Mexico’s external deficits increase but are manageable

Significance

Inflows of foreign direct investment (FDI) and remittances should nevertheless finance such deficits comfortably. The Bank of Mexico (Banxico) also holds a substantial stock of international reserves that it can use to assuage any sudden volatility if uncertainty hits the exchange rate.

Impacts

• The strong peso will weigh on exports and economic growth, while helping to reduce inflation through cheaper imports.
• The government has the legal right to determine the exchange rate regime, but is unlikely to modify the floating peso.
• The peso’s strength has not halted an increase in remittances, which should reach around USD58.8bn in 2022, up from USD51.6bn in 2021.