Mexico: External conditions and economic outlook

BNP ParibasNew York, March 21, 2016

Mexico: External conditions and economic outlookManuel Sánchez

Since mid-2014, international risk aversion has risen, affecting emerging markets especially hard

2

1/ JP Morgan’s index tracking total returns for traded external debt instruments in the emerging markets. It includes U.S. dollar-denominated Brady bonds, loans, and Eurobonds with an outstanding face value of at least $500 million. */ To March 16Source: JP Morgan

EMBI global1

Basis points

447.0

200

300

400

500

600

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Mexico: External conditions and economic outlook

*

Portfolio capital flows to emerging economies has become negative

3Mexico: External conditions and economic outlook

Total portfolio flows to emerging economies1

Billions of U.S. dollars

-0.2

-30

-15

0

15

30

45Ju

n-14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

1/ Net purchases by nonresidents of emerging-market shares and bonds posted to the balance of payments. Emerging economies are Argentina, Brazil, Bulgaria, Chile, China, Colombia, the Czech Republic, Ecuador, Egypt, Hungary, India, Indonesia, South Korea,Lebanon, Malaysia, Mexico, Morocco, Nigeria, Peru, the Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Turkey, Ukraine, the United Arab Emirates, and Venezuela. Source: IIF

… while prices for commodities and financial assets have continuously fallen

4

Prices for commodities, shares, and currencies in U.S.-dollar termsJune 2014 = 100

1/ Float-adjusted market capitalization index based on U.S. dollars for Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary,India, Indonesia, South Korea, Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.2/ Non-weighted average of dollar exchange rates for the Mexican peso, Chinese yuan, Russian ruble, Turkish lira, Korean won, South Africanrand, Brazilian real, Indian rupee, Polish zloty, Hungarian florin, Malaysian ringgit, Thai baht, Chilean peso, Indonesian rupee, Philippine peso,Colombian peso, and Peruvian solSource: Banco de México, Bloomberg, Haver Analytics and the IMF

45.8

70.573.4

40

60

80

100

120

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

IMF all commodity price indexMSCI emerging markets share price indexEmerging-market currency prices in dollar terms


2

1


Mexico’s exchange rate has recently been hit by volatility above that of other emerging-market currencies

5

1/ Non-weighted average for the Chinese yuan, Russian ruble, Turkish lira, Korean won, South African rand, Brazilianreal, Indian rupee, Polish zloty, Hungarian florin, Malaysian ringgit, Thai baht, Chilean peso, Indonesian rupee,Philippine peso, Colombian peso, and Peruvian sol*/ To March 17Source: Bloomberg

Mexico and emerging economies: U.S. dollar exchange rate in local currency termsJune 2014 = 100

1

133.9

129.2

90

100

110

120

130

140

150

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Mexico

Emerging economies excl. Mexico

*

Mexico: External conditions and economic outlook 6

Mexico: Oil price and exchange rateU.S. dollars per barrel and pesos per U.S. dollar

*/ To March 17Source: Banco de México and PMI

32.0

17.4

12

13

14

15

16

17

18

19

20

10

30

50

70

90

110

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Mexican oil mix price

MXN / USD

*

The correlation between the exchange rate and oil prices has strengthened


… which has coincided with the deterioration of Pemex’s credit risk premium, lately attenuated by improved oil prices

7

164.3

360.5

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

50

150

250

350

450

Mexico

Pemex

*/ To March 11Source: Bloomberg

Mexico: Sovereign and Pemex credit risk premium5-year CDS, basis points

*


In contrast, market interest rates have remained relatively stable

8

*/ To March 11Source: Banco de México

Mexico: Government bond interest rates%

4.9

6.2

4

5

6

7

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

3-year 10-year

*

Nonresident holdings of peso-denominated government securities have stayed roughly constant in peso terms since 2015

9

Mexico: Nonresident holdings of peso-denominated government securities1

June 2, 2014 = 100

109.4

95

100

105

110

115

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16


1/ Cetes, Bondes D, Bonos M and Undibonos*/ To March 10Source: Banco de México

*


… while those holdings relative to the total outstanding have declined moderately

10

1/ Unweighted average of ratios for Brazil, Colombia, Hungary, Indonesia, Israel, Malaysia, Peru, Poland, Russia, SouthAfrica, South Korea, Thailand and Turkey. 2/ Total outstanding includes Bonos M, Cetes, Bondes D, Udibonos and BPASource: Finance ministries, central banks and other national authorities

23.3

30.7

22

25

28

31

34

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Emerging economies excluding Mexico

Mexico

Emerging economies and Mexico: Nonresident holdings of local-currency-denominated government securities

% of total outstanding

February

1

January

2

So far, the most negative external impact on Mexico’s output stems from U.S. manufacturing

11

s.a. / Seasonally adjusted*/ Only January for Mexico and January-February for the United StatesSource: INEGI and the U.S. Federal Reserve

Mexico and the United States: Manufacturing productionAnnual % change, s.a.

