Peso Devaluation Spurs Many Mexican Firms to “Act Now”

Mexico's peso devaluation is having a mix of good and bad effects on businesses of all sizes as they prepare for the currency's continued free-fall.

Mexico peso devaluation

Regardless of how you look at it, Trump’s heavy handed approach to NAFTA was always going to result in economic turbulence for Mexico, however short-term it may be.

The country’s currency took an expected hit in value when Trump took office, dropping almost 13% against the dollar after election day – an all-time low for the peso.

U.S. companies have already publicly announced how this will affect them, with Meg Whitman, CEO of Hewlett Packard Enterprise, highlighting the negative aspects of the stronger dollar.

“When the dollar is strong, our goods are more expensive overseas…let’s say someone in Europe was going to buy 1,000 servers, now maybe they’d only buy 800 because the dollar is so strong…we’ve got to manage this to get our cost structure in line,” said Whitman during an interview with CNBC.

On the other hand, Delta Airlines is reportedly using the opportunity to buy up more shares in Aeroméxico while the going rate is cheaper, ramping up its meager 4.2% stake to over 36%.

But it’s not just US companies who experiencing a variety of potential outcomes from the weak peso.

Emcor Software, a Mexican development company that claims to have distributed its products to more than 15,000 customers in 19 countries, is expecting to reap the rewards of the declining currency.

martha mendoza
Martha Mendoza, Key Account Executive at Emcor Software

“We are trying to get more business with our nearshore services in the U.S., since there is a greater benefit than having domestic clients,” said Martha Mendoza, Key Account Executive at the company.

“Even though the costs of infrastructure, equipment, and other factors here in Mexico increased with the inflation, we will still be seeing an increase in our income by focusing on the U.S. market,” she continued.

Mendoza further stressed that Emcor will use the profits gained from the peso devaluation to expand its business in the U.S. and invest more into human capital and capacity.

Angel Sanchez, Founder of Arkusnexus, a software development firm with offices in both Tijuana and San Diego, has a slightly different outlook, explaining his concern for the company’s Mexican employees.

Angel Sanchez, Founder of Arkusnexus

“When your highest outgoing cost is your payroll, this isn’t the best situation,” he said. “We don’t sell a product, so it’s painful every time the peso loses value against any other currency in the world, as we have to raise our payroll to ensure our people can retain their quality of life. It’s not a direct benefit for us, but if you are a larger software company selling products to the US, then I can see why it would be.”

Sanchez clarified that SMEs ted to struggle more than huge corporations when the economy experiences any negative effects, so it’s vital to take the necessary precautions to avoid difficult fallout when this happens.

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Rafael Cortes, Customer Success Director at ScreenIT, a human resources firm in Mexico explained some of the precautions his company is taking, as well as the benefits he has seen.

Rafael Cortes, Customer Success Director at ScreenIT

“On a natural scale, the devaluation will be good for firms or companies whose currency is the U.S. dollar,” he said. “However, we do not bet on that, because there is a certain level where it can become worse. While we will continue to focus on the U.S. market, we are now looking closer at Canada due to its economic similarity to the U.S. and the fact that they like Mexican services. We regularly set our structured costs based on the value of the peso, so this devaluation has really helped us.”

Regarding the cost of talent, Cortes confirmed that the staff sourced by his company gets paid in pesos, so doesn’t expect it to increase. The profits that ScreenIT expects to make be folded back into its sourcing area and its promotional marketing budget.

“We see clients expectantly waiting to see what outcome the political climate in America will produce, but haven’t seen any slowdown in contracts,” he said. “They’re still chasing the high added value that nearshore vendors can provide, regardless of what is happening in the U.S. Mexico has a very entrenched relationship with the United States, so a logical and cordial eventuality has to take place.”

Looking ahead, Alfredo Coutiño, Moody’s Analytics’ Director for Latin America, has told Forbes that the peso’s depreciation will continue, and expects it to drop to around 23 pesos per dollar by the end of 2017.

So, with smaller vendors preparing for damage, and experts predicting an ongoing free-fall, the time to plan for negative outcomes is now, but be aware that profitable opportunities are there for the taking, providing your company is large enough to capitalize on them.

AMENDMENT – February 17, 2017: The previous version of this article incorrectly stated that Emcor Software had more than 15,000 clients in 19 countries. The correct statement is that Emcor claims to have distributed its products to more than 15,000 customers in 19 countries. This has been appended to the relevant paragraph. 

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