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
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)
Mexico becomes fashionable again? Mexico: GDP Growth (Percent) 4.0 10.3 12.0 3.0 2.0 1.0 0.0 (1.3) (0.3) 0.5 8.0 3.1 6.0 2.9 4.5 1.7 5.3 5.9 2.9 5.8 3.0 1.4 2.7 1.8 2.1 5.4 5.5 8.0 4.0 0.0-1.0-2.0-3.0 (5.7) -4.0-8.0-4.0 08-Q2 08-Q4 09-Q2 09-Q4 10-Q2 10-Q4 11-Q2 11-Q4 12-Q2 12-Q4 13-Q2 13-Q4-12.0 quarter on quarter (left scale) annualized (right scale)
percent Cost of funding for emerging is still very low 24 Interest rates 10-year bonds 21 18 15 12 9 6 EMBIG Latam Peru Brazil Mexico Colombia 3 0 4
Short-term capital inflows skyrocket 80 Net portfolio investment USD billions 70 60 50 40 30 20 10 0-10 -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mexico Brazil 5
Short-term capital inflows skyrocket (2) Peso denominated debt in the hands of foreigners (USD billions) 140 120 100 80 60 40 20 0 2003-Q1 2003-Q4 2004-Q3 2005-Q2 2006-Q1 2006-Q4 2007-Q3 2008-Q2 2009-Q1 2009-Q4 2010-Q3 2011-Q2 2012-Q1 2012-Q4 6
FDI not as much 70 Foreign Direct Investment USD billions 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mexico Brazil 7
Weaker peso makes Mexico more competitive compared to China 2.5 Mexican peso depreciates 2 1.5 1 0.5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mexican pesos per Chinese yuan remimbi PPP 8
Weaker peso makes Mexico more competitive compared to China 2.5 Mexican peso depreciates 2 54 % 1.5 1 0.5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mexican pesos per Chinese yuan remimbi PPP 9
PEMEX investment grew 50% in 2009-2012 PEMEX INVESTMENT Billions of US dollars AVG 20.8 Billion AVG 13.9 Billion 10
Labor costs in Mexico became more competitive Minimum wages USD/month 700 600 500 400 300 200 100 0 Brazil Mexico Argentina Chile Colombia Peru China 1 China 2 India Russia 11
Mexico fundamentals and risks
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
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
Industrial Production: Two Tales, Mexico loses momentum Industrial Production - Seasonally Adjusted (Jan 2003=100) 140 130 120 110 100 90 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
Mexican Consumer: Slowly but Sustained Recovery in Confidence Consumer Confidence (January 2003= 100) 120 100 80 60 40 20 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13 Mexico USA
Mexican Consumer: Slowly but Sustained Recovery in Confidence Consumer Confidence (January 2003= 100) 120 110 100 90 80 70 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13 non seasonally adjusted Seasonally adjusted
sales are hurting since December Retail Sales 129 10 123 5 117 0 111-5 105-10 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
The labor market
Formal Employment Recovers in 2010-2012 Mexico: Formal Employment (Insured Workers at IMSS) 17000000 750000 16000000 600000 15000000 450000 14000000 300000 13000000 150000 12000000 0 11000000-150000 10000000-300000 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
Unemployment: Still Above Pre-crisis Level Unemployment Rate (Percent of Labor Force) 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2008 2009 2010 2011 2012 2013
Unemployment: a more optimist view 7 Unemployment rate 6.5 6 5.5 5 4.5 4 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
Investment is key
Producers Are Bullish on Mexico s S-T Outlook Purchasing Managers' Index (Index, over 50 indicates expansion) 60 55 50 45 40 35 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
2003-Q1 2003-Q2 2003-Q3 2003-Q4 2004-Q1 2004-Q2 2004-Q3 2004-Q4 2005-Q1 2005-Q2 2005-Q3 2005-Q4 2006-Q1 2006-Q2 2006-Q3 2006-Q4 2007-Q1 2007-Q2 2007-Q3 2007-Q4 2008-Q1 2008-Q2 2008-Q3 2008-Q4 2009-Q1 2009-Q2 2009-Q3 2009-Q4 2010-Q1 2010-Q2 2010-Q3 2010-Q4 2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4 2013-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
