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News Article

Remittances Soar but May Drop Presently

By Alejandro Ehrenberg | Thu, 05/28/2020 - 16:59

Out of the 57 million people of Mexican origin that live in the United States, 11.2 million send money to relatives in Mexico, according to the think tank Pew Research Center. As noted by El Economista, remittances are Mexico’s top source of foreign currency after automobile industry exports and provide crucial financial support to roughly 10 million people in Mexico. Thus, the 35.8 percent year-on-year increase in remittances that Mexico experienced this March came as a very welcome surprise amid the current COVID-19-fueled economic turmoil.

The surge defied forecasts by analysts who expected a major drop in remittances. Researchers at BBVA were quoted by El Economista saying that “remittances can decrease by more than 21 percent in 2020 and 2021. They may contract by 17 percent just this year.” It would be rash to completely discard the possibility of an upcoming major decrease based only on March figures: one swallow does not a summer make. Nevertheless, understanding the reasons behind March’s strong performance may throw light on the behavior of a major source of financial stability for Mexico.

Araby Smyth, a researcher at the University of Kentucky, has posited a threefold explanation. First, she points out, immigrant workers are disproportionally employed in industries that have been defined as essential. It is worth clarifying that most of the 11.2 million workers of Mexican origin that send money to Mexico were born in that country, as opposed to only being of Mexican descent. Therefore, a large number of Mexican immigrants have kept laboring and supporting their relatives back home. To this point, Smyth comments: “With all the talk of the US economy being closed, certain sectors are still going strong. Mexican immigrants are more likely than other workers to be employed in the construction, maintenance, service and production industries. These are all essential sectors of the pandemic economy, though many pay barely above minimum wage.”

The second reason Smyth argues is behind remittances soaring in March is the poor performance of the Mexican peso against the US dollar. That month, the peso lost 17 percent of its dollar value. Smyth notes that “migrants took advantage of favorable exchange rates before the economy began closing to maximize their families’ purchasing power.” An article published in Al Jazeera puts forward a quote by Barclays researchers that supports Smyth’s thesis: "Mexicans are taking advantage of the cheap peso to send some savings back home. They are rushing to secure the savings before they need to go back to Mexico due to more labor risks and unemployment amid the pandemic, as well as potential deportation."

Finally, Smyth posits that Mexico’s own shutdown-related woes may have pushed workers in the US to send more money than usual to their relatives back home. The income of most people in Mexico depends on informal and precarious occupations closely related to the more affluent sectors of the economy. When the latter were forced to shut down or to practice home office due to the pandemic, the former saw incomes disappear. Imagine a street food vendor outside of an office building in Mexico City: the sudden vanishing of office workers effectively translates into no customers. “Remittance senders have always felt obligated to their loved ones back home,” says Smyth. “It is likely such feelings of care and responsibility would only increase in a crisis such as COVID-19.”

It is not unreasonable to think that remittances from the US to Mexico will remain strong in the coming months. After all, Mexicans working in the US are not likely to switch their jobs in California’s agribusinesses for home-office-eligible positions as traders in Wall Street any time soon. Moreover, familial obligations tend to become stronger in times of crisis, and analysts expect the Mexican peso to remain low in comparison to the US dollar. Nevertheless, mounting unemployment coupled with harsher immigration policies ahead of the Trump vs Biden contest in November might make it harder for Mexicans in the US to keep remittances afloat.

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Alejandro Ehrenberg Alejandro Ehrenberg Journalist and Industry Analyst