Information Analytics Expertise AUGUST 2014 MEXICO S ECONOMIC OUTLOOK Rafael Amiel Director, Latin America -IHS Economics +1 215 789 7405 rafael.amiel@ihs.com
Why has growth in emerging markets slowed? Cyclical forces Withdrawal of policy stimulus Weak export markets Capital rotation as US bond yields rise Excess capacity after investment booms Structural forces Slower labor force growth Slower pace of globalization End of commodity price supercycle Lack of market reforms 51
Vulnerable countries depend on external financing: Current-account and fiscal balances External financing (Percent of GDP, 2013) China Russia Poland Mexico India Indonesia Brazil South Africa Turkey -8-6 -4-2 0 2 Current-account balance Fiscal balance 52
Percent of world GDP The pace of globalization has slowed World imports share of GDP 35 30 25 20 15 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 53
Economic reforms shape Mexico s outlook Mexico s economy is closely linked to the United States through trade, capital flows, and remittances, and will benefit from a pickup in US growth. Exports and fixed investment will lead Mexico s acceleration in 2014-15. Consumer spending growth will strengthen in response to income gains. The automotive industry is expanding as vehicles assembled in Mexico continue to gain market share in the United States. Constitutional changes will open Mexico s oil and gas industries to substantial foreign investment and eventually reverse the downward trend in oil production. President Peña Nieto s agenda also includes reforming education and labor markets, increasing competition in communications industries, and broadening the tax base. 54
Growth moderates after rebounding from mild recession GDP Percent Change Brazil 2009 2010 2011 2012 2013 2014 2015-0.3 7.5 2.7 0.9 2.3 0.7 1.8 Argentina Venezuela Chile Colombia Peru 0.9 9.2 8.9 1.9 5.5-1.4-0.2-3.2-1.5 4.2 5.6 1.1-3.2-0.3-0.9 6.1 6.0 5.6 4.1 2.9 4.0 1.7 4.0 5.9 4.0 4.2 4.9 4.4 0.9 8.8 6.9 6.3 5.0 5.0 5.6 Mexico -6.0 5.6 3.9 3.9 1.1 2.4 4.0 Latin America & Caribbean -1.8 5.8 4.0 2.7 2.6 1.1 2.3 55
Mexico fundamentals and risks
Global Outlook is Positive but Downside Risks are Plentiful Synchronized business cycle with U.S. Good contagion and bad contagion Eurozone setback China hard Landing Oil Price Rise US recovery stalls Domestic Oil dependence: running out of time New administration: will reforms happen and impact positively or same old Security and operational risks remain high 57
Key risks to the global economy Risk China hard landing Eurozone setback Energy price shock US recovery stalls Signposts Loan defaults by developers and local governments trigger a banking crisis and a credit squeeze. Real estate market bubbles burst. The government responds with limited fiscal stimulus. Banking problems intensify, leading to a credit crunch. Greece exits the Eurozone. Spain needs a bailout. Contagion spreads to Italy, Portugal, and France. Conflicts in the Middle East and North Africa lead to an oil supply disruption. Transportation is temporarily affected. Oil prices soar initially, until markets adapt. Russia-Ukraine conflict cuts gas supplies to Europe. Businesses and households spend more cautiously. Recoveries in housing and auto markets relapse. 58
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; room for improvement in risk management 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 59
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 15-Q4 U.S. Ind. Prod. Mex. GDP US Real imports 60
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 14- Q1 14- Q2 14- Q3 14- Q4 15- Q1 15- Q2 15- Q3 15- Q4 U.S. Ind. Prod. Mex. GDP 61
Recent Developments Industry accelerating driven by automotive sector Consumer confidence not picking up PMI on expansion territory Inflation within targeted band; not a threat Government spending accelerating Oil output stable at 2.5 million barrels per day Remittances bottoming up (USD 21.5 billion in 2013) FX Reserves continue to grow; all time peak July 2014 62
Investment constraints growth in Mexico 50 Public Investment growth percent change over previous year 40 30 20 10 0-10 -20 2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4 2013-Q1 2013-Q2 2013-Q3 2013-Q4 2014-Q1 2014-Q2 63 Public Finances National Accounts 63
Investment constraints growth in Mexico. 15.0 Investment 10.0 5.0 0.0-5.0-10.0-15.0 2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4 2013-Q1 2013-Q2 2013-Q3 2013-Q4 2014-Q1 Total Private Public 64 64
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 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 Investment constraints growth in Mexico 130.0 Investment 2008=100, seasonally adjusted 120.0 110.0 100.0 90.0 80.0 70.0 60.0 Total Construction Machinery & equipment 65 65
