Manuel Sánchez, Deputy Governor Adam Smith Seminar, Schloss Spiez, Switzerland, July 2, 2014
Contents 1 The return of market optimism 2 Mexico s cyclical recovery 3 Structural challenges 2
International financial conditions reflect the perceived postponement of monetary tightening by major central banks The Fed will likely continue tapering asset purchases, but it will probably maintain the current target range for the Fed funds rate for a considerable time The ECB recently lowered its monetary policy rates, launched targeted long term refinancing operations, and decided to intensify work for outright purchases in the ABS market The Bank of Japan is to continue quantitative and qualitative monetary easing Other advanced countries central banks have followed suit 3
The renewed search for yield has boosted overall and highrisk financial asset prices Interest rates for select fixed rate market instruments % United States Europe 30 25 20 The range in the last 10 years June 30 15 10 5 0 AAA Corporates BBB Corporates High Yield Corporates* ABS MBS Agencies AAA Corporates BBB Corporates High Yield Corporates* *Bonds with a rating below BBB. The duration of AAA rated U.S. and European corporate bonds, BBB rated U.S. corporate bonds, and mortgage backed securities is approximately 7 years. The agency bonds, European BBB rated corporate bonds, and U.S. and European high yield bonds have a duration of about 4 years. The duration of asset backed securities is 2 years Source: Bank of America Merrill Lynch Indices 4
and has also dampened financial market volatility Financial market volatility 300 Basis points 100 Percentages 250 80 200 60 150 100 40 50 20 0 Treasury Bills 1/ 0 Standard & Poor's 500 Index 2/ Currency index 3/ Commodities index 4/ June 30 The range in the last 10 years 1/ MOVE, index of implied volatility in at the money" options at a maturity of one month over Treasury bonds with maturities of 2, 5, 10 and 30 years. 2/ VIX, index of average implied volatility at one month in the options market for the S&P 500. 3/ CVIX, implied volatility at 3 months for currency rates. 4/Historic volatility for the CRB (index of futures for commodities comprised of 19 contracts) Source: Own calculations with Bloomberg data 5
At the same time, portfolio capital flows to emerging markets have recently regained steam Portfolio flows from nonresidents to emerging economies 1 Billions of dollars 45 30 15 0 15 30 45 Jan 13 Feb 13 Mar 13 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 1/ Includes 30 emerging economies. Data from April to June 2014 to be updated by the IIF Source: Institute of International Finance (2014), EM Portfolio Flows Tracker for June 2014, IIF Research Note,May 6
In Mexico, as in other emerging markets, foreign holdings of local currency government bonds have rebounded 2.0 1.5 Total Bank deposits Government securities 2 M4 held by nonresidents 1 Trillions of pesos at December 2010 prices 1.0 0.5 0.0 2007 2008 2009 2010 1/ M4 is defined as domestic financial assets and domestic private sector bank deposits plus deposits in Mexican banks agencies abroad, held both by residents and nonresidents. 2/ Marked to market Source: Banco de México 2011 2012 2013 2014 7
while private sector access to market financing has continued an upward trend Outstanding nonfinancial private sector debt End of period; billions of pesos at December 2010 and billions of dollars at 1982 84 350 300 1 Domestic markets 2 International markets (right axis) 35 25 250 200 15 150 2007 2008 2009 2010 1/Includes commercial paper,ious, stock certificates, and ordinary participation certificates. 2/Includes bonds and commercial paper Source: Banco de México 2011 2012 2013 2014 5 8
As a result, interest rates remain at all time or nearly alltime lows Mexico: Government bond yields %, daily average 9 8 3 year 10 year Q2 7 6 5 4 2007 2008 2009 2010 2011 2012 2013 2014 Source: Banco de México 9
However, there is no evidence of overheating in credit markets 40 Total financing Mexico: Total financing to the nonfinancial private sector End of period; % of GDP 35 Bank lending 1 30 25 20 15 10 2007 2008 2009 2010 2011 2012 2013 2014 1/ Performing commercial bank credit to the nonfinancial private sector Source: Banco de México and INEGI 10
notwithstanding a certain recent deterioration in loan portfolio quality 25 20 Mexico: Adjusted delinquency rates in the nonfinancial private sector 1 Quarterly averages; % Total Consumer 15 10 5 0 2007 2008 2009 2010 1/ The adjusted delinquency rate is the past due loan portfolio plus write offs over the previous twelve months divided by the total loan portfolio plus write offs over the previous twelve months Source: Banco de México 2011 2012 2013 2014 11
Real estate prices have just kept up with consumer prices 110 Homes Home prices vs. the CPI 1 2012=100 100 CPI Q2* 90 80 70 60 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1/ Quarterly average for the CPI and quarterly data for home prices. */ Only includes April and May Source: Sociedad Hipotecaria Federal and INEGI 12
