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The Mexican Economy in the Global Economic Juncture
Mr. Javier Guzmán Calafell, Deputy Governor, Banco de México
Santander EM Day, Macro & Corporates Conference
London, 7 June 2016
Outline
1
External Conditions
2
Evolution of the Mexican Economy
3
Inflation and its Determinants
4
Monetary and Exchange Rate Policies
5
Final Remarks
The Mexican Economy in the Global Economic Juncture
2

International financial markets were affected by an episode of turmoil at the beginning
of 2016.

Although uncertainty declined subsequently, as evidenced by recent bouts of market
turbulence, the global economic and financial situation remain fragile. This is explained,
among other factors, by:
 A weak recovery in advanced economies.
 Subdued global trade growth.
 Expectations of an increase in interest rates in the United States.
 The perception of a reduced effectiveness of monetary policy in advanced economies.
 Geopolitical risks.
 Persistent economic challenges in China.
 Low growth and a vulnerable situation in many emerging market economies.
The Mexican Economy in the Global Economic Juncture
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World economic and trade growth remain below their long-term averages.
World Economy: Real GDP and Trade Volume
Annual % change
14
Real GDP
12
Average Real GDP Growth 2000-2015
10
Trade Volume*
8
Average Trade Volume* Growth 2000-2015
6
4
2
2017
2016
2015
2014
2013
2012
2011
2010
0
*/ Trade volume of goods and services.
Source: IMF (World Economic Outlook, April 2016).
The Mexican Economy in the Global Economic Juncture
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The US economy has shown resilience to international developments, as GDP growth in
this country has exceeded that observed in other advanced economies. However, its
industrial production remains feeble.
United States: Industrial Production
Quarterly Growth
Annualized %
Level and Expected Growth
Index 2012 = 100 and %
108
4
<- Level (Actual)
Actual
Growth in 2016 (Forecast) ->
3
Forecast
2
106
3
1
104
2
102
1
0
-1
-2
100
0
-3
Source: Federal Reserve and Blue Chip Economic Indicators.
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
98
Apr-16
April
May
-1
-4
I
II
III
2015
IV
I
II
III
2016
IV
I
II
III
IV
2017
Source: Federal Reserve and Blue Chip Economic Indicators.
The Mexican Economy in the Global Economic Juncture
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After recording at the beginning of this year its lowest levels since early 2002, the price of
the Mexican oil basket has increased. Futures markets continue to anticipate a gradual
recovery of oil prices.
International Prices of Oil
Index January 2015 = 100
120
WTI
100
BRENT
Futures
80
Mexican Oil Basket
60
40
20
Dec-18
Jun-18
Dec-17
Jun-17
Dec-16
0
Jun-16
Dec-15
Jul-15
Dec-14
Jul-14
Jan-14
June
Source: Pemex and Bloomberg.
The Mexican Economy in the Global Economic Juncture
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Outline
1
External Conditions
2
Evolution of the Mexican Economy
3
Inflation and its Determinants
4
Monetary and Exchange Rate Policies
5
Final Remarks
The Mexican Economy in the Global Economic Juncture
7
Notwithstanding the difficult external environment, the Mexican economy has continued
to expand at a moderate pace…
Mexico: Total Output
Index 2Q-2009 = 100, s.a.
128
IGAE*
GDP
124
120
116
112
108
104
100
March
1Q-2016
2008
2009
2010
2011
2012
2013
2014
2015
96
2016
s.a. / Seasonally adjusted.
*/ Monthly GDP proxy.
Source: INEGI.
The Mexican Economy in the Global Economic Juncture
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… and has kept a stable growth rate despite falling growth in global economic activity.
Real GDP Growth
Annual %
Mexico
4
3
1980-2007
2000-2007
2
2011-2015
1
0
LAC ex. Mexico
United States
LAC: Latin America and the Caribbean.
Source: INEGI, IMF (World Economic Outlook, April 2016) and Bureau of Economic Analysis.
The Mexican Economy in the Global Economic Juncture
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In fact, Mexico is one of the few emerging market economies that has managed to
maintain a stable rate of economic growth, before and after the global financial crisis.
Change in the Growth Rate of Real GDP
2000-2007 vs 2011-2015, % points
1
0
-1
-2
-3
-4
-5
-6
Indonesia
Colombia
Mexico
Malaysia
Peru
India
Turkey
Chile
Poland
Hungary
S. Africa
Thailand
Korea
Brazil
China
Russia
-7
Source: IMF (World Economic Outlook, April 2016) and INEGI.
The Mexican Economy in the Global Economic Juncture
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In the face of stagnation of US industrial production and a situation of weakness in the
global economy, non-oil exports have been sluggish. Thus, economic activity has been
supported by domestic demand.
Exports
Index 2008 = 100, s. a.
Consumption and Investment
Index 2008 = 100, s. a.
160
125
Private Consumption in the Domestic Market
Total
120
140
Gross Fixed Investment
Oil
115
120
Non-Oil
110
100
105
80
100
60
95
40
s. a./ Seasonally adjusted.
Source: SAT, Secretaría de Economía, Banco de México and INEGI.
March
85
2016
2015
2014
2013
2012
2011
2010
2009
2008
20
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
April
90
s. a./ Seasonally adjusted.
Source: INEGI.
The Mexican Economy in the Global Economic Juncture
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As for the external sector, the current account deficit has widened mainly as a result of
the deterioration of the oil trade balance.
Mexico: Current Account and Trade Balance
% of GDP
3.0
2006
2015
-0.8
-2.8
-0.6
-1.3
Oil
2.0
-0.9
Non-Oil
-2.6
-0.4
Current Account
Trade Balance
2.0
1.0
Oil Trade Balance
0.0
Non-Oil Trade Balance
-1.0
-2.0
2016*
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
-3.0
*/ Data for 2016 corresponds to the first quarter.
Source: Banco de México and INEGI.
The Mexican Economy in the Global Economic Juncture
12
Mexico’s Share in US Imports ex. Crude Oil
%, s.a.
13
As evidenced by the fact that Mexican
exports have continued to gain share in the
US market, these have remained very
competitive.
12
11
This would allow a more balanced growth of
the various components of aggregate
demand.
10
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
April
2004

