Mexican Q1 economic data: a reality shock, or there is still a brighter outlook?

Transcription

1 Mexican Q1 economic data: a reality shock, or there is still a brighter outlook? Rafael Amiel, Director Latin America Economics IHS Global Insight Julio 2013

2 Mexico becomes fashionable again Mexico Makes It (Foreign Affairs, March- April 2013) How Mexico Got Back in the Game (New York Times, Jan 2013) Mexico: Aztec Tiger (Financial Times, Feb 2013)

3 Mexico becomes fashionable again? Mexico: GDP Growth (Percent) (1.3) (0.3) (5.7) Q2 08-Q4 09-Q2 09-Q4 10-Q2 10-Q4 11-Q2 11-Q4 12-Q2 12-Q4 13-Q2 13-Q quarter on quarter (left scale) annualized (right scale)

4 percent Cost of funding for emerging is still very low 24 Interest rates 10-year bonds EMBIG Latam Peru Brazil Mexico Colombia 3 0 4

5 Short-term capital inflows skyrocket 80 Net portfolio investment USD billions Mexico Brazil 5

6 Short-term capital inflows skyrocket (2) Peso denominated debt in the hands of foreigners (USD billions) Q Q Q Q Q Q Q Q Q Q Q Q Q Q4 6

7 FDI not as much 70 Foreign Direct Investment USD billions Mexico Brazil 7

8 Weaker peso makes Mexico more competitive compared to China 2.5 Mexican peso depreciates Mexican pesos per Chinese yuan remimbi PPP 8

9 Weaker peso makes Mexico more competitive compared to China 2.5 Mexican peso depreciates 2 54 % Mexican pesos per Chinese yuan remimbi PPP 9

10 PEMEX investment grew 50% in PEMEX INVESTMENT Billions of US dollars AVG 20.8 Billion AVG 13.9 Billion 10

11 Labor costs in Mexico became more competitive Minimum wages USD/month Brazil Mexico Argentina Chile Colombia Peru China 1 China 2 India Russia 11

12 Mexico fundamentals and risks

13 Outlook is Positive but Downside Risks are Plentiful Global Synchronized business cycle with U.S. Good contagion and bad contagion Eurozone Recession Harder Chinese Landing Oil Price Rise Fiscal Uncertainty in the US Domestic Oil dependence: running out of time New administration: will reforms happen or same old Security and operational risk keep rising

14 Mexico: high quality policy framework increases resilience to external shocks Credible inflation targeting regime A flexible exchange rate regime External sector, the bright side of Mexico Financial system: well capitalized with relatively good asset quality and no bubbles Public finances: still look good but action is required Public debt: relatively low and manageable in the short and medium-term Domestic market moving up slowly, but moving up. Labor market, not too bright

15 Industrial Production: Two Tales, Mexico loses momentum Industrial Production - Seasonally Adjusted (Jan 2003=100) Apr-03 Mar-04 Jan-05 Dec-05 Dec-06 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11 Jun-12 May-13 Mexico Brazil

16 Mexican Consumer: Slowly but Sustained Recovery in Confidence Consumer Confidence (January 2003= 100) Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13 Mexico USA

17 Mexican Consumer: Slowly but Sustained Recovery in Confidence Consumer Confidence (January 2003= 100) Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13 non seasonally adjusted Seasonally adjusted

18 sales are hurting since December Retail Sales Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13 % Growth y/y, nsa (right scale) Seasonally adjusted, 2003=100

19 The labor market

20 Formal Employment Recovers in Mexico: Formal Employment (Insured Workers at IMSS) Jan-00 Dec-00 Dec-01 Nov-02 Nov-03 Oct-04 Oct-05 Sep-06 Sep-07 Aug-08 Aug-09 Jul-10 Jul-11 Jun-12 Jun-13 Net Job Creation per Year (right scale) Permanent Total

21 Unemployment: Still Above Pre-crisis Level Unemployment Rate (Percent of Labor Force) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

22 Unemployment: a more optimist view 7 Unemployment rate Jan-09 May-09 Sep-09 Feb-10 Jun-10 Nov-10 Mar-11 Aug-11 Dec-11 Apr-12 Sep-12 Jan-13 Jun-13

23 Investment is key

24 Producers Are Bullish on Mexico s S-T Outlook Purchasing Managers' Index (Index, over 50 indicates expansion) Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Mexico Brazil

25 2003-Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q1 as percent of GDP At 20% of GDP, investment cannot sustain a very fast pace 50% Investment 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Mexico China India Brazil

26 Machinery and Equipment Drives Growth in Investment Q = 100; 4Q moving average Fixed Investment Total Construction Machinery and Equipment

