Mexico s Outlook: A New Opportunity for Structural Reforms

Transcription

1 Mexico s Outlook: A New Opportunity for Structural Reforms Presented to: Maquiladora Industry Outlook Conference September Presented by: Rafael Amiel, Ph.D. Managing Director, Latin America Service Global Insight

2 A Difficult Political Setting: Baseline Scenario (75% probability) Andrés Manuel López Obrador (AMLO) has a well-earned reputation for tenacity, bordering on antagonism. He will remain defiant in the coming months, but his support base, other than more radical elements, will shrink in the run-up to Felipe Calderón s inauguration. With die-hard AMLO backers still on the streets, some violence is anticipated but not on a large scale. AMLO has already begun to alienate centrist voters, with leftist intellectuals condemning his protests. Felipe Calderón is expected to win over centre-leftist voters, including those from the poorer social strata, with a renewed focus on poverty reduction. The President-Elect will keep antipoverty programs at the top of the political agenda, moving away from this job-creating electoral platform and promising public spending in a bid to steal AMLO s thunder. 2

3 A Difficult Political Setting: Baseline Scenario (75% probability) The composition of Calderón s cabinet, and whether he keeps to his pledge to welcome coalition partners, will prove pivotal in indicating his plans for government and his ability to usher them through Congress. Naming a recognized figure from the left to a top social post would be one way of granting credibility to his transformed program for government. Calderón has already won over the private sector and the upper-to-middle classes. His chief challenge is to assuage the threat of social unrest in the short-to-medium term. He is expected to be inaugurated as scheduled on 1 December although public protests will represent an early challenge to his administration. 3

4 A Difficult Political Setting: Worst Case Scenario (25% probability) Andrés Manuel López Obrador (AMLO) utilizes his leadership qualities to keep the momentum behind his campaign of civil disobedience. He and his backers are spurred on by the fact that they forced a "U-turn" from members of the penal justice system and the government that sought to impeach him in AMLO s claims are inadvertently supported by the TRIFE s ruling that outgoing President Vicente Fox's illegal participation in the electoral campaign was "a risk for the validity of the elections," according to two of its magistrates. Such statements undermine the court s ruling of the "legality and legitimacy" of Felipe Calderón s designation as Mexico s next president. 4

5 A Difficult Political Setting: Worst Case Scenario (25% probability) Public protests swell, becoming violent in an attempt to force authorities to reconsider the electoral result or call a re-election. AMLO campaigns for the vote to be annulled and his parallel authority undermines the official government. Those who perceive López Obrador as a "champion of the poor" exceed those who question his commitment to the democratic process. Mexico s democratic institutions are placed under further strain. The distraction created by AMLO s alternative government undermines Felipe Calderon s efforts to convert himself from candidate to statesman. His revised government pledges making antipoverty programs a priority fail to convince the electorate, particularly those who voted for the For the Good of All Alliance. 5

6 A Difficult Political Setting: Worst Case Scenario (25% probability) Under pressure, Calderón gives his backing to an annulment of the election and, effectively, AMLO s grassroots movement forces an interim government. The ensuing uncertainty creates heightened investment risks in the interim, although AMLO s heavy-handed tactics make him more likely to lose by a much larger margin in fresh elections. His campaign is a setback for Mexico s largest centre-leftist Democratic Revolution Party (PRD), harming its future election prospects outside its traditional Federal District and southern heartlands. 6

7 The Mexican Economy in Moderate Economic Growth Price and Exchange Rate Stability Fiscal and External Accounts Balanced Risks remain Economic growth will follow that of the United States due to the lack of reforms The China factor has not gone away Oil prices The AMLO threat Congress paralysis? 7

8 Political Situation 8

9 Political Situation 9

10 Political Situation A Divided Congress House of Representatives Senate PAN 41.2% PAN 40.6% PRD 25.4% PRD 23.4% PRI 20.6% PRI 25.8% PVEM 3.6% PVEM 4.7% PT 3.2% PT 1.6% Convergencia 3.4% Convergencia 3.1% Nueva Alianza 1.8% Nueva Alianza 0.8% Alternativa 0.8% Calderon will have a stable 43% in the House and a 41.4% in the Senate, thanks to Nueva Alianza, requiring 7% and 8.6% more for the ruling majority, respectively. Neither PRD nor PRI can stop a constitutional reform by themselves. 10

