March 10, 2009 / 6:45 PM / 9 years ago

Weak Mexican peso aids factories in crisis

CIUDAD JUAREZ, Mexico, March 10 (Reuters) - Mexico’s sliding peso currency is a blessing for the country’s factories on the U.S. border, cutting labor costs and saving companies from collapse amid the global crisis, an industry leader says.

Mexico’s assembly-for-export factories, or maquiladoras, sell everything from car parts to computers to the United States. As demand plummets in the United States’ worst recession in decades, they have shed more than 70,000 jobs since last year and the sector expects exports to fall 1 percent this year after seven years of growth.

But because the factories are owned and operated by foreign firms with dollars who bring in much of their equipment from the United States and all their assembly, running and labor costs are in pesos, they win out because their dollars go much further in Mexico, given the devalued currency.

“The exchange rate is keeping the maquiladoras standing,” said Jorge Pedroza, director of the maquiladora association in Ciudad Juarez across from El Paso, Texas. “Labor costs are now 40 percent cheaper than a year ago” (in dollar terms), he told Reuters in a recent interview.

“Yes, some factories have closed and we have had layoffs, but it could have been so much worse,” Pedroza added, pointing to the 2001 U.S. downturn, when maquiladoras in Ciudad Juarez alone fired 100,000 workers. “Here in Ciudad Juarez 80 percent of the industry is auto assembly and the crisis has hit us very hard as it is,” Pedroza said.

Such is the drop in U.S. demand, particularly as new car sales tumble, that the weak peso is not helping Mexico’s wider economy, which is expected to enter into recession this year.

ASIAN COMPETITION

Maquiladoras, which generated more than $120 billion in income for Mexico in 2007, have also faced increasing competition from Asia as rising Mexican labor costs undercut competitiveness.

While labor costs are also rising in China, factory workers in Vietnam earn as little as $50 a month. Prior to the fall in the peso, a Mexican maquiladora worker was on average 2.5 times more expensive, according to Mexican government data.

Since August, the peso has lost more than a third of its value against the U.S. dollar as investors flee to safer assets amid the global economic crisis and as Mexico’s industrial output has fallen for eight consecutive months.

Mexico's finance ministry says the currency MXN= MEX01, trading at around 15.50 pesos per dollar, is undervalued considering the government's strong fiscal accounts.

The central bank is trying to defend the peso using daily dollar auctions and direct sales to traders, but few economists see it creeping back to beyond 14 per dollar by year-end.

Mexico’s 2,700 or so maquiladoras, which include plants operated by car parts maker Delphi Corp DPHIQ.PK and medical company Johnson & Johnson (JNJ.N), are also turning to international payment services, bypassing banks, to win better peso-dollar exchange rates.

One U.S.-based non-bank foreign exchange service, AFEX, says that by having dedicated traders and less bureaucracy than banks, they can offer more competitive rates, meaning more pesos for every dollar transaction to Mexico.

Editing by Kenneth Barry

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