Construction stabilizes but no signs of growth yet 41 Empresas constructoras: Valor de la producción en términos reales miles de millones de pesos de diciembre 2003 40 39 38 37 36 35 34 33 32 31 30 66 Serie desestacionalizada Tendencia-ciclo 66
Some light at the end of the tunnel Construction percent change year on year 15.0 10.0 5.0 0.0-5.0 Total Buildings Transport -10.0-15.0-20.0 67 67
Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Some more light at the end of the tunnel 150.00 New formal jobs created (thousands) year over year 800.00 100.00 96.21 600.00 400.00 50.00 200.00 0.00-50.00-16.35 0.00-200.00-400.00-100.00-600.00-150.00-800.00 68 Construction (left scale) Total 68
Mexican industry accelerating driven by manufactures Industrial Production - Seasonally Adjusted (Jan 2003=100) 140 130 120 110 100 90 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 May-11 May-12 May-13 May-14 Mexico Brazil 69 69
Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Producers Are Bullish on Mexico s S-T Outlook 58 PMI Manufacturing Headline Index - - 56 54 52 50 48 46 Seasonally Adjusted Above 50 indicates expansion 70
Mexican consumers are not Consumer Confidence (January 2003= 100) 120 100 80 60 40 20 Jul-07 Mar-08 Nov-08 Aug-09 Apr-10 Jan-11 Sep-11 May-12 Feb-13 Oct-13 Jul-14 Mexico USA 71
Low unemployment rates 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 2014 72
Under these conditions, consumption cannot drive growth Consumption % change over previous year 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4 2013-Q1 2013-Q2 2013-Q3 2013-Q4 2014-Q1 Total Private Public 73
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 74
The bright side of Mexico: external accounts
External Accounts: The Bright Side Foreign Exchange Reserves ( Billions of U.S. Dollars) 200 180 160 140 120 100 80 60 Feb-06 Jan-07 Dec-07 Nov-08 Nov-09 Oct-10 Sep-11 Aug-12 Aug-13 Jul-14 76
External Deficit Entirely Financed by FDI External Financing (Billions of U.S. dollars) 40 35 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Current account deficit FDI 77
Exchange Rate: Another Overshooting, Another Correction Exchange Rate (MXN Pesos per USD) 15 14 13 12 11 10 Jul-14 Oct-13 Jan-13 Apr-12 Jul-11 Sep-10 Dec-09 Mar-09 Jun-08 Sep-07 Dec-06 Mar-06 Jun-05 Nominal PPP Bilateral 78
Exchange Rate: Volatility is the norm Recent depreciation 2013-2014 - local currency versus US dollar (30-April 2013 =100) 125 120 115 110 105 100 95 1-May 3-Jun 6-Jul 8-Aug 10-Sep 13-Oct 15-Nov 18-Dec 20-Jan 22-Feb 27-Mar 29-Apr 1-Jun 4-Jul 6-Aug Colombia Brazil Mexico Chile Uruguay Peru Argentina 79
Manageable Fiscal Deficit; but Reforms must yield positive results 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 80
Public Finances Uruguay Cuba Brazil Bolivia Argentina Ecuador Nicaragua Chile Panama Peru Honduras Colombia El Salvador Paraguay Costa Rica Venezuela Dominican Republic Haiti Guatemala Mexico Central government: tax collection * 0.0 5.0 10.0 15.0 20.0 25.0 30.0 *includes social security contributions. Source CEPAL
GDP: Income approach (Percent of Total) Compensation to workers Interest + rent + proprietors' income + corporate profits+ depreciation Indirect business taxes Mexico 27 69 4 Brazil 42 43 15 United States 55 32 13 82
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 33 CYP NLD UK ESP USA DEU FRA BEL ISL PRT IRL ITA GRC MEX 84 84
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 39 20 0 CYP NLD UK ESP DEU FRA BEL ISL PRT IRL ITA GRC USA MEX 85 85
Final Comments Linked business cycle with U.S. economy will continue to dominate Mexico s dynamics, bad contagion ahead Unless energy reform materializes, gloomy outlook is foreseen for the oil sector: lower oil production will hurt oil-export revenues and government fiscal accounts, 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 86
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Mexico Underlying Production Function Trends TFP Growth accelerates above historical rates 6 5 4 3 2 1 0-1 -2 1997 2003 2009 2015 2021 2027 2033 2039 Capital Labor TFP Capital ratio rise as investment remains elevated 350 300 250 200 150 1997 2003 2009 2015 2021 2027 2033 2039 Capital stock (% of GDP, LHS) Investment (% of GDP, RHS) 50 40 30 20 10 0 Labor force adds nearly 20 million through forecast 80 70 60 50 40 30 20 10 0 1997 2003 2009 2015 2021 2027 2033 2039 Labor Force (Millions, LHS) Participation Rate (Percent, RHS) 75 70 65 60 55 50 Unemployment rate 6 5 4 3 2 1 0 1997 2003 2009 2015 2021 2027 2033 2039 Unemployment Rate - NAIRU Unemployment Rate - Actual and WES forecast 88