The Mexican Economy: Tackling the problems · 1 2 3 Two short-term challenges The economic outlook The problem of long-term growth Contents The Mexican Economy: Tackling the problems

Bank of Japan, Tokyo, March 31, 2015

The Mexican Economy: Tackling the problems

Manuel Sánchez

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Two short-term challenges

The economic outlook

The problem of long-term growth

Contents

The Mexican Economy: Tackling the problems 2

3The Mexican Economy: Tackling the problems

Despite the modernization of the last few decades, Mexico’s long-term economic performance has been less than stellar

1/ GDP per capita at current dollars in 2014 was US$10,837Source: Penn World Table 8.0

0

10,000

20,000

30,000

40,000

50,000

60,000

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60

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62

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70

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02

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10

South Korea

China

Mexico

Singapore

GDP per capita at chained PPPs1

2005 U.S. dollars


The key problem is stagnant total factor productivity

Mexico: Growth accounting from 1981 to 20131,2

Annual average % change

1/ Own calculations with data from the World Development Indicators, International Financial Statistics, ConferenceBoard Total Economy Database and data and theory from Kehoe, T.J. and F. Meza, (2011), “Catch-up Growth Followedby Stagnation: Mexico, 1950-2010,” Latin American Journal of Economics, 48(2)2/ Sums might not be equivalent to totals due to rounding

0.70

0.03

0.65-0.51

0.81

Working-age populationas % of the total

Hours worked as % ofworking-age population

Contribution to capital Total factor productivity GDP per capita

Contribution to labor


Mexico has undertaken an ample reform agenda in the aim of tackling this problem

Reforms encompass many sectors, including

Labor

Education

Financial system

Telecommunications

Energy

The general objective is to promote greater market flexibility, investment in both human and physical capital, and competition


The telecoms reform seeks to widen access to services atlower prices

FDI caps have been lowered, operators can now offer a broad basket of services, and two new national digital TV networks are in the works

Customer mobility is facilitated across telecoms operators

A price restriction is imposed on all telephony operators in the elimination of national long distance fees

An asymmetric regime applies to dominant telecoms and broadcasting players in order to level the playing field

The reform has yielded benefits, with an already declining trend in relative telecoms prices deeper, and greater variety in packages offered


The energy reform allows private participation invirtually all aspects of the sector

Contracts to govern upstream oil and gas activities, and permits to be granted for middle and downstream undertakings

Permits conceded to generate, sell and import electricity

Recent progress:

Two auctions announced for oil exploration and extraction

Two contracts awarded to deliver gas in private pipelines

The first permit granted to import electricity connected to the National Electric System

Investment, production efficiency and lower domestic energy prices are expected


Deep-seated results from the reforms requirefundamental conditions

Good-quality implementation in the sense of actually producing greater market flexibility, investment and effective competition

Complementary policies

A strengthened rule of law

Further investments made in physical infrastructure

Enhanced public security

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Contents



The first challenge comes from lower oil prices anddeclining production

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Mexico: Price for the Mexican oil mix and crude productionDollars per barrel, 3-month moving average; millions of barrels on a daily basis, trend

2.0

2.5

3.0

3.5

20

40

60

80

100

120

140

Jan

-04

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Mexican oil mix price

Crude production (right axis)

Source: Bloomberg and INEGI


… which have weakened the public-sector financialposition

Mexico: Oil-related public revenues

Source: Haver Analytics

-40

-20

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% of total revenue Annual real change (right axis)


The government has sent investors a sign of fiscalresponsibility

Proactive spending cuts announced amounting to 0.7 percent ofGDP

Austerity measures taken across government ministries and thestate oil and electricity companies

Some investment projects cancelled or postponed

The above despite the fact 2015 budgeted oil revenue is almostfully hedged


Although still important for the government, oil accountsfor a declining share of Mexico’s total exports and output

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Mexican oil indicators

*/ January-February, except oil production, which is to JanuarySource: Banco de México, Haver Analytics and INEGI

2004 2014 2015*

Mexican oil mix priceDollars per barrel, daily average

31.1 87.7 43.0

Oil productionMillion of barrels per day, average

3.4 2.4 2.3

Oil and gas extraction% of GDP

9.1 5.9 n.a.