14
2003

15
It is expected that the Mexican economy
will continue to display a gradual recovery in
coming months, in part as a result of the
anticipated rebound of industrial output in
the US.
2002

s. a./ Seasonally adjusted.
Source: Banco de México with data from the US Department of Commerce.
The Mexican Economy in the Global Economic Juncture
13
9
Nonetheless, the output gap could remain negative throughout 2017 and downside risks
persist.
Output Gap Estimates and Projections
% of potential, s.a.
Real GDP Growth Projections
Annual %
7
6
Banco de México1/
3
Banamex
Survey2/
2
Banco de México Survey3/
2017
Q4
2016
Q4
7
6
2016
2017
2.0 – 3.0
2.3 – 3.3
4
2.30
2.76
3
2.45
2.80
2
5
4
2015
Q4
5
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
-6
-6
-7
-7
Q2
Q4
2008
Q2
Q4
2009
Q2
Q4
2010
s.a./ Seasonally adjusted.
1/ Quarterly Report, January-March 2016, released 25 May 2016 .
2/ Median projection of the 20 May 2016 release.
3/ Median projection of the May 2016 survey, released 1 June 2016.
Source: Banco de México, Banamex and INEGI
Q2
Q4
2011
Q2
Q4
2012
Q2
Q4
Q2
2013
The Mexican Economy in the Global Economic Juncture
Q4
2014
Q2
Q4
2015
Q2
Q4
2016
Q2
Q4
2017
14
Outline
1
External Conditions
2
Evolution of the Mexican Economy
3
Inflation and its Determinants
4
Monetary and Exchange Rate Policies
5
Final Remarks
The Mexican Economy in the Global Economic Juncture
15
In spite of the significant depreciation of the peso exchange rate, inflation recorded in
2015 historical minima for 8 consecutive months, and currently stands at 2.5 percent,
below the 3 percent target.
Headline CPI and USD/MXN Exchange Rate
Index September 2014 = 100
140
Headline CPI
135
Target CPI
130
Exchange Rate
125
120
115
110
105
100
95
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
May
Source: Banco de México and INEGI.
The Mexican Economy in the Global Economic Juncture
16
Survey-based long-term inflation expectations have decreased and show greater
convergence to the target, although they are still slightly above it.
Inflation Expectations
Annual %
3.6
Year Ago
Latest
3.5
3.4
3.3
3.2
3.1
3.0
Next 1-4 Years
Next 5-8 Years
Next 2-6 Years
(Banco de México)
(Banco de México)
(Banamex)
Source: Banco de México and Banamex.
The Mexican Economy in the Global Economic Juncture
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These achievements are the result of a combination of factors.

