Download Scenario Review - Mexico

Scenario Review - Mexico
June 2013
No More Cuts
• Temporary factors led to a sharp slowdown of the economy in 1Q13. We expect a rebound
over the next few quarters that will bring growth to 3.2% this year and 3.6% in 2014.
• As markets start to price in an earlier reduction of monetary stimulus in the U.S., the peso
has depreciated. We now expect a slower pace of exchange-rate appreciation (to 12.0 pesos
to the dollar by the end of this year and to 11.8 pesos to the dollar by the end of 2014). We no
longer expect rate cuts.
• A temporarily weaker peso will add to inflation this year. We have revised our inflation
estimate for 2013 to 3.5%. Our inflation forecast for 2014 is unchanged, at 3.5%.
• The government has recently announced a bill to reform the financial sector. Meanwhile,
divisions within the PAN have emerged, posing a new risk for the set of reforms expected to
be sent for congressional approval in the second half of the year.
A Temporarily Slow Economy in 1Q13
The IGAE (a monthly proxy for Mexico’s GDP) fell by 1.8% year over year in March, bringing
1Q13 growth down to 0.8%. Industry was the main drag on activity during the first quarter (1.5%), but services also performed poorly (1.9%). The slowdown from the 4Q12 was mostly due to
calendar effects (2012 was a leap year, and the Easter week fell in April that year). In fact, on a
sequential basis, activity in 1Q13 was weak but not as bad as the year-over-year figure suggests.
The IGAE expanded by 0.25% from February, following a 0.21% gain in the previous month. GDP
therefore expanded by 1.8% qoq/saar in 1Q13.
Slow public expenditures also reduced growth in 1Q13. Nominal primary expenditures fell by
7.7% year over year in the quarter.
We expect activity to rebound in 2Q13. We view the weakness in growth in 1Q13 as transitory,
and not only because of the calendar effects. The markets for labor and credit remain supportive
enough to ensure stronger growth rates in consumption. Also, the public budget set for this year
hints that public expenditures can’t continue declining for long.
A better outlook for the U.S. economy also works in favor of a recovery ahead. We recently
revised our growth expectations for the U.S. economy, for which we now expect stronger
sequential growth rates over the next few quarters.
We expect Mexico’s economy to grow by 3.2% this year. In 2014, we see growth at 3.6%.
Next year, growth will likely be positively influenced by reforms.
No Additional Rate Cuts as U.S. Rates Rise and Curb the Pace of Peso
Appreciation
The balance of payments data show that the current-account deficit is widening in 2013 but
is still at a comfortable level. The current account balance posted a USD 5.5 billion deficit for
1Q13, bringing the four-quarter rolling deficit to USD 14.4 billion (1.2% of GDP), up from USD 11.4
billion in 2012. The wider current-account deficit is mostly due to lower trade balances.
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Mexico – Thursday, June 06, 2013
Interest Differentials Off Their Lows
5.0%
4.5%
4.0%
3.5%
3.0%
Jun-10
10Y Swap Rate Spread Mexico vs. U.S.
Jun-11
Jun-12
Jun-13
Regarding the capital account, foreign portfolio
investment moderated in the first quarter but
remained strong, at USD 13.9 billion. During the
last four quarters, foreign portfolio inflows were
USD 71.1 billion, down from USD 81.3 billion in
2012. Foreign direct investment amounted to USD
5.0 billion in 1Q13 and USD 13.8 billion over the
last four quarters. However, net direct investment
(that is, foreign direct investment excluding
Mexican investments abroad) remained low in
1Q13, at USD 1.3 billion. Over the last four
quarters, the net direct investment account saw
net outflows of USD 9.9 billion.
Source: Bloomberg, Itaú
We now see the exchange-rate trading at 12 pesos to the dollar by the end of this year. For
year-end 2014, our exchange-rate forecast now stands at 11.8 pesos to the dollar.
Previously, we projected the exchange rate at 11.8 pesos to the dollar by the end of 2013 and at
11.5 pesos to the dollar by the end of 2014. The peso weakened sharply against the dollar in May
as markets started to price in an earlier reduction of monetary stimulus in the United States. In
spite of higher rates in the U.S., we still see room for an appreciation of the peso, which will likely
continue to benefit from the debate over structural reforms. In addition, we note that a better
outlook for the U.S. economy combined with the recent negative surprises in China will likely help
the peso to outperform its peer currencies.
We no longer expect rate cuts. In fact, the central bank has communicated clearly that the key
rationale for a potential rate cut would be the lax monetary policies abroad. Thus, now that the
reduction of monetary stimulus in the U.S. could come sooner than expected, the board is unlikely
to lower interest rates. In our previous scenario, we expected the central bank to deliver two 25-bp
rate cuts during 2Q13.
Transitory Factors Keep Headline Inflation Above the Target Range
Mexico’s consumer price index showed a 0.35% decrease in the first half of May. The
deflation was mostly due to seasonal factors (namely, the electricity discounts that take place in
April and in May and are later reversed in October and November).
