War on drugs
Mexico has hit the headlines in recent days. The capture of the infamous drug lord, Joaquin Guzman, more commonly known as ‘El Chapo’ (Spanish for ‘Shorty’ due to his height), after six months evading law enforcement propelled the country to the top of the global news. The Latin American drug trade is often sensationalised, and notorious Colombian drug lord Pablo Escobar was made the subject of Netflix series ‘Narcos’. Similarly, El Chapo ignited imaginations, and his capture became the sensational final act of an oft-romanticised criminal enterprise. Though the capture of El Chapo has brought Mexico to attention, it has simply eclipsed Mexico’s underlying issues- primarily economic problems. The Mexican currency, the peso has for over a month been in free-fall, and the Latin American nation now teeters precariously on the edge of a financial cliff.
Economic woes
The ongoing issues with the narcotics industry in Mexico are symptomatic of the country’s economic and social problems. Mexico is estimated to have a poverty rate of 53.2%, and involvement in the drug trade may seem an attractive prospect to many, in an attempt to improve their circumstances. This may be a fruitful venture, with Mexico’s drug trade contributing 4% to the country’s GDP. The peso, has already weakened by four points in 2016, reaching an historical nadir of 18 pesos to the US dollar.
Currency wars
The Mexican government blames external forces on the collapse of its currency. Perhaps bizarrely, concerns over the performance of the Chinese economy, in addition to oil price uncertainty, have converged to drive the peso to historic lows. A weak performance in China’s services sector created economic shock-waves which have lapped at Mexico’s shores. In a stern, though no doubt inconsequential warning to the Asian economic giant, Mexico’s government warned of the risk of triggering ‘perverse currency wars’. Mexico’s finance minister, Luios Videgaray, voiced worries that as China’s economy continued to decelerate, what he termed ‘competitive devaluations’ would begin to take place. This would have the potential to cause untold economic chaos in Mexico.
The peso is what is termed a free-floating currency, meaning its exchange rate is subject to the mechanisms of the foreign exchange market. If currency devaluations rise due to competition between larger economies, Mexico may see itself upon the horns of a dilemma. The country’s central bank has already begun to sell off dollars in an attempt to stabilise the peso, to no avail. Mexico may be powerless in the relentless struggle between China and the world’s economies, and its people could suffer for it.
