Surprised the peso has been devaluing?

After looking at the numbers on portfolio investment in Mexican money market instruments in the first six months of this year, you won't be. Foreign investment in money market instruments came to a barely discernible US$0.9 billion, down from US$10.8 billion in the first six months of 2014. Portfolio investment in money market instruments in each of the first two quarters of this year was the lowest it’s been in any quarter since 2009.

Any bets on what the numbers will look like for the third quarter?

A slow motion devaluation...

The following graph charts the average monthly exchange rate as well as the minimum and maximum rates in each month since January 2007. The picture speaks for itself...

What will it take to boost Mexico's growth rate?

Mexico's central bank, Banco de Mexico (Banxico) had something to say about that it in its most recent Quarterly Report on Inflation, released yesterday. Banxico's reduction in this year's projected growth to 1.7% - 2.5% (down from 2.0% - 3.0% three months ago) captured the headlines. But it's the final paragraph of its two page summary of the report that is what's really important. Roughly translated, Banxico's Governors warn:

"... Mexico must undertake additional efforts to strengthen its institutions and the rule of law since, for example, the lack of public security has negative effects on confidence, inhibits the efficient allocation of resources in the economy and complicates economic growth. To the extent that Mexico moves in this direction, it will be possible to detonate the economy's potential growth rate in a context of low inflation and financial stability." (underlining mine)

The drop in the peso...

The average monthly cost of a dollar has risen each month for over a year. In July 2014, the fix rate averaged $12.98. In the first six days of August of this year, it's averaged $16.24. That's a 20% jump in the cost of a dollar.

There hasn't been a panic, testimony to the effectiveness of a flexible exchange rate regime.

Some facts about income in Mexico...

The average Mexican household’s monthly income was just Ps$13’240 last year (US$995 at the average 2014 fix exchange rate). The average obscures wide disparities: the income of the bottom 10% of households averaged Ps$2’572 a month (US$193) while that of the top 10% averaged Ps$46’928 (US$3,527). 

Just over half – 51% -- of income went to the top fifth of households last year. The bottom 50% of households (deciles I – V) received just over a fifth (20.8%) of income. The sixth, seventh and eighth deciles received 28% of income.