and no significant FX appreciation from the financial bonanza has occurred, thereby limiting carry trades somewhat Mexico and emerging economies: Nominal exchange rate Local currency prices in terms of USD, December 2012=100 110 105 Emerging economy currencies other than MXN* Mexican peso 100 95 Appreciation 90 85 Dec 12 Jan 13 Feb 13 Mar 13 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 */ Includes Brazil, Chile, Colombia, Russia, Turkey, Poland, the Czech Republic, India, Indonesia, South Korea, Thailand, South Africa, Peru, Hungary and Malaysia Source: Bloomberg 13
Yet global risk taking poses challenges to emerging economies, including Mexico s Market calm seems to increase with bad news from the pace of recovery in advanced economies Addiction to lax monetary policy leads to a search for yield in the form of leverage, or lower quality, illiquid assets As disequilibria may build, significant asset price corrections may occur Given that investors may anticipate and act ahead of monetary policy decisions in advanced countries, capital flows could unwind in a disorderly way Authorities in emerging markets should remain alert to burgeoning vulnerabilities 14
Some factors in the Mexican economy could mitigate disturbances from possible capital flow reversals Modest and stable external debt to GDP Moderate corporate leverage and FX exposure Deep and liquid FX and sovereign bond markets Macroeconomic fundamentals Reduced inflation Relatively stable public debt Low current account deficit more than financed by FDI Solid banking sector 15
Contents 1 The return of market optimism 2 Mexico s cyclical recovery 3 Structural challenges 16
Since mid 2012, Mexico s GDP growth has taken a declining path and become stuck at low rates 4 Gross Domestic Product % change, s.a. 8 3 2 4 1 0 0 1 2 4 3 Nonannualized quarterly (left axis) Annual 4 2008 2009 2010 2011 2012 2013 2014 8 s.a. / Seasonally adjusted Source: Own calculations with data from INEGI 17
Economic deceleration reflects a sequence of negative shocks The U.S. slowdown A drop in government spending due to a new administration A shortage in the natural gas supply stemming from distribution bottlenecks, as well as greater demand and lower production The bankruptcy of the three largest housing development firms Tax reform which includes hikes and the elimination of immediate capital expenditure deductibility 18
Although manufacturing has picked up, construction continues to stagnate 110 105 Manufacturing Construction Mexico: Manufacturing and construction Quarterly averages; 2008 = 100; s.a. 100 95 90 85 2008 2009 2010 2011 2012 2013 2014 s.a. / Seasonally adjusted Source: INEGI 19
The transitory slowing in manufacturing appears to stem from a soft patch in export demand 4,500 Exports of goods and services Billions of 2008 pesos; s.a. 4,000 3,500 3,000 2,500 2008 2009 2010 2011 2012 2013 2014 s.a. / Seasonally adjusted Source: INEGI 20
Private consumption has remained largely flat since 2013 9,500 Private consumption Billions of 2008 pesos; s.a. 9,000 8,500 8,000 7,500 2008 2009 2010 2011 2012 2013 2014 s.a. / Seasonally adjusted Source: INEGI 21
reflecting weaker confidence levels 115 Consumer confidence Quarterly averages; 2008 = 100, s.a. 110 105 Q2* 100 95 90 85 2008 2009 2010 2011 2012 2013 2014 */ Only April to May s.a. / Seasonally adjusted Source: INEGI and Banco de México 22
Investment has been a drag on the economy 2,500 Gross fixed capital formation Billions of 2008 pesos; s.a. 2,000 1,500 Private Public 1,000 500 2008 2009 2010 2011 2012 2013 2014 s.a./ Seasonally adjusted 1/ Manufacturing Sector Business Confidence Indicator Source: INEGI 23
while the performance of bank lending has followed that of output Mexico: Bank credit and economic growth Real annual change, % 20 1 Credit 10 GDP 0 10 20 2008 2009 2010 2011 2012 2013 2014 1/ Performing commercial bank credit to the nonfinancialprivate sector. Change based on end of period figures Source: Banco de México and INEGI 24
Given improved global conditions, Mexico s GDP should rise gradually this year, and the next few years Mexico: GDP growth forecasts % 2014 2015 2016 Banco de México 2.3 3.3 3.2 4.2 n.a. Banco de México Survey 2.8 3.9 4.1 Blue Chip 2.9 3.9 n.a. The World Bank 2.3 3.5 4.0 Source: Banco de México, Blue Chip Economic Indicators and the World Bank 25
However, some risks persist In the short term, risks are to the downside Possible additional weakening in consumer confidence Greater deterioration in the construction sector Increased global risk aversion In the long term, risks are to the upside Momentum from structural reforms 26
In the context of slower GDP growth, monetary policy accommodation has broadened 9 Mexico: Monetary Policy Rate Annual, % 8 June 7 6 5 4 3 2 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 Source: Banco de México 27
