Mexico: Dealing with international financial uncertainty. Manuel Sánchez

Transcription

1 Manuel Sánchez United States Mexico Chamber of Commerce, Chicago, IL, August 6, 2015

2 Contents 1 Moderate economic growth 2 Waiting for the liftoff 3 Taming inflation 2

3 Since 2014, Mexico s economic recovery has been limited by three major factors Mexico: GDP % change, s.a. 6 4 Average annual growth % Annualized QoQ 4 YoY 6 Q s.a. / Seasonally adjusted Source: INEGI

4 First, industrial production has been slowing down, Mexico: GDP by sector YoY % change, s.a. 6 Average Industry 2.1% Services 2.9% Industry 0 Services Q */ Based on the April May average of the Global Economic Activity Indicator s.a. / Seasonally adjusted Source: INEGI 2015 * Q2 4

5 mainly as a result of a persistent contraction in mining output 10 5 Mexico: Industrial GDP YoY % change, s.a. Average Mining 0.6% Construction 2.8% Manufacturing 2.5% Mining 10 Construction Manufacturing Q */ Based on the April May average of the Global Economic Activity Indicator s.a. / Seasonally adjusted Source: INEGI Q2* 5

6 which has been driven by shrinking oil production 2.6 Mexico: Oil production Millions of barrels, quarterly daily averages Average millions of barrels Q Q2 Source: INEGI and PEMEX 6

7 Second, manufacturing has been halted largely due to a deceleration of the U.S. industry The United States and Mexico: Production YoY % change, s.a. 6 5 Mexican manufactuting U.S. industry Correlation coefficient Q Q2* */ Mexican manufacturing based on the April May average s.a. / Seasonally adjusted Source: INEGI and U.S. Federal Reserve 7

8 which has coincided with less dynamic manufacturing exports to the U.S., in spite of the peso s real depreciation 20 Mexico: Trade and real exchange rate YoY % change, s.a Mexican manufacturing exports to the U.S. MXN/USD real exchange rate 20 Q Q2 s.a. / Seasonally adjusted except for the real exchange rate Source: Banco de México and U.S. Federal Reserve 8

9 Third, domestic spending has remained soft: the increasing trend in investment growth has become weaker 25 Mexico: Investment and capital imports YoY % change, s.a. 20 Capital goods imports Gross fixed investment Q Q2* */ Gross fixed investment based on the April May average s.a. / Seasonally adjusted Source: INEGI 9

10 7 while consumption rebound has proceeded at a measured pace Mexico: Consumption YoY % change, s.a. 6 Revenues of retail businesses Private consumption Q */ Based on the April May averages s.a. / Seasonally adjusted Source: ANTAD and INEGI Q2* 10

11 The main drag for domestic spending does not seem to be the labor market, where indicators have improved 70 Mexico: Unemployment and labor force participation % of EAP and % of 14 year old and older population, s.a. Labor force participation Unemployment rate Unemployment 1 average % Q Q / From April 2000 to December 2004, based on 14 year old and older population; from January 2005 to December 2007, on those 15 year old and older population s.a. / Seasonally adjusted Source: IMSS, INEGI and Banco de México 11

12 110 A more likely cause relates to disappointing trends in consumer and producer confidence Mexico: Consumer and producer sentiment 2007 = 100, s.a. Consumer Producer Q Q2 1/ Manufacturing s.a. / Seasonally adjusted Source: INEGI and Banco de México 12

13 Mexico s GDP growth forecasts have been adjusted downward, together with those of the United States 4 The United States and Mexico: GDP growth forecasts % January 2015 July 2015 Banxico Banxico Banxico 3.2 Banxico The United States Mexico Source: Blue Chip and Banco de México 13

14 Downside risks to Mexico s GDP growth scenario might prevail Further declines in oil extraction U.S. industrial production less robust than expected Consumer and producer sentiment remaining weak 14

15 Mexico s reform agenda may foster long term productivity growth Reforms encompass many sectors, including labor, education, the financial system, telecommunications, and energy Price and investment impacts may be expected, especially from the telecom and energy reforms These impacts and the reforms effect on potential long term economic growth will ultimately depend on the quality of implementation More significant results can be obtained if the rule of law, public security and physical infrastructure are enhanced 15

16 Contents 1 Moderate economic growth 2 Waiting for the liftoff 3 Taming inflation 16

17 Expected Fed policy has largely affected EM asset prices: the MXN has depreciated along with other currencies The United States and emerging economies: Currency exchange rate April 30, 2013 = 100 Mexico: USD/MXN Emerging economies excluding Mexico 1 2 DXY June Appreciation Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 1/ Emerging economies excluding Mexico considers the unweighted average of the value of currencies from Chile, Colombia, Brazil, Russia, Turkey, Poland, the Czech Republic, India, South Korea, Thailand and Indonesia in U.S. dollar terms. 2/ The DXY is a weighted average of the dollar's value relative to the euro (57.6%), the Japanese yen (13.6%), the pound sterling (11.9%), the Canadian dollar (9.1%), the Swedish krona (4.2%), and the Swiss franc (3.6%) Source: Bloomberg