Machinery and Equipment Drives Growth in Investment 200.0 Q1 2003 = 100; 4Q moving average Fixed Investment 180.0 160.0 140.0 120.0 100.0 80.0 Total Construction Machinery and Equipment
The bright side of Mexico: external accounts
External Accounts: The Bright Side Foreign Exchange Reserves ( Billions of U.S. Dollars) 180 Lost USD1.5 billion from all time peak in May 160 140 120 100 80 60 Feb-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Mar-11 Dec-11 Sep-12 Jun-13
External Deficit Entirely Financed by (net) FDI External Financing (Billions of U.S. dollars) 30 25 20 15 10 5 0 2000 2002 2004 2006 2008 2010 2012 Current account deficit FDI
Exchange Rate: Another Overshooting, Another Correction Exchange Rate (MXN Pesos per USD) 15 14 13 12 11 10 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
Exchange Rate: Volatility is the norm Recent depreciation - local currency versus US dollar (30-April 2013 =100) 115 112 109 106 103 100 97 5/1/13 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
Monetary policy and inflation
Monetary Policy Interest Rates: Mexico vs. USA (Percent) 12 10 8 6 4 2 0 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
Inflation Is Not a Threat, but may Tie Hands of Central Bank Mexico Consumer Prices (Percent change from a year earlier) 8 6 4 2 0-2 Nov-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Sep-12 Jun-13 Administered Prices CPI
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 1400 1200 1000 800 600 400 Business recovers in April and May Credit to the Private Sector (Billions of Pesos at May 2013 Prices) 700 600 500 400 300 200 200 100 Businesses (left axis) Consumption Housing
Oil dependency and fiscal accounts
Dependence on Oil: Output Stabilizes Momentarily Oil Output (Millions of barrels per day) 4.0 3.5 3.0 2.5 2.0 Jan-01 Feb-02 Apr-03 May-04 Jul-05 Aug-06 Oct-07 Nov-08 Jan-10 Feb-11 Apr-12 May-13
Manageable Fiscal Deficit; but Reforms are Needed Fiscal Balance (As percent of GDP) 1.0 0.0-1.0-2.0-3.0-4.0-5.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Overall Balance Excludes Pemex Investment
Milking the Cow of PEMEX PEMEX: Financial Results (US$ millions) 2007 2008 2009 2010 2011 2012 Total Sales 104,451 98,162 80,643 101,429 125,276 125,140 -- 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 48,071 61.712 68,784 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) +0.192
End of Subsidies: Short-Term Palliative
Manageable debt and growth outlook
Total External Debt/GDP in 2012; 100% and up = Critical Region 1200 1000 980 800 803 600 400 200 0 508 426 312 293 233 254 171 174 186 124 96 27 CYP NLD UK ESP USA DEU FRA BEL ISL PRT IRL ITA GRC MEX 42
Government Debt/GDP in 2012; 60% and up = Critical Region. 180 160 167 140 120 120 114 127 100 80 89 67 72 81 80 90 85 96 99 60 40 36 20 0 CYP NLD UK ESP DEU FRA BEL ISL PRT IRL ITA GRC USA MEX 43
The Other Dependence Mexico is far from decoupling (Percent change from a year earlier) 20.0 15.0 10.0 5.0 0.0-5.0-10.0-15.0-20.0 99-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
The Other Dependence: a Closer Look Mexico is far from decoupling (Percent change from a year earlier) 8.0 6.0 4.0 2.0 0.0 10-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
Mexico Economic Growth by Sector (Percent change) 2010 2011 2012 2013 2014 Real GDP 5.4 3.9 3.9 2.9 4.2 Consumption 5.0 4.5 3.3 3.0 4.5 Fixed Investment 0.1 8.7 5.9 2.5 7.3 Government 2.4 0.6 1.5 1.9 3.0 Exports 21.6 7.5 4.6 3.2 7.9 Imports 20.5 6.7 4.1 3.6 7.3
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
Thank You for Your Participation! Rafael Amiel, Director Latin America Economics rafael.amiel@ihs.com IHS Global Insight July 2013