Annual inflation is in the process of converging to the 3 percent permanent target 8 Average annual inflation % 7 6 5 4 3 Target 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *2014 */ Until May Source: INEGI 28
A significant risk is upward pressure and volatility in the noncore component of the consumer price index 8 Average annual inflation % 7 Core Non core 6 5 4 3 Target 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *2014 */ Until May Source: INEGI 29
Contents 1 The return of market optimism 2 Mexico s cyclical recovery 3 Structural challenges 30
Mexico s long term economic growth has been disappointing 9.6 Mexico: GDP Natural logs, billions of 2008 pesos 9.4 9.2 9.0 Average annual change (%) GDP 2.4 8.8 GDP per capita 0.8 8.6 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Own calculations based on INEGI data 31
The main challenge to sustained economic improvement is how to enhance total factor productivity growth Mexico: Growth accounting from 1981 to 2013 1 Annual average % change 0.65 0.51 0.03 0.70 0.81 Working age population relative to the total Hours worked relative to working age population Contribution of capital Total factor productivity GDP per capita Contribution of labor 1/ Own calculations with data from the World Development Indicators, International Financial Statistics, Conference Board Total Economy Database and data and theory from Kehoe, T.J. y F. Meza, (2011), Catch up Growth Followed by Stagnation: Mexico, 1950 2010, Latin American Journal of Economics, 48(2). Sums might not be equivalent to totals due to rounding 32
The current reform agenda seeks to bring about investment and productivity gains The scope of the reforms is broad The opening of the energy sector to private agents is noteworthy Contracts in exploration and extraction for oil and hydrocarbons Permits in gas processing and oil refining, transportation, storage, distribution, and commercialization Participation in electricity generation and sales Telecommunications reform is also promising Playerscanofferalltypesofservicesprovidedmarketnonconcentration requirements are met Limits on FDI reduced 33
With geologic conditions similar to those of Texas, Mexico has a big opportunity for a more efficient oil sector 1,250 Mexico and Texas: Crude Oil Production Millions of barrels 1,000 Mexico Texas 750 500 250 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *2014 */ Data annualized for Texas January to March and for Mexico, January to April Source: The U.S. Energy Information Administration (EIA) and Petróleos Mexicanos 34
Despite abundant natural gas reserves, Mexico achieves only minimum and declining production 7,500 6,000 Mexico Texas Mexico and Texas: Natural Gas Production Billions of cubic feet 4,500 3,000 1,500 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *2014 */ Data annualized for Texas January to March and for Mexico, January to April Source: The U.S. Energy Information Administration (EIA) and Petróleos Mexicanos 35
Mexico cannot import enough natural gas cheaply due to a limited pipeline network, another investment opportunity 20,000 Mexico: Pipeline Network kilometers 18,000 Gas Oil 16,000 14,000 12,000 10,000 8,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Presidencia de la República (2013), Primer Informe de Gobierno 2012 2013. Gobierno de los Estados Unidos Mexicanos 36
More readily available and cheaper natural gas and electricity would boost economic total productivity 20 18 United States Mexico 2 Mexico and the United States: Electricity prices 1 U.S. dollar cents of 2008 per kilowatt hour 16 14 12 10 8 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1/ Includes residential, commercial, services and agricultural. 2/ PPP adjusted, data up to October 2013 Source: Own calculations with information from the Energy Information Administration, SENER and OECD 37
The telecom sector needs more competition to broaden access, improve quality, and reduce prices Mexico and the United States: Broadband for consumers 1 Speed (megabytes per second) Price (USD per megabyte per second) Subscribers (per 100 inhabitants) Optic fiber connections (% subscribers) Mexico 12.9 5.82 11.9 4.73 United States 24.7 3.49 29.3 7.72 1/ Speed and price of broadband as of June 2014, and subscribers and fiber connections as of 2013 Source: OOKLA (2014), June; OECD Broadband Portal 38
Final remarks Authorities need to remain alert given market calm due to postponed tighter monetary policy in advanced nations Long positions in the search for yield pose risks Mexico s GDP growth reflects negative transitory shocks, and the rebound still has to overcome drags from stagnant construction, lower investment, and soft private consumption With disappointing long term economic growth, the main challenge is how to enhance productivity Reforms, currently in progress, have to be high quality and wellimplemented to draw investors and bring about productivity gains 39
Mejoran las perspectivas económicas mundiales 40