Mexico: Economic integration, challenges and

Mexico: Economic integration, challenges and outlook
Manuel Sánchez
United States‐Mexico Chamber of Commerce, Los Angeles
August 5, 2016
Contents
1
Economic integration with the U.S.
2
Growth and financial developments
3
Monetary policy and inflation
Mexico: Economic integration, challenges and outlook
2
Mexico is increasingly integrated with the United States1

Highly dynamic bilateral exports and imports

Significant FDI and technology transfers

Substantial remittances

Benefits on both sides of the border
 Business and job creation
 Wider and better consumer choices
 Higher living standards
1/ For a discussion of the U.S.‐Mexico economic relationship, see Villarreal, M.A. (2015). U.S.‐Mexico Economic
Relations: Trends, Issues, and Implications. Washington, DC: Congressional Research Service, pp. 1‐9
Mexico: Economic integration, challenges and outlook
3
California and Mexico have long been important trade partners
California and Mexico: Merchandise trade
Billions of dollars
50
45.1
Exports from Mexico to California
40
Exports from California to Mexico
30
26.8
20
2015
2014
2013
2012
2011
2010
2009
2008
10
Source: U.S. Department of Commerce
Mexico: Economic integration, challenges and outlook
4
Perhaps there is no better indicator of binational economic ties than industrial integration
The United States and Mexico: Industrial and manufacturing production
YoY % change, s.a.
20
10
0
‐0.6
‐1.2
‐10
U.S. industry
Mexico's manufacturing
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
‐20
*
s.a. / Seasonally adjusted
*/ Data until 2Q16, with Mexican manufacturing in that period based on the April‐May average
Source: INEGI and the U.S. Federal Reserve
Mexico: Economic integration, challenges and outlook
5
Structural reforms undertaken by Mexico have opened up broad mutual opportunities1

Hiring and firing flexibility should benefit labor productivity

Wider and cheaper access to telecoms services is already resulting from the entrance of new players

The unprecedented opening of the energy sector to private investment will yield lower key input prices