Chief among them is the implementation of prudent macroeconomic policies over
several years.
 In particular, monetary policy set by an independent central bank and in the context of
an inflation targeting regime has allowed to strengthen the credibility of the
authorities’ commitment with price stability.

The structural reforms set in motion over the last years have resulted in declines in the
prices of several key goods in the economy, telecommunications and electricity among
them.

Inflation has also been contained by lower international prices for several inputs and the
absence of demand pressures on prices.
The Mexican Economy in the Global Economic Juncture
18
Inflation is projected to fluctuate around 3 percent during the rest of this year and the
next.

This is explained to a great extent by the expected behavior of gasoline prices.
 Starting in January this year, the Finance Ministry (SHCP) changed the mechanism for
the determination of these prices, temporarily introducing a fluctuation band based on
international prices, as way of transition towards their full liberalization in January
2018.

Thus, inflation in Mexico will be affected this year and next, by both the seasonality in
the international prices of this product and the formula used by the Finance Ministry to
set its domestic prices.

A trajectory of inflation characterized by fluctuations around 3 percent would be both
normal and consistent with achievement of the target.
The Mexican Economy in the Global Economic Juncture
19
Outline
1
External Conditions
2
Evolution of the Mexican Economy
3
Inflation and its Determinants
4
Monetary and Exchange Rate Policies
5
Final Remarks
The Mexican Economy in the Global Economic Juncture
20
Notwithstanding a situation characterized by a negative output gap, low inflation and
firmly anchored inflation expectations, the reference interest rate has been increased
twice recently.
25 bps increase to 3.25%.
December 17, 2015
 Following the 25bps increase in the target range for the federal funds rate by the
U.S. Federal Reserve.
50bps increase to 3.75%.
February 17, 2016
Extraordinary Meeting
 As part of a coordinated policy response to the increase in volatility in
international financial markets, the deterioration of the external environment,
and risks for inflation and its expectations deriving from the sharp adjustment of
the exchange rate.
The reference rate has been kept unchanged subsequently, as inflation is expected to
display a trajectory consistent with the target.
The Mexican Economy in the Global Economic Juncture
21

In implementing monetary policy, the Board of Governors of the Banco de México
has sought the convergence of inflation to the target at the lowest possible cost
in terms of economic activity.

Notwithstanding the above-mentioned interest rate hikes, monetary conditions
have remained very relaxed as a result of the exchange rate depreciation.

The incidence of the higher monetary policy rate has been concentrated on shortterm interest rates.

In any event, the achievement of low and stable inflation represents the best
contribution that the Banco de México can make to economic growth.
The Mexican Economy in the Global Economic Juncture
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
The Board will remain vigilant of all determinants of inflation and its expectations,
especially:
The exchange rate and its possible pass-through to domestic prices.
The relative monetary policy stance between Mexico and the US.
The evolution of the output gap.

The Banco de México will adjust the monetary policy stance with all due flexibility
and at the moment that conditions require it, in order to consolidate the efficient
convergence of inflation to the 3 percent target.

