Effect of Strong Peso on MX Tourism (and expats)

Excerpts from the Washington Post Business section on July 17, 2023.  


Soho House’s Arrival Signals Mexico City’s Moment
Analysis by Juan Pablo Spinetto | Bloomberg
July 17, 2023 at 6:21 a.m. EDT


Soho House, the trendy network of private clubs for the cool and prosperous, is coming to Mexico City. And while exclusivity is part of its appeal — maybe even the whole idea — the club’s Mexico City outpost will sorely test its value proposition.

Don’t get me wrong: I am sure Mexico City’s Soho House, its first to be located in Latin America, will be spectacular. It’s not scheduled to open until September, but I can report that it has a pretty edgy address, in a renovated baroque building in the historic neighborhood of Juárez.

The challenge for Mexico City’s Soho House is the same as for the Mexican economy as a whole: the seemingly unstoppable super peso. While it represents a vote of confidence in Mexico, it can also wreak havoc on sectors of the economy most exposed to international competition.  

Mexico’s currency, which has surged about 40% in the last several years, hugely increases the cost of Soho House membership in dollar terms. Of the club’s 40-plus locations worldwide, only the “Little Beach House” in Malibu, overlooking the Pacific Ocean, is more expensive.

Annual membership in Mexico City’s Soho House will cost 47,000 pesos, which translates to about $2,727 — slightly more than members pay in New York, and almost double what they shell out at the original Soho House in London. And this isn’t just an emerging-market premium: In Istanbul, the annual membership works out to $1,692.(1)

This isn’t Soho House’s fault: Sharp currency movements tend to produce these distortions, and they can be exacerbated by variations in local costs and customer demand. But there is anecdotal evidence that the peso is too strong. A Big Mac in Mexico City, for example, costs 89 pesos, which at current exchange rates is the equivalent of $5.27. That’s almost as much as the US price of $5.36 listed in this year’s Big Mac index, published by the Economist magazine, and means the peso is overvalued when adjusted for purchasing power.

Granted, the super peso has not yet had a big impact on the overall economy, which is expected to grow close to 3% again this year. Mexico’s exports go mainly to the US, so the currency-driven loss of competitiveness could take longer to become apparent.

But prices will adjust to the new exchange rate over the coming months, making Mexican exports more expensive compared to those of other countries, says Gabriela Siller, director of economic analysis at Grupo Financiero BASE in Monterrey. And the effect of the super peso is already apparent in industries such as tourism: International air arrivals grew just 1.1% in May compared to the previous year.

Despite its security crisis, less-than-steadfast commitment to rule of law and social problems, Mexico is becoming ever more integrated to the US economy, becoming its No. 1 supplier — and increasingly appealing to foreign investors. A recent survey put Mexico as the top destination for expats in 2023. Accelerating remittances flows (to the tune of almost $61 billion in the past 12 months) and faster-than-expected growth are also other sources of support.

As Goldman Sachs notes in a recent report, the peso can be increasingly overvalued and nonetheless remain “misvalued for substantial periods of time” given changes in global trading patterns. In a theoretical exercise, Goldman’s Teresa Alves used previous instances of peso mispricing to assess the current overvaluation and found that in a “moderate” misvalue scenario, the Mexican peso could reach 16.6 to the dollar, and in a more extreme scenario, it could trade as low as 15.1 — a level not seen in almost a decade.

If that comes to pass, a Soho House Mexico City membership may not look like such a bad deal after all. Of course, I would want to see it for myself, and ideally to compare its amenities to those of the Little Beach House in Malibu. I promise to report back.

I don't know about Soho House but I do fear that the Mexican exports and tourism is going to take a big hit if the peso remains where it is at or even stronger. The only good it can have on the domestic population is when they travel abroad or if the retail price of imports drops.

I've noticed more MLS house listings here are now being priced in pesos, not USD.