Oil exports% of total exports

12.6 10.8 7.3

Oil trade balanceMillions of dollars

12,434 1,489 -1,423

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Mar

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December 2014 median FOMC forecast

March 2015 median FOMC forecast

Implied forward overnight rate

December 2014 FOMC forecast interval――

March 2015 FOMC forecast interval――


The second challenge stems from future U.S. monetarynormalization, the pace of which remains highly uncertain

1/ As of March 20, 2015Source: Bloomberg with calculations by Banco de México

Federal Reserve: Implied forward overnight rate and FOMC fed funds rate forecasts

%

1


The Mexican peso has been hit by international volatility mainly reflecting broad dollar strength

1/ The DXY is a weighted average of the dollar's value relative to the euro (57.6%), Japanese yen (13.6%), pound sterling (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%), and Swiss franc (3.6%)Source: Own calculations based on a first difference of logarithms linear regression with Bloomberg data

Mexico: Changes in MXN/USD rate explained by oil prices and the U.S. dollar%

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3-S

ep

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-Se

p-1

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WTI

DXY1


The yield curve has shifted upward, largely along withthat of the United States

Government securities yield curve1

%

1/ Solid line, April 30, 2013. Dotted line, March 27, 2015Source: Banco de México and U.S. Treasury

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Mexico

United States


Although nonresident holdings of peso government securities have

continued to rise, future portfolio adjustments cannot be ruled out

1/ Cetes, Bondes D, Bonos and UdibonosSource: Banco de México

1,000

1,250

1,500

1,750

2,000

2,250en

e.-1

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mar

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jul.-

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sep

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ene.

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February

Nonresident holdings of peso-denominated government securities1

Billions of pesos

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Contents



In Mexico, economic activity has begun to gain somesteam

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Mexico: GDP growthAnnual % change, trend

Source: INEGI

-8

-4

0

4

8

Q12008

Q3 Q12009

Q3 Q12010

Q3 Q12011

Q3 Q12012

Q3 Q12013

Q3 Q12014

Q3

Q4


The current upturn has been driven largely by externaldemand

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Mexico: Aggregate demandAnnual % change, trend

Source: INEGI

-20

-10

0

10

20

30

Q12008

Q3 Q12009

Q3 Q12010

Q3 Q12011

Q3 Q12012

Q3 Q12013

Q3 Q12014

Q3

Domestic spending

External spending

Q4


An important source of impetus has come from manufacturing exports

to the U.S., which have recently weakened due to temporary factors

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Mexico: Manufacturing exports2008=100; s.a.

*/ Estimated on the basis of January and February datas.a. / Seasonally adjustedSource: Banco de México

60

80

100

120

140

160

Q12008

Q3 Q12009

Q3 Q12010

Q3 Q12011

Q3 Q12012

Q3 Q12013

Q3 Q12014

Q3 Q12015

To the U.S.

To the rest of the world Q1*


Going forward, Mexico should benefit from a strongerU.S. economy

U.S. and Mexican GDP forecastsYoY % change

Source: Blue Chip Economic Indicators, March 2015 and Banco de México (2015), Quarterly Report, October-December 2014, Summary, February

2014 2015 2016

U.S. Blue Chip 2.3 3.1 2.9

Mexico Blue Chip 2.1 3.1 3.7

Mexico Banxico 2.1 2.5 – 3.5 2.9 – 3.9


However, the growth scenario faces some risks

To the downside

Consumer and producer confidence potentially remaining stagnant

The risk of a negative impact on economic activity from social unrest

Possibly continuing declines in oil production and prices

To the upside

Stronger-than-foreseen U.S. economic recovery

Greater-than-expected push from structural reforms


In the wake of soft economic activity, Mexico’smonetary policy accommodation increased

Mexico: Monetary policy rate%

Source: Banco de México

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Sep

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Sep

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Jan

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After an off-track period reflecting mainly noncore components,

inflation has returned to a path toward the 3 percent permanent target

Annual inflation%

First half of March

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Headline

Core

Source: INEGI

Target

In this context, inflation risks should be carefully monitored to consolidate convergence to the target

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Risks

Despite low pass-through in recent years, substantial currency depreciation may have a wide impact on inflation

Renewed substantial rises in noncore price components

Eventual aggregate demand pressures

Challenges

Relative monetary stance vis-à-vis the United States

Analysts’ long-term inflation expectations remain above the target


Concluding remarks

Mexico has undertaken an ample reform agenda to tackle the problem of low productivity growth

Success depends on the degree the reforms actually bring about market flexibility, investment, and effective competition

In the short term, financial challenges stem from lower oil prices and upcoming U.S. monetary normalization

Further bouts of volatility may occur, and thus authorities must remain on alert

The Mexican economic recovery is picking up steam, although there are risks to the growth scenario

Inflation risks should be carefully monitored to make convergence to the target a permanent phenomenon


28Mejoran las perspectivas económicas mundiales

Documents

The Mexican Economy: Tackling the problems · 1 2 3 Two short-term challenges The economic outlook The problem of long-term growth Contents The Mexican Economy: Tackling the problems