OCTOBER 23 RECENT EVOLUTION AND OUTLOOK OF THE MEXICAN ECONOMY BANCO DE MÉXICO
2 RECENT DEVELOPMENTS OUTLOOK MEDIUM-TERM CHALLENGES
3 RECENT DEVELOPMENTS
In tandem with the global economic cycle, the Mexican economy has been growing below potential since 21. GLOBAL ECONOMIC ACTIVITY INDEX (IGAE) (Annual variation, %) 2-I 2-II 2-III 2-IV 21-I 21-II 21-III 21-IV 22-I 22-II 22-III 22-IV 23-I 23-II -1.5-1.5-2.2..2 1. 2. 1. 1.9 2.3.7 7. 7.3 7. 1 6 2-2 - REAL GDP (Annual variation, %) Seasonally Adjusted 6 Seasonally Adjusted 2-2 - -6 Jan- Apr- Jul- Oct- Jan-1 Apr-1 Jul-1 Oct-1 Jan-2 Apr-2 Jul-2 Oct-2 Jan-3 Apr-3 Jul-3
On the demand side, and similarly to developments in the US, growth has been supported by a relatively strong private consumption, while investment has been weak. PRIVATE CONSUMPTION (Annual variation, %) PRIVATE INVESTMENT (Annual variation, %) 5 -. -.5 -. -11.9-5.9-1.5-5.2-1.7-7. 1.7 1.3 13..1 11.7 1. 9.. -1. -6. -11. -16. 2-I 2-II 2-III 2-IV 21-I 21-II 21-III 21-IV 22-I 22-II 22-III 22 - IV 23-I 23-II 2-I 2-II 2-III 2-IV 21-I 21-II 21-III 21-IV 22-I 22-II 22-III 22 - IV 23-I 23-II 3.2 1. 1. -1.6 3.1 2. 1.2 3.6.9 6.6 6..6.9.9 11. 9. 7. 5. 3. 1. -1. -3.
Exports have mirrored a weak external demand, while imports are still affected by the fragility of domestic expenditure. Current account deficits are small, and financed mostly by FDI. 32 EXPORTS AND IMPORTS (Annual growth, %, 3-months moving average) 2, FDI AND CURRENT ACCOUNT DEFICIT (Millions of dollars) 27 22 Exports Imports 1, Foreign Direct Investment Current Account Deficit 17 16, 12 1, 7 2 12, -3 - -13 an- pr- Jul- ct- an-1 pr-1 Jul-1 ct-1 an-2 pr-2 Jul-2 ct-2 an-3 pr-3 Jul-3 1,, 199 1999 2 21* 22 23** * Excluding Banamex-Citicorp transaction ** Expected, Banco de México s Survey, September 23 6
Industrial production in Mexico has not yet reflected the incipient recovery in the US. However, other productive sectors are performing better. INDUSTRIAL PRODUCTION: MEXICO AND US (Annual variation, %, seasonally adjusted) GDP: AGRICULTURE AND SERVICES (Annual variation, %) 1 US 1 Agriculture Mexico 6 Services 6 2 2-2 -2 - - -6-6 199 1999 2 21 22 23 I 2 III 2 I 21 III 21 I 22 III 22 I 23 7
As expected, lackluster in economic activity has adversely affected the labor market in Mexico.. 3. 3.6 3. 3.2 3. 2. 2.6 2. 2.2 2. Jan- May- Sep- Jan-1 May-1 Sep-1 Jan-2 May-2 Sep-2 Jan-3 May-3 Sep-3 Jan- Apr- Jul- Oct- Jan-1 Apr-1 Jul-1 Oct-1 Jan-2 Apr-2 Jul-2 Oct-2 Jan-3 Apr-3 Jul-3 6 2 2 6 U.S. INDUSTRIAL PRODUCTION AND EMPLOYMENT IN MEXICO (Annual Growth Rate, %) UNEMPLOYMENT RATE (Percentage of the Labor Force) Mexican Workers Insured by IMSS U.S. Industrial Production