In spite of the sequential deflation, headline inflation increased on a year-over-year basis,
reaching 4.72% (up from 4.58% in the second half of April). Inflation is therefore running far
above the target range, but this is mostly due to base effects. Also, we note that the May CPI
figure incorporates the new weightings derived from the 2010 household budget survey. Because
the weighting of electricity in the CPI has been reduced, the discounts mentioned above
contributed less to reducing sequential inflation than they did in 2012 and thereby boosted inflation
on a year-over-year basis.
Annual core inflation remained benign, at 2.89%, below the midpoint of the target range.
Within the core, goods inflation came in at 3.54% (3.53% in the previous fortnight). Inflation for
core goods excluding food, alcohol and tobacco is running at 2.87% year over year, helped by
exchange-rate appreciation, while inflation for core food items remains above the target range (at
4.38%). Inflation for services fell by 1 bps (to 2.34%), remaining below the midpoint of the target
range.
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Mexico – Thursday, June 06, 2013
Starting in June, inflation will probably start to converge to the target range. The base
effects will be favorable and the expiration of the electricity discounts will add less to inflation than
it did the previous year.
We now expect inflation to end this year at 3.5% (previously, we saw inflation at 3.3%). For
2014, our inflation forecast is unchanged at 3.5%. Slower exchange-rate appreciation than we
previously expected is the main reason behind the revision.
The Government Presents the Financial Sector Reform
In May, President Enrique Peña Nieto, together with the leaders of Mexico’s major political
parties, announced a bill to reform the financial sector. The government had intended to
unveil the bill a few weeks earlier, but the announcement was put on hold after PRI state officials
in Veracruz were accused of using public funds for electoral purposes. Political tensions eventually
abated, allowing the government to move forward with the reform agenda.
The basic goal of the reform is to increase lending while reducing borrowing costs.
Because credit is scarce in Mexico, there is substantial room to increase productivity by making
financing more accessible. The proposed bill would strengthen bankruptcy laws (improving the
process for the execution of guarantees, for example) in order to reduce uncertainty for lenders. A
unified national credit bureau would also be created, in an effort to help lenders to assess better
each household credit risk. At the same time, the bill would also seek to foster higher competition
within the financial system by, for example, improving price transparency for users of the system
and increasing “loan portability”. Regulatory agencies would also be strengthened. Finally, the bill
aims to increase the participation of the development bank in lending activities.
The political divisions that have emerged within the PAN (one of Mexico’s main opposition
parties) represent a new risk for the energy and tax reforms, both of which are expected to
be submitted for congressional approval during the second half of this year. While the
progress of the financial sector reform can be read as another sign that politicians in Mexico can
find enough common ground to advance reforms, political factors could always disrupt this accord.
The PAN has recently been shaken by a power struggle between the party’s chairman, Gustavo
Madero, and the party’s Senate leader, Ernesto Cordero (who is also a former finance minister).
The dispute has accentuated the divide between those PAN lawmakers who support the Pacto por
México (the Madero camp) and those who believe that the PAN, in Cordero’s words, “can’t be a
satellite of the PRI”. In response to the situation, Madero has decided to change the leadership of
the party in the Senate. The support of the PAN will be a key to making the constitutional changes
necessary for a meaningful energy sector reform.
João Pedro Bumachar
Economist
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Mexico – Thursday, June 06, 2013
Forecasts: Mexico
Economic Activity
Real GDP growth - %
Nominal GDP - USD bn
Population
Per Capita GDP - USD
Unemployment Rate - year avg
Inflation
CPI - %
Interest Rate
Monetary Policy Rate - eop - %
Balance of Payments
MXN / USD - eop
Trade Balance - USD bn
Current Account - % GDP
Foreign Direct Investment - % GDP
International Reserves - USD bn
Public Finances
Nominal Balance - % GDP
Net Public Debt - % GDP
Source: IMF, Bloomberg, INEGI, Banxico, Haver and Itaú
2008
2009
2010
2011
2012
2013F
2014F
1.2
1,094
109.5
9,993
4.0
-6.0
883
111.3
7,935
5.5
5.3
1,034
112.9
9,166
5.4
3.9
1,159
114.3
10,142
5.2
3.9
1,177
115.6
10,184
5.0
3.2
1,324
116.8
11,342
5.0
3.6
1,492
117.9
12,653
4.8
6.5
3.6
4.4
3.8
3.6
3.5
3.5
8.25
4.50
4.50
4.50
4.50
4.00
4.00
13.54
-17.3
-1.7
2.5
85.4
13.06
-4.7
-0.7
1.9
90.8
12.36
-3.0
-0.2
2.1
113.6
13.99
-1.5
-0.8
1.9
142.5
13.01
0.2
-0.8
1.1
163.5
12.00
-5.0
-1.4
2.0
193.0
11.80
-7.0
-1.5
2.5
208.0
-0.1
18.2
0.0%
-2.3
29.0
0.0%
-2.8
30.6
0.0%
-2.5
32.2
0.0%
-2.6
33.7
0.0%
-2.0
33.6
-2.0
33.3
Macro Research - Itaú
Ilan Goldfajn – Chief Economist
Tel: +5511 3708-2696 – E-mail: [email protected]
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Mexico – Thursday, June 06, 2013
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