An enhanced rule of law, better public security, and improved physical infrastructure could further leverage the positives
1/ For an online progress report of Mexico’s structural reforms, see Presidencia de la República, Reformas en Acción,
http://reformas.gob.mx/
Mexico: Economic integration, challenges and outlook
6
Since 2014, Mexico has grown at close to historically average rates, with a dip in 2Q16
Mexico: GDP
%, s.a.
6
Quarterly annualized change
Annual change
4
2
1.4
0
‐1.2
‐2
‐4
Q1 Q2 Q3 Q4 Q1 Q2
2012
2013
s.a. / Seasonally adjusted
*/ Preliminary estimate
Source: INEGI
Q3
Q4
Q1 Q2
2014
Q3
Q4
Q1 Q2
2015
Mexico: Economic integration, challenges and outlook
Q3
Q4
Q1 Q2*
2016
7
In the past two and a half years, an expanding services sector has been offset by slowing industrial production
Mexico: GDP
Annual % change, s.a.
6
Industry
Services
4
2.4
2
0
‐0.5
‐2
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2012
2013
s.a. / Seasonally adjusted
*/ Based on April‐May IGAE average
Source: INEGI
Q4
Q1 Q2
2014
Q3
Q4
Q1 Q2
2015
Mexico: Economic integration, challenges and outlook
Q3
Q4
Q1 Q2*
2016
8
Softer Mexican industry has been affected by two shocks: a contraction in oil extraction ... Mexico: Mining and oil production
Annual % change, s.a.
4
0
‐2.2
‐4
‐3.9
‐8
Mining
Oil production
‐12
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2012
2013
2014
s.a. / Seasonally adjusted
*/ Mining production is based on April‐May IGAE
Source: INEGI
Q3
Q4
Q1 Q2
2015
Mexico: Economic integration, challenges and outlook
Q3
Q4
Q1 Q2*
2016
9
and decelerating U.S. industrial production
The United States and Mexico: Industrial and manufacturing production
YoY % change, s.a.
6
4
2
0
Mexico's manufacturing
‐0.6
U.S. industry
‐1.2
‐2
Q1 Q2
2012
Q3
Q4
Q1 Q2
2013
Q3
Q4
Q1 Q2
2014
Q3
Q4
Q1 Q2
2015
Q3
Q4
Q1 Q2*
2016
s.a. / Seasonally adjusted
*/ Mexican manufacturing is based on the April‐May average
Source: INEGI and the U.S. Federal Reserve
Mexico: Economic integration, challenges and outlook
10
Consistent with this picture, manufacturing exports to the U.S. have fallen
Mexico: U.S. dollar value of manufacturing exports
Annual % change, s.a.
20
15
10
5
0
‐2.3
‐5
To the U.S.
‐6.5
To the rest of the world
‐10
‐15
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2012
2013
2014
2015
2016
s.a. / Seasonally adjusted. Source: Banco de México with data from the Ministry of Finance (SAT), Ministry of Economy (SE), Banco de México, INEGI. Merchandise Trade Balance. SNIEG. Information of National Interest
Mexico: Economic integration, challenges and outlook
11
Mexican exports to the U.S. respond more to manufacturing output there than to the bilateral real exchange rate…
The United States and Mexico: U.S. manufacturing output and bilateral RER
Annual % change, s.a.
30
U.S. manufacturing output
Pesos per dollar
20
16.2
10
0.1
0
‐10
‐20
Q1 Q2
2012
Q3
Q4
Q1 Q2
2013
Q3
Q4
Q1 Q2
2014
Q3
Q4
Q1 Q2
2015
Q3
Q4
Q1 Q2
2016
s.a. / Seasonally adjusted
Source: Banco de México
Mexico: Economic integration, challenges and outlook
12
although peso competitiveness may have contributed to a higher proportion of Mexican exports in the U.S. market
Mexico: Nonoil exports
% of U.S. nonoil imports, s.a.
35
30
29.8
25
25.3
Total
20
Nonautomotive
Automotive
15
10
13.6
12.4
10.3
10.1
5
Q1 Q2
2012
Q3
Q4
Q1 Q2
2013
Q3
Q4
Q1 Q2
2014
Q3
Q4
Q1 Q2
2015
Q3
Q4
Q1 Q2
2016
s.a. / Seasonally adjusted
Source: Own calculations with data from the United States Department of Commerce
Mexico: Economic integration, challenges and outlook
13
Private consumption has been a driver of recent economic expansion
Mexico: Private consumption
Annual % change, s.a.
6
4
2
1.8
0
Q1 Q2 Q3 Q4 Q1 Q2
2012
2013
s.a. / Seasonally adjusted
*/ Based on April‐May data
Source: INEGI
Q3
Q4
Q1 Q2
2014
Q3
Q4
Q1 Q2
2015
Mexico: Economic integration, challenges and outlook
Q3
Q4
Q1 Q2*
2016
14
This performance coincides with better labor market indicators
Mexico: Unemployment and labor force participation
% of EAP and % of population, s.a.1
5.5
65.0
Unemployment rate
Labor force participation
5.0
62.5
4.5
59.5
4.0
60.0
57.5
3.95
3.5
55.0
Q1 Q2
2012
Q3
Q4
Q1 Q2
2013
Q3
Q4
Q1 Q2
2014
Q3
Q4
Q1 Q2
2015
Q3
Q4
Q1 Q2
2016
1/ EAP = Economically active population. Measures based on 15‐year‐old and older population
s.a. / Seasonally adjusted. Source: INEGI
Mexico: Economic integration, challenges and outlook
15
… as well as an upturn in remittances and consumer lending
Mexico: Remittances and consumer lending
Annual % change, s.a.
20
Remittances
Consumer lending
15
10.4
10
8.9
5
0
‐5
‐10
‐15
Q1 Q2
2012
Q3
Q4
Q1 Q2
2013
Q3
Q4
Q1 Q2
2014
Q3
Q4
Q1 Q2
2015
Q3
Q4
Q1 Q2
2016
s.a. / Seasonally adjusted
Source: Banco de México
Mexico: Economic integration, challenges and outlook
16
In contrast, investment has stumbled
Mexico: Investment and capital imports
Annual % change, s.a.
15
Gross fixed investment
Capital goods imports
10
5
0
‐1.0
‐5
‐7.3
‐10
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2*
2012
2013
2014
2015
2016
s.a. / Seasonally adjusted. */ Gross fixed investment is based on April‐May average
Source: INEGI and Ministry of Finance (SAT), Ministry of Economy (SE), Banco de México, INEGI. Merchandise Trade Balance. SNIEG. Information of National Interest
Mexico: Economic integration, challenges and outlook
17
Forward‐looking indicators of economic activity have deteriorated
Mexico: Purchasing Managers’ Indexes1
56
Manufacturing
Nonmanufacturing
54
52
51.3
50
49.5
48
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3*
2012
2013
2014
2015
2016
1/ Adjusted by company size
*/ Only July
Source: IMEF
Mexico: Economic integration, challenges and outlook
18
Along with the U.S., Mexico is expected to experience a transitory deceleration in 2016
The United States and Mexico: GDP forecasts
Annual % change, average
20151
2016
2017
The United States
2.4
1.9
2.2
Mexico
2.5
2.3
2.6
1/ Observed
Source: Consensus Forecasts and Latin American Consensus Forecasts, July 2016
Mexico: Economic integration, challenges and outlook
19
Mexico’s short‐term growth scenario faces risks