Nonetheless, for the first time in decades, Mexico is undergoing a run-of-the-mill business cycle instead of a financial crisis that would entail balance sheet adjustments. EXCHANGE RATE VOLATILITY (6 days rolling variation coefficient) EMBI+ MEXICO AND U.S. CORPORATE SPREADS INDEX (Basis points) CURRENT ACCOUNT AND TRADE BALANCE (Millions of Dollars at annual rate).25.2.15 5 35 EMBI + Mexico Corporate US BBB - -2, -, I 1999 I 2 I 21 I 22 I 23 Current Account Trade Balance 3-6,.1.5 25 2 -, -1, -12,. Oct-92 Oct-93 Oct-9 Oct-95 Oct-96 Oct-97 Oct-9 Oct-99 Oct- Oct-1 Oct-2 Oct-3 15 Oct-2 Dec-2 Feb-3 Apr-3 Jun-3 Aug-3 Oct-3-1, -16, -1, -2, 9
Fiscal discipline (coupled with a high price of oil), has been one of the pillars of macroeconomic stability. 1.5 FISCAL BALANCE (% of GDP) 3 PRICE OF MEXICAN OIL MIX (Dollars per barrel) 1..9 25.5 2. 15 -.5-1. -1.5-1.1 -.7-1.2 2 21 22 23-1H 1 5 Jan-96 May-96 Sep-96 Jan-97 May-97 Sep-97 Jan-9 May-9 Sep-9 Jan-99 May-99 Sep-99 Jan- May- Sep- Jan-1 May-1 Sep-1 Jan-2 May-2 Sep-2 Jan-3 May-3 Sep-3 1
The other pillar has been monetary policy, which has undergone important institutional changes in the recent past. Autonomy of the Central Bank. Key objective: Price stability. Strict limits on credit to the government. Board of Governors protected from the political cycle. Budgetary autonomy. Floating exchange rate. Banco de México gained control over monetary policy when the float was adopted. Inflation targeting framework. Absence of fiscal dominance. Inflation target: 3%, +/-1% variability interval; Transparency and accountability (Inflation Report, frequent presentations by the Board of Governors, predetermined dates for policy announcements and press releases).
Monetary policy has allowed domestic interest rates to reflect global liquidity and reach historically low levels. 2 DAYS CETES NOMINAL AND REAL EX-ANTE INTEREST RATE (%) YIELD CURVE (Basis points) 32 2 Real ex-ante 12 11 December 22 March 23 2 Nominal 1 October 23 2 9 16 12 7 Mar-99 Aug-99 Jan- Jun- Nov- Apr-1 Sep-1 Feb-2 Jul-2 Dec-2 May-3 Oct-3 6 5 2 days Cetes 91 days Cetes 12 days Cetes 36 days Cetes 3 years Bond 5 years Bond 7 years Bond 1 years Bond 12
13 In this context, inflation has been converging towards the target established for the end of 23 and onwards. CPI INFLATION AND CORE INFLATION (%) CPI INFLATION AND COMPONENTS (%) 13 12 11 1 9 7 6 5 3 Core Inflation Mar- Jun- Sep- Dec- Mar-1 Jun-1 Sep-1 Dec-1 Mar-2 Jun-2 Sep-2 Dec-2 Mar-3 Jun-3 Sep-3 Sep-3 Mar-3 Dec-2 Sep-2 CPI Inflation CPI. 5.6 5.7.95 Core 3.51 3.53 3.77 3.5 Tradable Goods 2.27 2.3 1.95 1.5 Services.91 5. 6.23 6.61 Agricultural 5.7 13.2.65 2.3 Fruits and Vegetables 6.36 2.9 22.23 5.9 Meat and Eggs.6.37 -.1. Education.2 1.2 1. 1.1 Administered and Regulated 6.7.22 1.96 9.23 Administered* 1.96 15.2 16. 12.93 Regulated**.57 2.6 6.12 6.1 * Administered prices are: electricity, gas and gasoline ** Regulated prices include items such as public transportation, telephone services and licenses fees.
