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How Exporters Can Battle Against a Strengthened Peso

By Francisco Murguía - Frutos Guadalajara

General Director

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As we entered the first quarter of 2023, our news feeds were flooded with the historic news that the Mexican peso had crossed the famous threshold of 18 pesos per US dollar. The appreciation of the national currency was a source of pride in political discourse, and good for inflation indices, and a significant portion of the importing sector. The Mexican peso is one of the most traded currencies in international markets, with an approximate daily trading volume of US$114 billion, of which 82% occurs outside of Mexico. On the other hand, worthy of the complexity that characterizes an open economy like Mexico's, what may be good news for some, for others would signify the announcement of a significant challenge, especially for the sector that represents 40.36% of the national aggregate demand: exporters.

The so-called "super-peso" dealt a blow to the competitiveness of a large number of exporting companies that earn in dollars and spend in pesos, particularly in agriculture and mining. According to data published by the National Institute of Statistics and Geography (INEGI), agricultural and fisheries exports in the seventh month of the current year were US 1.326 billion dollars, compared to US $1.41 billion in 2022.

Exporters in highly competitive markets with narrow profit margins may face reduced competitiveness if their currency strengthens compared to countries with weaker currencies against the US dollar. This is particularly true in the agriculture industry, where most players are from developing countries. As a result, transactions may decrease. According to Foreign Trade data from July 2023, there was a trade deficit of US$881.2 million, with US$47.5504 billion in exports and US$48.4316 billion USD in imports.

As an entrepreneur operating in the agricultural sector, one of the most vulnerable industries to climatic changes, I have come to recognize the importance of financial planning and management. As a lawyer and accountant by profession, I understand that these tools are crucial in situations beyond our control, such as currency fluctuations. For businesses operating in highly competitive markets with narrow profit margins, optimal financial planning is essential, as even a single dollar can make the difference between success and failure. Hence, I would like to share some concepts to consider while devising a flexible financial plan.

Hedging or Coverage: A financial operation that aims to reduce or eliminate potential transaction losses. It is a risky activity that requires a deep understanding of the market. Financial derivatives, similar to insurance contracts, are often used to conduct these transactions. They allow a specific exchange rate to be fixed for future transactions and can be conducted on the market or between private parties.

Market Diversification: When it comes to exporting, it's not the best vision to rely on a single market. Doing so can limit your flexibility to adjust to changes in currency. Instead, it's important to diversify your export destinations. For example, if the peso's value goes up compared to the dollar, you can make up for that loss of income by exporting to countries with stronger currencies.

Negotiation with Suppliers and Business Partners: To effectively navigate market changes, it's crucial to have an honest and open conversation with everyone involved in the value chain. This means finding solutions that benefit all parties.

Technological Agility: To compete successfully in global markets, it is essential to have a quick and effective way to communicate with financial institutions. This helps prevent and manage currency fluctuations by anticipating future scenarios.

Understanding and implementing the proposed strategies is crucial to succeed in today's global market. Each of the four proposed points requires a high level of knowledge, professionalism, and careful consideration of associated costs. It's essential to tailor each strategy to a company's specific situation and take into account the market conditions at that time. Financial experts should guide the process based on a detailed case analysis.

In addition to financial planning and strategies, effectively managing resources from inputs to human resources is a must. Adopting new technologies, efficient and sustainable practices, and optimizing the supply chain are all critical to staying competitive. However, these initial expenses can be challenging, making financing options vital.

Today's international context demands restructuring with a focus on efficiency for all market participants. Exporters face a range of challenges, including loss of competitiveness, the need for innovative business models to mitigate risks, and fluctuations in the exchange rate. Despite these obstacles, implementing innovative business practices and pursuing opportunities in new markets is key to success. Ultimately, adaptability and resilience are crucial to face these challenges and achieve long-term success.

We can conclude that a financial strategy to mitigate currency fluctuations will require the comprehensive cooperation of all areas involved within the organizational structure of the exporting company.

However, due to the share exporters represent within the national GDP, financial rigor is a duty. This enables them to access tools and financial means that contribute to and incentivize operational efficiency and contingency preparedness. These recent years have brought us surprises, but if we review international economic history, we will realize that no period has been exempt from drastic market changes. Therefore, we must be prepared for any fluctuation, and the most powerful tools we have, without a doubt, lie within the financial area.