A greater slowdown in U.S. imports and industrial production

Deterioration in consumer and producer confidence

A larger‐than‐expected fall in crude oil output

Potentially greater financial volatility, yielding restrictions on financing possibilities 
To the upside, recent structural reforms could begin to yield more benefits
Mexico: Economic integration, challenges and outlook
20
In 2016, the Mexican peso has depreciated more than other EME currencies
Dollar in peso terms vs. dollar in terms of a basket of EME currencies1
January 1, 2015 = 1, 30‐day moving average
1.2
1.13
1.1
1.0
Jan‐14
Feb‐14
Mar‐14
Apr‐14
May‐14
Jun‐14
Jul‐14
Aug‐14
Sep‐14
Oct‐14
Nov‐14
Dec‐14
Jan‐15
Feb‐15
Mar‐15
Apr‐15
May‐15
Jun‐15
Jul‐15
Aug‐15
Sep‐15
Oct‐15
Nov‐15
Dec‐15
Jan‐16
Feb‐16
Mar‐16
Apr‐16
May‐16
Jun‐16
Jul‐16
Aug‐16
0.9
*
1/ Basket based on JP Morgan Index of emerging‐market currencies, which includes Brazil, Chile, Mexico, Hungary, South Africa, Turkey, Russia, China, India and Singapore
*/ To August 1. Source: Banco de México with data from Bloomberg
Mexico: Economic integration, challenges and outlook
21
Exacerbated peso depreciation may stem from several factors

The role of the Mexican peso as an international hedge mechanism1

A weakened fiscal position
 Longstanding rising trend of the historic balance of public‐sector borrowing requirements over GDP
 Drastic reduction of Pemex net oil export revenues

Geopolitical jitters
1/ See BIS (2014). “Triennial Central Bank Survey of foreign exchange and derivatives market activity in 2013,” detailed tables
Mexico: Economic integration, challenges and outlook
22
A stronger fiscal stance is necessary given increasing public debt
Mexico: Public debt1
% of GDP
50
46.9
45.7
45
41.4
40
38.6
34.3
34.4
34.9
2011
35
2010
36.4
32.9
30
*2016
2015
2014
2013
2012
2009
2008
25
1/ Historic balance of public‐sector borrowing requirements. */ To June
Source: SHCP (2016). Informes sobre la Situación Económica, las Finanzas Públicas y la Deuda Pública,
Segundo trimestre de 2016
Mexico: Economic integration, challenges and outlook
23
… and worsening Pemex finances, which have a bearing on the current account
Pemex sales revenue and budgetary expenditure
First half for each year, billions of 2015 pesos
400
Sales revenue1
Budgetary expenditure
300
287.7
200
122.1
100
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
1/ Revenue from net foreign and domestic sales, minus taxes paid by Pemex. Excludes various sources
of income, such as federal government transfers
Source: Own calculations with data from SHCP
Mexico: Economic integration, challenges and outlook
24
Holdings of peso government securities by nonresidents have fallen lately, driven by drops in those of short maturities
Mexico: NR peso‐denominated government securities holdings
Billions of pesos
2.5
Total
1
Coupon bonds
2.0
Zero coupon bonds
1.9
1.5
1.6
1.0
0.5
Apr‐16
Jan‐16
Oct‐15
Jul‐15
Apr‐15
Jan‐15
Oct‐14
Jul‐14
Apr‐14
Jan‐14
Oct‐13
Jul‐13
Apr‐13
Jan‐13
Oct‐12
Jul‐12
Apr‐12
Jan‐12
* Jul‐16
0.2
0.0
1/ Zero coupon bonds, coupon bonds, and inflation‐linked bonds
*/ To July 27
Source: Banco de México
Mexico: Economic integration, challenges and outlook
25
Further bouts of international financial volatility could easily occur

In the wake of Brexit, deeper monetary accommodation is foreseen in most developed countries
 Rising leverage worldwide1
 Increasing proportions of debt with negative yields in advanced nations

