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Recent Developments and Outlook for the Mexican Economy
April 19, 2016
Credit Suisse, 2016 Macro Conference
Outline
Recent Developments and Outlook for the Mexican Economy
2
Final Remarks3
Inflation and Monetary Policy1
2Recent Developments and Outlook for the Mexican Economy
3
In line with its constitutional mandate, the monetary policy conducted by Banco de Méxicoaims at procuring the stability of the national currency’s purchasing power, at the lowest costto society in terms of economic activity.
Thus, an environment of low and stable inflation in Mexico has been achieved:
In 2015 headline inflation closed at 2.13 percent.
Banco de México expects inflation to close 2016 around the 3 percent permanent target.
During 2016 inflation rebounded due to transitory factors, staying at levels below 3 percent.
Recent Developments and Outlook for the Mexican Economy
To achieve this, the monetary policy conducted by Banco de México has been fundamental.Banco de México has set its monetary policy rate to achieve its permanent target.
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Inflation in Mexico showed a downward trend during 2015, reaching a historical minimum.However, at the beginning of 2016 it rebounded due to a transitory increase in someagricultural products’ prices.
Consumer Price IndexAnnual % change
Source: Banco de México and INEGI.
Headline
CoreVariability interval
Non-Core
4
March
Recent Developments and Outlook for the Mexican Economy
5
Long-term inflation expectations implicit in market instruments have diminished.
1.5
2.0
2.5
3.0
3.5
4.0
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5.0
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Annual Headline Inflation Expectations 1/
%
1/ It refers to long-term inflation expectations implicit in market instruments. Based on the methodology described in Box 1 “Decomposition of the Break-even Inflation” of the QuarterlyReport October-December 2013. Source: Banco de México.
March
Variability interval
Recent Developments and Outlook for the Mexican Economy
Long-term inflation expectations
The Board of Governors estimates that the current monetary policy stance is congruent with theconsolidation of inflation convergence towards to the permanent 3 percent target.
Monetary Policy Rates%
1/ Before January 20, 2008 it refers to the observed Overnight Interbank Interest Rate.2/ The upper limit of the target range is showed.Source: Federal Reserve and Banco de México.
0
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U.S.: Target Federal Funds Rate 2/
Mexico: Target for the Overnight Interbank Interest Rate 1/
April
6Recent Developments and Outlook for the Mexican Economy
Outline
Recent Developments and Outlook for the Mexican Economy
2
Final Remarks3
Inflation and Monetary Policy1
7Recent Developments and Outlook for the Mexican Economy
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Recent Developments and Outlook for the Mexican Economy 8
The international environment has been characterized by a notable weakness in the globaleconomic activity growth rate, which has been reflected in a stagnation of global trade.
World Economy: Evolution of GDP Growth ForecastsAnnual % change
Goods ExportsIndex 2008=100, s.a.
Source: IMF, WEO fall 2011-2015 and spring 2016. s.a. / Seasonally adjusted data.Source: OECD.
G7
January
OECD
December
0
1
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6
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00
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2015
Observed
20132014
20122011
2016
15
30
45
60
75
90
105
120
135
150
20
08
20
09
20
10
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Mexican Oil Mix
WTI
Futures 1/
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International commodity prices showed an important decrease and remain at low levels.
Crude Oil PricesUSD per barrel
1/ Data up to April 12, 2016.Source: Bloomberg.
Recent Developments and Outlook for the Mexican Economy
-20
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-10
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Mexico
U.S.
2.7
1.9
0.5
0.1
1.9
1.1
3.0
3.8
-0.9
4.6
5.0
2.1
0.6
3.9
2.0
1.4
2.0
2.4
2.4
2.4
-2.0
-1.0
0.0
1.0
2.0
3.0
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6.0
I 201
2
III 2
012
I 201
3
III 2
013
I 201
4
III 2
014
I 201
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III 2
015
I 201
6
III 2
016
Recent Developments and Outlook for the Mexican Economy 10
U.S. indicators point to a moderate growth of economic activity in early 2016 and to weaknessin the industrial production.
U.S.: Gross Domestic ProductQuarterly % change at annual rate, s.a.