11 Output and Growth

12 The Economy Strengthened in the H

13 As the United States Keeps Setting the Pace 13

14 Particularly Industrial Output 14

15 While Private Consumption Appears to be on Track 15

16 It Hides Strong Preferences for Imported Goods 16

17 Public Investment Fuels Aggregate Demand 17

18 Will Oil Prices Sustain Public Investment? 18

19 Risks should not be ignored 19

20 Exchange Rate and Prices

21 Exchange Rate Not Seriously Misaligned 21

22 The Exchange Rate is not Critically Overvalued 22

23 Strong FX Inflows Support the Appreciation 23

24 Inflation is Under Target 24

25 Shielded by Gasoline Subsidies 25

26 Monetary and Fiscal Policy

27 Having Controlled Inflation, the Central Bank Is Relaxing the Monetary Policy 27

28 Inflationary Objectives vs. Registered Inflation Year Objective Registered Inflation Target % 9.0% Met % 4.4% Met % 5.7% Not Met % +/ % Met % +/ % Not Met % +/ % Met 28

29 The Central Bank has Little Room for Further Cuts 29

30 Sound Fiscal Accounts: Not Prudence, It s Oil Again 30

31 Trade

32 Strong U.S. Demand 32

33 Oil Again? 33

34 Imports go in Tune with Exports 34

35 Consumption Goods Lead the Way 35

36 But Investment Goods Will Support Future Growth 36

37 Raw Materials for Current Expansion 37

38 Slow Down But Signals Are Still Not Strong Enough 38

39 Pending Reforms

40 Mexico: Major Oil Producer 40

41 But Maybe Not in the Long-Run 41

42 Milking the Cow PEMEX: Financial Results (US$ millions) Total Sales 55,726 69,119 86, Domestic 34,465 39,861 46, Exports 21,261 29,258 39,302 Net Income before taxes and contributions to the government 30,309 40,736 49,669 Taxes and contributions to the government 34,028 41,991 53,653 Net Income (loss) (3,719) (1,255) (3,984) 42

43 Natural Gas 43

44 Guaranteed Demand 44

45 Not For All Products 45

46 China Continues To Increase Its Market Share At The Expense Of Mexico 46

47 Investment in China 47

48 The Financial Sector Will Help 48

49 Banking Sector 49

50 Fiscal Reform Fiscal Data Latin American Countries Argentina Chile Peru Mexico Venezuela Brazil Ecuador VAT rate (%) VAT levied as % of GDP Fiscal Pressure as % of GDP - W/SS and state na na na Fiscal Pressure as % of GDP - No SS - No state

51 Fiscal Reform 51

52 The Need To Diversify Exports Destinations 52

53 The Need To Diversify Exports Destinations 53

54 World Economic Forum - Institutions Index International comparison Country Finland Chile USA Taiwan, China India Spain Uruguay Egypt Colombia Mexico China Ranking

55 Global Insight s GRS Model Business Index International comparison Country Finland Chile USA Taiwan, China India Spain Uruguay Egypt Colombia Mexico China Ranking

56 Baseline Scenario Real GDP Growth (%) GDP US$ Billions Interest Rate (CETES-28, %) Fiscal Balance (% of GDP) GDP Deflator Change (%) CPI Average Change (%) End of Period Change (%) Interbank Exchange Rate Annual Average Change (%) End of Period Change (%)

57 Worst Case Scenario Change in business and consumer sentiment affects real variables in Q and beyond. To control a potential large capital outflow in this scenario, we foresee higher interest rates in the 1-4% ( basis points additional to current rates) range during the crisis (maybe higher), Not large enough to avoid the flight-to-quality, S-T portfolio, No further FDI Not major change in exports and imports affecting the current account, negative balances from the capital account will generate some pressure against the peso, which will depreciate in the 5-10% range. 57

58 Worst Case Scenario Private consumption decelerates during the crisis: for 2007 we expect a growth rate 1% lower than in the baseline. Consumption of durables decelerate from 8.0% growth rates in 2005 to 3.6% and 1.0% in 2006 and 2007, respectively. Investment in plant and equipment and housing decelerates, for expansion rates in the % range, down from 7.5% in the previous two years. Under these assumptions, GDP growth rates would decelerate to 4.3% and 2.3% in 2006 and 2007, respectively, down from 4.4% and 3.7% in our baseline prediction. 58

59 Final Remarks... Mexico s economy will slowdown in 2007 in line with the deceleration of the US economy Price and exchange stability will continue in the foreseeable future Public spending is expected to accelerate to contain social discontent 59

60 Thank You Rafael Amiel, Ph.D. Managing Director, Latin America Service Global Insight