European banks face fragile financial conditions

Concerns persist on Chinese economic health and policy interventions
1/ See BIS (2016). BIS Statistical Bulletin, June
Mexico: Economic integration, challenges and outlook
26
Since last year, annual inflation has remained moderate,
largely supported by unusually low noncore inflation
Mexico: Annual inflation
%
6
Headline
5
Noncore
4
Target
3
2.72
2
1.86
1
Jul‐16
Jun‐16
May‐16
Apr‐16
Mar‐16
Feb‐16
Jan‐16
Dec‐15
Nov‐15
Oct‐15
Sep‐15
Aug‐15
Jul‐15
Jun‐15
May‐15
Apr‐15
Mar‐15
Feb‐15
Jan‐15
0
*
*/ First half
Source: INEGI
Mexico: Economic integration, challenges and outlook
27
The rising path of core inflation reflects the effect of the
exchange rate on tradable goods prices
Annual core inflation
%
6
Core
Merchandise
5
4
3.68
3
2.99
2
1
Jul‐16
Jun‐16
May‐16
Apr‐16
Mar‐16
Feb‐16
Jan‐16
Dec‐15
Nov‐15
Oct‐15
Sep‐15
Aug‐15
Jul‐15
Jun‐15
May‐15
Apr‐15
Mar‐15
Feb‐15
Jan‐15
0
*
*/ First half
Source: INEGI
Mexico: Economic integration, challenges and outlook
28
An accelerating rise in the producer price index also
reveals an impact from peso depreciation
Mexico: Nonoil Producer Price Index
Annual % change
6
5.62
5
4
3
2
1
Jun‐16
May‐16
Apr‐16
Mar‐16
Feb‐16
Jan‐16
Dec‐15
Nov‐15
Oct‐15
Sep‐15
Aug‐15
Jul‐15
Jun‐15
May‐15
Apr‐15
Mar‐15
Feb‐15
Jan‐15
0
Source: INEGI
Mexico: Economic integration, challenges and outlook
29
Medium‐term inflation expectations as measured by analysts’
surveys have remained relatively stable, albeit above the target
Mexico: Annual inflation expectations
One to four years, median, %
4.0
3.5
3.36
3.0
2.5
Jul‐16
Jun‐16
May‐16
Apr‐16
Mar‐16
Feb‐16
Jan‐16
Dec‐15
Nov‐15
Oct‐15
Sep‐15
Aug‐15
Jul‐15
Jun‐15
May‐15
Apr‐15
Mar‐15
Feb‐15
Jan‐15
2.0
Source: Banco de México, Encuesta sobre las Expectativas de los Especialistas en Economía del Sector Privado
Mexico: Economic integration, challenges and outlook
30
Also, market‐derived expectations appear to show a
recent spike
Compensation for inflation and inflation risk implicit in bonds
%
4.0
3‐year
10‐year
3.61
30‐year
3.5
3.47
3.23
3.0
2.5
*/ To August 2
Source: Own calculations with data from PiP
Mexico: Economic integration, challenges and outlook
Aug‐16
Jul‐16
Jun‐16
May‐16
Apr‐16
Mar‐16
Feb‐16
Jan‐16
Dec‐15
Nov‐15
Oct‐15
Sep‐15
Aug‐15
Jul‐15
Jun‐15
May‐15
Apr‐15
Mar‐15
Feb‐15
Jan‐15
2.0
*
31
Policy interest rate hikes have sought to avert deviations of inflation expectations and to anchor them on the target
Policy overnight interest rate
%
5.0
4.5
4.25
4.0
3.5
3.0
Jul‐16
Apr‐16
Jan‐16
Oct‐15
Jul‐15
Apr‐15
Jan‐15
Oct‐14
Jul‐14
Apr‐14
Jan‐14
Oct‐13
Jul‐13
Apr‐13
Jan‐13
Oct‐12
Jul‐12
Apr‐12
Jan‐12
Oct‐11
Jul‐11
Apr‐11
Jan‐11
2.5
Source: Banco de México
Mexico: Economic integration, challenges and outlook
32
The resulting flattening of the yield curve seems to reflect confidence that inflation will continue to be contained
Mexico: Government securities yield curve
%
7
November 30, 2015
August 5, 2016
6
5
4
30‐year
20‐year
10‐year
7‐year
5‐year
3‐year
2‐year
1‐year
6‐month
3‐month
1‐month
1‐day
3
Source: Banco de México
Mexico: Economic integration, challenges and outlook
33
Some risks to the consolidation of convergence of inflation to the 3 percent permanent target prevail

The most notable danger is more weakening of the peso with a generalized impact on prices, knocking inflation expectations off track

Rises in noncore prices could accelerate, returning to historic rates, possibly producing second‐round price effects

Aggregate demand pressures could surface
Mexico: Economic integration, challenges and outlook
34
Conclusions

Mexico and the United States have benefited from increased economic integration 
Mexican economic activity has recently decelerated and confronts downside risks

In a context of greater risk aversion, which could become exacerbated by geopolitical events, the fiscal stance should be fortified

Monetary policy should continue to employ complete flexibility in order to consolidate the convergence of inflation to the target
Mexico: Economic integration, challenges and outlook
35
Mejoran las perspectivas económicas mundiales
36