Manufacturing Activity in the U.S. and Mexico % Annual change, s.a.
s.a./ Seasonally adjusted data.Source: Bureau of Economic Analysis (BEA) and Blue Chip.
s.a./ Seasonally adjusted data.Source: Federal Reserve and INEGI.
4Q 2016 February
Forecast
Recent Developments and Outlook for the Mexican Economy 11
A growing divergence among advanced economies’ monetary policy stances has beenobserved, which has been partially reflected in the value of the US dollar.
-0.7
-0.4
-0.1
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1.1
Oct
-13
Mar
-14
Au
g-1
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Jan
-15
Jun
-15
No
v-1
5
Ap
r-1
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Sep
-16
Feb
-17
Jul-
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Dec
-17
Advanced Economies: Expected Monetary Policy Rates 1/
%
U.S. Dollar Index (DXY) 2/
Index 1-Jan-2013=100
1/ The expected rates are the trajectories implicit in OIS Curves (Overnight Index Swap).Source: Bloomberg with estimates from Banco de México.
2/ DXY index is estimated by the Intercontinental Exchange (ICE) based on the weighted geometric mean ofthe dollar's value compared with a basket of 6 other major currencies which are: EUR: 57.6%, JPY: 13.6%, GBP:11.9%, CAD: 9.1%, SEK: 4.2%, and CHF: 3.6%. Source: Bloomberg.
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Jan
-13
May
-13
Sep
-13
Jan
-14
May
-14
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-14
Jan
-15
May
-15
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-15
Jan
-16
April
Appreciation
Dec. 2016
Dec. 2017
Implied target rate in OIS curve
Federal Reserve
ECB Deposit Facility
ECB Marginal Lending Facility
Bank of Japan
Recent Developments and Outlook for the Mexican Economy 12
Episodes of increased volatility in international financial markets have taken place, althoughdepreciation of EMEs currencies has recently reverted.
Emerging Economies
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Jan
-14
Ap
r-1
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Jul-
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Oct
-14
Jan
-15
Ap
r-1
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Jul-
15
Oct
-15
Jan
-16
Implied Volatility in Exchange Rate Options 1/
%
1/ Refers to implied volatility in one-month options. 2/ Implied volatility in peso options.3/ Refers to the simple average of the options for the currencies of: Brazil, Chile, Colombia, Korea,India, Mexico, Peru, Poland, South Africa and Turkey.Source: Bloomberg
Emerging markets 3/
Mexico 2/
April90
100
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Jan
-13
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-13
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-13
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v-1
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-14
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Nominal Exchange Rate against USDIndex 01-Jan-2013 = 100
Source: Bloomberg.
Korea
Chile
Colombia
South Africa
Brazil
Mexico
April
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At the beginning of 2016, volatility in international financial markets considerably increased andthe external environment faced by the Mexican economy deteriorated. In face of thesedevelopments, the Mexican authorities announced on February 17, 2016 in a timely andcoordinated manner the following measures, which helped to revert the negative trend of thenational currency:
Recent Developments and Outlook for the Mexican Economy
Banco de México
50 bp reference rate increase in an extraordinary meeting.
Foreign Exchange Commission
Suspended auctions of U.S. dollars, leaving open the possibility to intervene
discretionally in the exchange market in exceptional cases.
A preemptive expenditure cut of 0.7% of GDP in 2016.
Ministry of Finance
Additionally, the Ministry of Finance on April 1st announced a cut to government expenditure for the 2017budget by 0.9% of GDP, which will allow to achieve its targeted deficit despite lower oil revenues.
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Public Debt 1/
% of GDP 2/Primary Balance 3/
Constant Billion Pesos of 2017 and % of GDP
1/ Refers to the Public Sector Borrowing Requirements Historical Balance.2/ As percentage of average GDP. e/ Estimates from Ministry of Finance. Doesn’t include the use of thesurplus of the Central Bank, which should reduce the trajectory.Source: Ministry of Finance.
3/ A negative (positive) figure indicates a deficit (surplus). From 2000 to 2008 expenditure includes Pemexphysical investment through Pidiregas scheme.e/ 2016 and 2017 figures are estimates from Ministry of Finance.Source: Ministry of Finance.
