Mexico | How could the potential overvaluation of the peso affect the Mexican economy?

Summary

The significant appreciation of the Mexican peso over the past 12 months has supported domestic consumption and the performance of the services sector; however, it has also generated important pressures on export-oriented manufacturing and domestic suppliers operating with low profit margins.

Key points

• Key points:
• Mexico is not completely vulnerable to this appreciation due to several factors, most notably: its trade and financial integration with the United States, the momentum of nearshoring (which could strengthen further under a relatively successful renegotiation of the USMCA), the maquiladora structure of the economy and macroeconomic stability.
• Nevertheless, the literature on exchange-rate misalignments suggests that a sustained overvaluation could gradually deteriorate manufacturing investment (especially in a context of institutional weakening), limit the development of domestic supply chains and reduce the industrial depth of economic growth.
• Consequently, the main risk for Mexico is not an economic recession in the short run, but rather a pattern of growth increasingly driven by services and consumption, with decreasing strengthening of domestic productive capacity and lower medium-term growth in total factor productivity (TFP).

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