Therefore, the reference rate in Mexico can increase irrespective of the pace of
normalization of monetary policy in the United States.
The Mexican Economy in the Global Economic Juncture
23
Although the Mexican peso has continued to be subject to pressures, the peso-U.S. dollar
rate stands below the levels reached in mid-February…
USD/MXN Exchange Rate
Pesos per Dollar
400
19.5
<- Memo: Auctioned USD (Million)
USD/MXN ->
320
19.0
240
18.5
160
18.0
80
17.5
June
Jun-16
May-16
Apr-16
Mar-16
Feb-16
17.0
Jan-16
0
Source: Banco de México.
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… within the context of a more liquid foreign exchange market, lower volatility of the
exchange rate…
USD/MXN Buy-Sell Spread
MXN cents
Implicit Volatility in 1-Month USD/MXN Options
%
400
1.00
400
20
<- Memo: Auctioned USD (Million)
320
0.90
320
18
Volatility ->
240
0.80
240
16
160
0.70
160
14
0.60
80
12
0.50
0
Jun-16
May-16
Apr-16
June
Mar-16
Jun-16
June
May-16
Apr-16
Feb-16
Jan-16
Source: Banco de México and Reuters.
Mar-16
Buy-Sell Spreads ->
0
Feb-16
<- Memo: Auctioned USD (Million)
Jan-16
80
Source: Banco de México and Bloomberg.
The Mexican Economy in the Global Economic Juncture
25
10
…and in general improved operating conditions.
Operating Conditions of the USD/MXN Market1/
Index
400
65
Operating Conditions ->
320
57
240
49
160
41
80
33
May-16
Apr-16
Mar-16
Feb-16
Jan-16
25
Jun-16
June
0
1/ The index is calculated based on the volatility, skewness, and kurtosis implicit in 6-month options for the USD/MXN, taking the performance during 2007-2015 as the benchmark.
Source: Banco de México with data from Bloomberg.
The Mexican Economy in the Global Economic Juncture
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<- Improving | Worsening ->
<- Memo: Auctioned USD (Million)

Mexico’s Foreign Exchange Commission, integrated by officials from the Ministry of
Finance and the Banco de México, has made it clear that:
It does not rule out the possibility of discretionary interventions in the foreign
exchange market should extraordinary conditions arise.
The nominal anchoring of the currency will continue to be sought through the
preservation of solid economic fundamentals.
The Mexican Economy in the Global Economic Juncture
27
The macroeconomic framework has also been supported by the ongoing strengthening of
public finances. In addition, the resilience of the Mexican economy will be enhanced by
the recent renewal and increase of the Flexible Credit Line with the IMF.
International Reserves and Flexible Credit Line
Level and relative to other indicators
300.0
72.0
264.6
International Reserves
252.1
58.1
250.0
87.7
200.0
60.0
Flexible Credit Line
83.4
19.2
48.0
150.0
36.0
25.3
100.0
177.0
168.7
38.8
50.0
16.9
0.0
<- Level (billion USD)
<- % of external short-term
debt
% of foreign portfolio
liabilities ->
24.0
8.4
% of GDP ->
12.0
8.1
2.7
5.4
0.0
Months of total imports ->
Source: Banco de México and IMF.
The Mexican Economy in the Global Economic Juncture
28
It should also be noted that solvency indicators for Mexico are favorably placed within
the emerging market world.
Emerging Market Economies: Credit Default Swaps
Basis points
June
640
580
520
460
400
340
280
220
160
100
Brazil
S. Africa
Turkey
Russia
Colombia
Indonesia
Peru
Malaysia
India
Mexico
Hungary
Thailand
Chile
Poland
Korea
Jun-16
Feb-16
Nov-15
Aug-15
Apr-15
Jan-15
Sep-14
Jun-14
Mar-14
Nov-13
Aug-13
May-13
40
Source: Bloomberg.
The Mexican Economy in the Global Economic Juncture
29
Outline
1
External Conditions
2
Evolution of the Mexican Economy
3
Inflation and its Determinants
4
Monetary and Exchange Rate Policies
5
Final Remarks
The Mexican Economy in the Global Economic Juncture
30

In spite of the difficult external conditions, the Mexican economy has continued to
display stable growth rates and low inflation.

However, the importance of strengthening the country’s economic fundamentals as
well as the domestic sources of growth has increased. This requires coordinated
actions in different areas.
In addition to the efforts on the monetary policy front, it will be fundamental to
continue with fiscal consolidation, so as to ensure the achievement of the targets
set for the PSBR and public debt in coming years.
It will also be necessary to preserve financial stability, and to ensure an adequate
implementation of the actions of structural reform and institutional change set in
motion to increase the country’s economic growth potential.
Finally, the authorities must be ready to implement any additional actions
required to ensure macroeconomic and financial stability, as well as a more solid
foundations to propel the economy’s growth.
The Mexican Economy in the Global Economic Juncture
31