherlands that kept the peso artificially strong. Today, neither the oil market, or remittances of migrants provide the financial cushion upon which rested the previous terms of trade.
In the absence of these factors, the current exchange rate seems realistic and up wind to the intrinsic conditions to generate foreign exchange in Mexico. The current exchange rate seems more sustainable than it was before the Crisis. The depreciation of the peso partly restored the competitiveness of the real sectors of the economy.
The forces of supply and demand cast their vote. Will the business and public officials know how to take advantage of the new terms of trade?
