In today’s globalized world, the economies of many countries are vastly interconnected. Currently, what happens in the economy of one country, for sure will have a direct effect on the economy of the trading partners and neighbors of that country. The U.S. and Mexico are a clear example of that. Our economies are strongly linked and the Mexican economy is still substantially dependent on the U.S. economy. This is one of the reasons why there is a word that in the U.S. and Europe is causing nervousness right now, but in Mexico is causing panic. That word is “recession”. In the last 40 years, Mexico suffered two major economic collapses: one in 1982 and the second in 1994. It took the Mexican economy almost ten years to recover from each one of those slumps. Even though today our economy is more consolidated and diversified, Mexico is still an emerging economy and a recession can still easily evolve in what we Mexicans call “economic crisis”.
So being a foreigner living in Mexico and having my source of income abroad, how can I be affected by a bad Mexican economy?
The first sign that Mexico is entering into an economic crisis is a major increase in the price if the U.S. dollar against the Mexican peso. You might think that this increase works in your benefit because you will be getting more pesos for your dollar, but this is a temporary effect. The expensive dollar triggers a chain reaction in that will affect practically all fields of the Mexican economy. For example: Mexico imports from the U.S. about 50% of the gasoline that is sold here. This will mean that eventually, the price of gasoline will rise considerably here. Having expensive gasoline will generate an increase in the prices of many products in Mexico and this will create inflation, which means that eventually, you will also be paying a higher price for things here in Mexico.
And how can an economic crisis in Mexico affect my property in Puerto Vallarta?
Commercially your property here in Puerto Vallarta is priced in U.S. dollars, so you might think that a weaker peso is not going to affect your property, right? Well, this might be the case … until you sell. For the Mexican government, the value that is used to calculate the capital gains tax is the price you paid in pesos when you bought and the price you receive in pesos when you sell. So let’s say that you bought your property for USD$200,000.00 back in 2011 when the exchange rate was around MXN$12.00 pesos for USD$1.00. By selling your property right now at exactly the same price in dollars, you might think that there is no capital gains, but in pesos, the sales price is much higher because of the current exchange rate (about MXN$19.00 pesos per U.S. dollar). This means that for the Mexican government you are indeed getting capital gains for which you will have to pay the corresponding tax. So bottom line, an expensive dollar will make you lose money when you sell your property here in Mexico.
The economic forecast does not look very promising for Mexico in the following months. Aside from the international threat of a recession, we have other external factors (such tariffs imposed on Mexican products by the U.S. president), and internal factors (such as the bad economic policies of our incompetent president and an economic growth of practically 0% in the past months) that might affect our currency and generate a devaluation of the Mexican peso. Mexicans of my generation and older, we have lived through bad economic times in Mexico. The younger generation of Mexicans have not, and they might have to learn that the hard way. In terms of the Mexican economy, my generation has learned to read the signs, expect the best and prepare for the worst.