18 with persistent volatility, although slightly less than in previous turbulence episodes 30 FX implied volatility 1 % Advanced economies currencies Emerging economies currencies Mexican peso Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 1/ Three month implied volatility for "at the money" options. Advanced economies currencies include those of G7 countries. EE currencies include those of South Korea, Mexico, Brazil, India, China, Taiwan, Singapore, Philippines, Poland, Hungary, Russia, Turkey and South Africa Source: Bloomberg Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 18

19 Also, Mexico s yield curve has steepened in tandem with that of the United States 7 6 Mexico United States The United States and Mexico: Yield curve 1 % month 3 months 6 months 1 year 2 years 3 years 5 years 7 years 10 years 20 years 30 years 1/ The solid line refers to April 30, 2013 and the dotted line to July 31, 2015 Source: Banco de México 19

20 40 30 However, shares of nonresident holdings of peso government bonds have remained relatively stable Mexico: Nonresident holdings of peso denominated government securities % of total outstanding Total Coupon bonds Zero coupon bonds Inflation linked bonds July Jan 10 Mar 10 May 10 Aug 10 Oct 10 Dec 10 Mar 11 May 11 Aug 11 Oct 11 Dec 11 Mar 12 May 12 Jul 12 Oct 12 Dec 12 Mar 13 May 13 Jul 13 Oct 13 Dec 13 Mar 14 May 14 Jul 14 Oct 14 Dec 14 Mar 15 May 15 Source: Banco de México 20

21 In short, Mexico has faced financial volatility without major disturbances so far Emerging economies: Sovereign credit risk 1 Basis points Mexico Average emerging economies excl. Mexico Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 1/ Five year credit default swaps are defined as default insurance instruments. Based on available data of Brazil, Chile, China, Colombia, South Korea, Peru, Poland, Russia, South Africa and Turkey Source: Bloomberg 21

22 Nevertheless, heightened uncertainty will likely be the new normal for some time The pace and other characteristics of U.S. monetary policy normalization are still unknown Even if asset prices have largely incorporated a changing scenario, markets can always be caught off guard, triggering significant turmoil Major foreign fund portfolio adjustment cannot be ruled out To manage these risks, Mexico needs to further buttress its macroeconomic policy framework, including consolidating the recent efforts in the fiscal realm and timely adjusting the monetary policy stance Mexican monetary policy will continue to take into account the relative stance vis à vis the United States, among other factors 22

23 Contents 1 Moderate economic growth 2 Waiting for the liftoff 3 Taming inflation 23

24 Monetary policy has been accommodative in the face of relatively weak economic activity 5.0 Mexico: Monetary policy target rate % Source: Banco de México 24 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15

25 Annual inflation has remained on target throughout 2015 Mexico: Annual inflation % July* 3% target Headline Core 25 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 */ First half Source: INEGI

26 Positive shocks have helped this performance 12 Mexico: Annual inflation % 10 Merchandise core Services core Non core July* 8 6 Lower energy price changes Tax base effects Elimination of phone national LD charges 2.16 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 */ First half Source: INEGI 26

27 Also, the pass through from the continuous peso depreciation to prices has been limited 6 Mexico: Merchandise core prices and nominal exchange rate YoY % change Durable merchandise prices Nominal exchange rate July* Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 */ First half for durable merchandise prices Source: INEGI 27

28 6 Medium term inflation expectations, as measured by surveys, have remained stable, although above target Mexico: Inflation expectations for one to four years ahead Forecast average, % % target Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Source: Banco de México, Survey of private sector economic analysts expectations 28

29 The Bank of Mexico expects inflation to remain near the permanent target Target Mexico: Annual headline inflation 1 % 0.0 T2 Q2 T4 Q4 T2 Q2 Q4 T4 Q2 T2 Q4 T4 Q2 T2 Q4 T4 Q2 T2 Q4 T4 Q2 T2 Q4 T / Quarterly average Source: Banco de México (2015), QuarterlyReport, January March 2015, May 2014 Q Q Q

30 Upside risks to the inflation outlook should be monitored, especially if second round effects may emerge Positive shocks of 2015 may not recur in the coming years Agriculture price increases may revert to their higher historic average Given the uncertainty on Mexico s growth potential, economic recovery may bring about aggregate demand pressures A sharp depreciation of the peso continues to be an important risk for inflation 30

31 Final remarks The recovery of the Mexican economy has been modest, and growth expectations have been adjusted downward Structural reforms should support the medium term economic outlook, but they must be carefully implemented Expected near term U.S. monetary policy normalization could always come with surprises Under this scenario, Mexico must strengthen its macroeconomic policy framework Monetary policy should ensure that convergence to the permanent inflation target consolidates 31

32 Mejoran las perspectivas económicas mundiales 32