27 The bright side of Mexico: external accounts

28 External Accounts: The Bright Side Foreign Exchange Reserves ( Billions of U.S. Dollars) 180 Lost USD1.5 billion from all time peak in May Feb-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Mar-11 Dec-11 Sep-12 Jun-13

29 External Deficit Entirely Financed by (net) FDI External Financing (Billions of U.S. dollars) Current account deficit FDI

30 Exchange Rate: Another Overshooting, Another Correction Exchange Rate (MXN Pesos per USD) Jun-13 Nov-12 Mar-12 Aug-11 Dec-10 May-10 Sep-09 Feb-09 Jul-08 Nov-07 Apr-07 Aug-06 Jan-06 Jun-05 Nominal PPP Bilateral

31 Exchange Rate: Volatility is the norm Recent depreciation - local currency versus US dollar (30-April 2013 =100) /1/13 5/7/13 5/13/13 5/19/13 5/25/13 5/31/13 6/6/13 6/12/13 6/18/13 6/24/13 6/30/13 7/6/13 7/12/13 7/18/13 Colombia Brazil Mexico Chile Uruguay Peru Argentina

32 Monetary policy and inflation

33 Monetary Policy Interest Rates: Mexico vs. USA (Percent) Dec-03 Feb-05 Apr-06 Jun-07 Sep-08 Nov-09 Jan-11 Apr-12 Jun-13 US 4-week T Bills Mexico Cetes28

34 Inflation Is Not a Threat, but may Tie Hands of Central Bank Mexico Consumer Prices (Percent change from a year earlier) Nov-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Sep-12 Jun-13 Administered Prices CPI

35 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Good News on the Credit Side Business recovers in April and May Credit to the Private Sector (Billions of Pesos at May 2013 Prices) Businesses (left axis) Consumption Housing

36 Oil dependency and fiscal accounts

37 Dependence on Oil: Output Stabilizes Momentarily Oil Output (Millions of barrels per day) Jan-01 Feb-02 Apr-03 May-04 Jul-05 Aug-06 Oct-07 Nov-08 Jan-10 Feb-11 Apr-12 May-13

38 Manageable Fiscal Deficit; but Reforms are Needed Fiscal Balance (As percent of GDP) Overall Balance Excludes Pemex Investment

39 Milking the Cow of PEMEX PEMEX: Financial Results (US$ millions) Total Sales 104,451 98,162 80, , , , Domestic -- Exports 54,485 50,210 44,125 54,102 62,628 65,812 49,855 47,600 36,126 46,907 62,644 59,264 Net Income before taxes and contributions to the government 60,753 48,923 33,441 48, ,784 Taxes and contributions to the government Net Income (loss) 62,234 57,001 40,445 51,752 70,301 68,590 (1,484) (8,078) (7,004) (3,681) (8,594)

40 End of Subsidies: Short-Term Palliative

41 Manageable debt and growth outlook

42 Total External Debt/GDP in 2012; 100% and up = Critical Region CYP NLD UK ESP USA DEU FRA BEL ISL PRT IRL ITA GRC MEX 42

43 Government Debt/GDP in 2012; 60% and up = Critical Region CYP NLD UK ESP DEU FRA BEL ISL PRT IRL ITA GRC USA MEX 43

44 The Other Dependence Mexico is far from decoupling (Percent change from a year earlier) Q3 00-Q4 02-Q1 03-Q2 04-Q3 05-Q4 07-Q1 08-Q2 09-Q3 10-Q4 12-Q1 13-Q2 14-Q3 U.S. Ind. Prod. Mex. GDP US Real imports

45 The Other Dependence: a Closer Look Mexico is far from decoupling (Percent change from a year earlier) Q3 10-Q4 11-Q1 11-Q2 11-Q3 11-Q4 12-Q1 12-Q2 12-Q3 12-Q4 13-Q1 13-Q2 13-Q3 13-Q4 U.S. Ind. Prod. Mex. GDP

46 Mexico Economic Growth by Sector (Percent change) Real GDP Consumption Fixed Investment Government Exports Imports

47 Final Comments Linked business cycle with U.S. economy will continue to dominate Mexico s dynamics, bad contagion ahead Gloomy outlook is foreseen for the oil sector: lower oil production will hurt oil-export revenues and government fiscal accounts, unless energy reform materializes Solid external position and favorable debt metrics support; exchange rate volatility is not endogenous. Peso converging to PPP equilibrium Inflation not a threat Operational and security risks remain high, but may have peaked Tougher U.S. immigration stance will continue to have a negative impact on remittances to Mexico and to worsen unemployment rates

48 Thank You for Your Participation! Rafael Amiel, Director Latin America Economics IHS Global Insight July 2013