Core goods inflation has remained largely subdued, while core services inflation has continued on its downward trend. CORE,GOODS AND SERVICES INFLATION (%) 13.5 11.5 9.5 CORE GOODS INFLATION AND EXCHANGE RATE DEPRECIATION (%) Core Goods Inflation (left axis) Depreciation (right axis) 2 16 12 1 12 1 Inflation Expectations for the Next 12 months Wage Settlements 7.5 5.5 6 3.5-2 1.5 - Mar- Jun- Sep- Dec- Mar-1 Jun-1 Sep-1 Dec-1 Mar-2 Jun-2 Sep-2 Dec-2 Mar-3 Jun-3 Sep-3 1 Mar- Jun- Sep- Dec- Mar-1 Jun-1 Sep-1 Dec-1 Mar-2 Jun-2 Sep-2 Dec-2 Mar-3 Jun-3 Sep-3 Feb- May- Aug- Nov- Feb-1 May-1 Aug-1 Nov-1 Feb-2 May-2 Aug-2 Nov-2 Feb-3 May-3 Aug-3 16 1 12 1 6 2 Core Services Inflation Core Goods Inflation Total Core Inflation EXPECTED INFLATION FOR THE NEXT 12 MONTHS AND WAGE SETTLEMENTS (%)
OUTLOOK 15
Following global developments, in Mexico growth forecasts for 23 have been revised downwards in the course of the year. Nevertheless, the recovery is expected to gain strength clearly in the remaining months of the current year and thereafter. PRIVATE SECTOR FORECASTS : GDP 23 (Annual Variation, %) PRIVATE SECTOR FORECASTS : GDP 2 (Annual Variation, %) 5 5 3 3 3.39 2 1.6 2 1 1 Jan-2 Mar-2 May-2 Jul-2 Sep-2 Nov-2 Jan-3 Mar-3 May-3 Jul-3 Sep-3 Dec-2 Jan-3 Feb-3 Mar-3 Apr-3 May-3 Jun-3 Jul-3 Aug-3 Sep-3 16
After deteriorating in the first half of 23, inflation expectations have been rapidly converging towards the inflation target. PRIVATE SECTOR FORECASTS: INFLATION 23 (%) PRIVATE SECTOR FORECASTS: INFLATION 2 (%) 5...5 3.67. 3.7 3.5 3.5 3. 2.5 3. Oct-1 17 Dec-1 Feb-2 Apr-2 Jun-2 Aug-2 Oct-2 Dec-2 Feb-3 Apr-3 Jun-3 Aug-3 Jun-2 Jul-2 Aug-2 Sep-2 Oct-2 Nov-2 Dec-2 Jan-3 Feb-3 Mar-3 Apr-3 May-3 Jun-3 Jul-3 Aug-3 Sep-3
There are some recent signs that economic activity in Mexico may be gathering strength. 15 INDUSTRIAL PRODUCTION IN MANUFACTURING (Seasonally adjusted data, index: 1993=1) LEADING INDICATORS: MEXICO AND US (Annual variation, %, 2-months moving average) 6 Mexico 15 Estimate from Banxico Survey 1 INEGI 2 U.S. August 23 135-2 13 2 21 22 23-2 21 22 23 1
19 Also, the expansion of the credit to the private sector is supportive of stronger economic activity. 15. PERFORMING LOANS GRANTED BY COMMERCIAL BANKS TO THE PRIVATE SECTOR (Annual real variation, %) 1. 5.. -5. -1. Feb-2 Apr-2 Jun-2 Aug-2 Oct-2 Dec-2 Feb-3 Apr-3 Jun-3 Aug-3
2 Balance of Risks External Either a weaker than expected upturn of US industrial production or a growth spurt that may not be sustainable; A volatile price of oil; and The loss of market share of Mexican exports. Internal Downward rigidity of core inflation, Supply shocks to non-core inflation; and Lack of progress on structural reforms.