Forecast Forecast
e/e/ e/ e/ e/ e/ e/e/
Billions of 2017 Pesos
GDP %
Recent Developments and Outlook for the Mexican Economy
It is expected that from the next year onwards, public debt will begin to gradually diminish.
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Domestic Environment:
Moderate economic growth.
• The output gap has remained negative and it is expected to be gradually closed inthe foreseeable future due to structural reforms.
Banco de México has remained particularly vigilant to the external environment, given thatin the domestic front no signs of aggregate demand pressures on prices have been observed.
Recent Developments and Outlook for the Mexican Economy
• Inflation expectations remain anchored.
• The labor market is gradually recovering.
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The output gap has remained negative and it is expected to remain so in the foreseeablefuture.
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GDP
IGAE
January
4Q-2015
s. a. / Calculated with seasonally adjusted data.1/ Estimated using the Hodrick-Prescott (HP) filter with tail correction method; see Banco de México (2009), “Inflation Report April–June 2009”,p.69.The shaded area is the 95%confidence interval of the output gap, calculated with an unobserved components method.Source: Calculated by Banco de México with data from INEGI.
Output Gap 1/
% of potential output, s. a.
Recent Developments and Outlook for the Mexican Economy
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Outlook for Economic Activity
Gross Domestic ProductAnnual % change
1/ Forecast published in the Quarterly Report October - December 2015.Source: INEGI and Banco de México.
Banxico Forecast 1/
2.0
% -
3.0
%
2.5
% -
3.5
%
Observed
Recent Developments and Outlook for the Mexican Economy
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❸ Growth enhancing reforms
In order to promote potential GDP growth, Mexico has also undertaken an ambitiousstructural reform agenda.
o Energy
o Telecommunication
o Labor
o Financial
o Competition
o Education
o Transparency
o Anti- corruption
A proper implementation of the reforms should boost
productivity
Improvehuman capital
Efficientresourceallocation
Adoption of new technologies
Increasedinvestment
OilElectricity1
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Mexico´s Economic Prospects in a Challenging World Environment
-50
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The peso depreciation has not affected the price formation process, meanwhile interest rateshave had a favorable behavior.
Government Securities’ Interest Rates 1/
%
1/ Since January 21, 2008, the one-day (overnight) interest rate corresponds to the target for theOvernight Interbank Interest Rate.Source: Banco de México and Proveedor Integral de Precios (PiP).
Recent Developments and Outlook for the Mexican Economy
Headline Inflation and Nominal Exchange Rate Depreciation: 1978-2016
Annual %
Source: Banco de México.
March
Headline Inflation
FX Depreciation
Depreciation
2
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1 day
10 years
30 years
1 year
3 months
2 years
April
20
Government Securities’ Holdings by Foreign Investors 1/
MXN billionInternational Reserves
USD billion
1/ Total includes CETES, bonos, udibonos, bondes and bondes D.Source: Banco de México.
Source: Banco de México and International Monetary Fund.
The government securities’ holdings by foreign investors have been stable and internationalreserves remain at high levels.
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0
500
1,000
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Mill
ares
April
Total
0
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Recent Developments and Outlook for the Mexican Economy
8-April
International Reserves
IMF’s Flexible Credit Line
Bonds
CETES
0.0
0.5
1.0
1.5
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3.0
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Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
Observed Inflation
Headline Inflation Target
Variability Interval
21
Annual Headline Inflation 1/
%
1/ Quarterly average of annual headline inflation.Source: Banco de México and INEGI.
2015 Q4
2017 Q4
2016 Q4
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Outlook for Inflation
Recent Developments and Outlook for the Mexican Economy
Outline
Recent Developments and Outlook for the Mexican Economy
2
Final Remarks3
Inflation and Monetary Policy1
22Recent Developments and Outlook for the Mexican Economy
23
Final Remarks
Looking forward, Banco de México’s Board of Governors will remain alert to the performance of allinflation determinants and its expectations for the medium and long term, especially:
The exchange rate and its possible pass-through onto consumer prices.
The monetary stance of Mexico relative to the U.S.
The evolution of the output gap.
→ All of the above, in order to be able to take measures in a flexible manner and whenever conditionsdemand it, so as to consolidate the efficient convergence of inflation to the 3 percent target.
Recent Developments and Outlook for the Mexican Economy
