Mexico’s peso wrapped up 2023 with an exceptional performance, experiencing its highest gain in decades. This impressive growth can be attributed to various factors, including high interest rates, a surge in remittances from the U.S., robust foreign direct investment, and substantial revenue from exports.
Closing at 16.97 to the U.S. dollar on Friday, the peso’s value stood in stark contrast to the previous year’s rate of 19.47. According to Banco Base’s Director of Analysis Gabriela Siller, this marks the most significant annual increase in percentage terms since the currency transitioned to a floating exchange rate system in the mid-1990s.
Among the major world currencies, only the Colombian peso outperformed the Mexican currency, achieving a growth of approximately 20% last year.
Looking ahead, the Mexican peso is expected to continue benefiting from strong exports and remittances in 2024. However, there may be some pressure on the currency if the Bank of Mexico decides to reduce interest rates in the first quarter and the Federal Reserve chooses to postpone easing until the second quarter, cautions Siller.
Since March, the Bank of Mexico has maintained its overnight interest-rate target at 11.25%. Nevertheless, as inflation has steadily declined from its peak in autumn 2022, it is widely anticipated that the central bank will commence rate cuts within the first quarter.
Mexican Peso Faces Risks, but Nearshoring Provides Strength
While experts worry about risks to the peso due to next year’s widening fiscal deficit during an election year, there is a potential source of strength in the form of capital inflows associated with nearshoring. Nearshoring refers to companies expanding or moving their production closer to the United States.
According to Jorge Amato, the head of Latin America investment strategy at Citi Global Wealth Investments, the peso’s fair value would be around the 19.00 area. However, he acknowledges that strong nearshoring flows may keep the currency relatively overvalued for an extended period of time.
Strong Performance in Local Stocks
In addition to the peso’s situation, local stocks had a solid year in 2023. The benchmark IPC index closed the year at 57386 points, just 359 points away from its all-time high of 57745 on December 26th. This represents a nominal gain of 18%.
Among the top-performing stocks were industrial and retail conglomerate Grupo Carso, which more than doubled in price, and cement maker Cemex, which ended the year with a 68% gain. However, some market heavyweights experienced underperformance, including telecom concern America Movil with an 11% decline, and retail leader Wal-Mart de Mexico with a modest 4.3% increase.
These developments provide a snapshot of Mexico’s economic landscape, offering insight into both the challenges and opportunities that lie ahead.