21 MEDIUM-TERM CHALLENGES
Strength Factors Mexico s resilience to external shocks rests on the strength of its macroeconomic fundamentals and on the institutional improvements that have taken place over the past decade. The solidity of the macroeconomic fundamentals derives from economic policy changes, such as: The free-floating exchange rate regime; Fiscal discipline; The adoption of an inflation targeting framework; and Pro-active public debt management. On institutional improvements, the following stand-out: NAFTA; Strengthening of electoral institutions; Sound financial regulation and supervision; Private sector pension reform; and The autonomy of the Central Bank 22
However, firms in Mexico have been losing its competitiveness mainly because of the lack of progress in the reform arena. RANK IN THE GLOBAL COMPETITIVENESS SCALE, WORLD ECONOMIC FORUM CHANGE IN THE GLOBAL COMPETITIVENESS SCALE RANKING BY CATEGORY: MEXICO (21-22) More Competitive Less Competitive 52 7 2 37 32 27 22 17 12 Mexico Brazil Chile China 1996 1997 199 1999 2 21 22 15 1 5-5 -1-15 -2-25 Total Macro Conditions Technology Mexico Poland Quality of Institutions 23
Thus, Mexican exports have been losing market share in the United States. MARKET SHARE OF MEXICO AND CHINA IN US IMPORTS (%) US IMPORTS BY COUNTRY (%) 1 12 1 6 2.3.7 5. 5.3 5.7 6.1 6.. 6.6 5. 6.9 5. 7.5 6.1 6.5 3.1 3.9 Mexico China 9.2 9.9 1. 1.7 11.2 11.5 1. 11.6 1.3 11. 11.5 11. 7.2 7...2 9. 196 197 19 199 199 1991 1992 1993 199 1995 1996 1997 199 1999 2 21 22 22 23 January - August 22 23 Total 1 1 Total excl. Mexico.2.97 1 Canada 1.3 17.96 2 Mexico 11. 11.3 3 China 1.25 11. Japan 1.6 9. 5 Germany 5.27 5.2 6 United Kingdom 3.57 3.3 7 Korea 3. 2.5 Taiwan 2.2 2.52 9France 2.9 2.29 1 Malaysia 2.12 1.99 11 Brazil 1.3 1. 12 Singapore 1.27 1.23 13 Thailand 1.26 1.1 1 Indonesia.7.77 15 Hong Kong..6 Sum of 15 countries 75.7 73.7 Jan-Aug Source: Bureau of Economic Analysis 2
25 Among the pending structural reforms, allowing the fiscal system to achieve its social goals should be a priority. TOTAL FISCAL BURDEN IN OECD COUNTRIES (2, percentage of GDP) SOCIAL EXPENDITURE IN OECD COUNTRIES (2, percentage of GDP) Denmark Sweden N. Zealand Finland Iceland Australia Belgium Norway Luxembourg UK Canada Italy France Austria Turkey Hungary Ireland Greece Portugal Netherlands Poland Switzerland Germany Spain United Czech Rep. Korea Slovak Rep. Japan Mexico 15. 17.22121. 35.1 39 6.5 31.5 3. 3.9 31.5 31 31.2 31.2 29 33.7 2. 27.7 27.6 26. 26. 2 25.3 25.6 23.7 23.1 22. 22.7 OECD 22.1 Average= 27.9 1 2 3 5 Sweden Denmark France Switzerland Germany Norway Austria Finland Italy Belgium UK Netherlands Poland Greece Luxembourg N. Zealand Spain Czech Rep. Iceland Portugal Canada Australia Ireland Japan United States Slovak Rep. Turkey Mexico Korea.2 5.9 15. 1.7 1.6 11.6 13.6 31 29. 2. 2.3 27.3 27 26. 26.5 25.1 2.7 2.5 23.9 22. 22.7 22.1 21 19.7 19. 1. 1 1.2 17. OECD Average= 21. 1 2 3
Another urgent issue for Mexico is the reform of the energy sector. This includes the electric power industry, and ELECTRICITY PRICES: INTERNATIONAL COMPARISON (US dollar cents per kilowatt - hour) ELECTRICITY OPERATING RESERVE MARGIN: MEXICO (Percentage of capacity) S. Africa Russia Canada Argentina Venezuela T&T Netherlands Brazil France Spain Belgium US Germany UK India Korea Mexico Italy 2 6 Source: Energy Ministry, Mexico 25 2 15 1 5 1993 199 1995 1996 1997 199 1999 2 21 Source: CFE, Mexico 26
Source: IEA Statistics Source: Energy Ministry, Mexico 27 the natural gas industry. ESTIMATED CONSUMPTION OF FUELS: MEXICO (As a percentage of the total) IMPORTS AND PRODUCTION OF NATURAL GAS: MEXICO 2 Natural Gas, 22% Coal, 12% Diesel, 2% 1, 9,, Imports Production 7, 6, Oil, 6% 5, 21 Natural Gas, 62% Coal, 21% Diesel, % Oil, 17%, 3, 2, 1, 21 22 23 2 25 26 27 2 29 21 211
2 Mexico has to find its way back to the path of higher sustainable growth. A growth strategy will have to consider: Completion of the pending structural reforms, with a special emphasis on the sequencing (given economic and political considerations); Strengthening of the institutional framework (e.g., the lower tiers of the judiciary, and the reelection of Congressmen); and Consolidation of macroeconomic stability.