2.2

1.5

-2

0

2

4

6

Q12011

Q2 Q3 Q4 Q12012

Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3 Q4 Q12015

Q2 Q3 Q4 Q12016*

Mexico

U.S.



Consequently, Mexico’s exports to the U.S. have slowed and even contracted

12

s.a. / Seasonally adjusted*/ Only JanuarySource: Banco de México

Mexico: U.S. dollar value of manufacturing exportsAnnual % change, s.a.

-0.5

-7.5

-20

-10

0

10

20

30

Q12011

Q2 Q3 Q4 Q12012

Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3 Q4 Q12015

Q2 Q3 Q4 Q12016*

To the United States

To the rest of the world

However, as in the U.S., mining has been the most significant drag on industrial production

13

s.a. / Seasonally adjustedSource: INEGI

Mexico: Industrial GDPAnnual % change, s.a.


0.2

-4.1

-0.5

-8

-4

0

4

Q12011

Q2 Q3 Q4 Q12012

Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3 Q4 Q12015

Q2 Q3 Q4

Industrial

Mining

Construction


The key drivers of an ongoing upturn in the economy are services and private consumption

14


Mexico: GDPAnnual % change, s.a.

2.5

3.5

3.7

0

2

4

6

Q12011

Q2 Q3 Q4 Q12012

Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3 Q4 Q12015

Q2 Q3 Q4

GDP

Private consumption

Services


… while private investment has decelerated

15


Mexico: InvestmentAnnual % change, s.a.

0.7

-11.3

3.6

-12

-6

0

6

12

Q12011

Q2 Q3 Q4 Q12012

Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3 Q4 Q12015

Q2 Q3 Q4

Total

Public

Private


The Mexican economy is expected to recover gradually, along with U.S. industrial production

0.9

2.42.5

2.9

0

1

2

3

2016 2017

U.S. industrial production

Mexican GDP

Source: Blue Chip, March 2016

The United States and Mexico: Growth forecasts Mean, %


The economic growth scenario holds risks

To the downside Slower-than-expected recovery for U.S. industrial

production A sudden swoon in Chinese economic momentum A drop in Mexican oil production beyond current

forecasts To the upside Greater-than-expected benefits from structural

reforms


Mexico needs to confront an adverse international scenario by strengthening its economic fundamentals

Strong macroeconomic stance

The finances of the public sector and Pemex adjusted to reflect lower oil prices

Convergence of inflation to the target safeguarded by monetary policy

Solid financial system maintained

Structural reforms that stoke greater productivity adequately implemented


After an unprecedented decline to an all-time low,inflation has slightly risen, approaching the target

Mexico: Annual inflation%

2.87

0

1

2

3

4

5

6De

c-14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Source: INEGI


Benign inflation has been supported by positive relative price shocks

8.08

-0.65

-6.94

-16

-12

-8

-4

0

4

8

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Agricultural

Energy

Telecommunication services

Mexico: Agricultural, energy and telecommunication services pricesAnnual % change

Source: INEGI


Also, the impact from peso depreciation on inflationhas been modest, confined to tradable goods

Mexico: Exchange rate and prices of some durable goodsAnnual % change

23.9

4.3

-5

0

5

10

15

20

25

30De

c-14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Exchange rateFurnitureDomestic accessoriesDomestic appliancesTextile accessories for home use

4.2

4.54.6

Source: Banco de México and INEGI


To face adverse international conditions, monetary policy has been adjusted twice

Source: Banco de México

3.75

2.0

2.5

3.0

3.5

4.0

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Mexico: Policy interest rate targetovernight funding rate, %


These interest rate hikes have sought to safeguard price stability

Maintain the relative monetary stance vis-à-vis that of the United States

Prevent inflation expectations from getting out of line in the face of peso depreciation

Buttress economic fundamentals, action taken in conjunction with the announcement of preventive public-sector spending cuts


Last year’s improvement in inflation expectations depended crucially on declines foreseen in the noncore component

1/ Implicit based on CPI weightsSource: Banco de México, Encuesta sobre las Expectativas de los Especialistas en Economía del Sector Privado

Mexico: Inflation expectationsMedian, %

3.4

3.0

4.6

0

2

4

6

Dec-

14Ja

n-15

Feb-

15M

ar-1

5Ap

r-15

May

-15

Jun-

15Ju

l-15

Aug-

15Se

p-15

Oct

-15

Nov

-15

Dec-

15Ja

n-16

Feb-

16Headline

Core

Noncore

Year-end 2016

3.33.2

3.9

0

2

4

6

Dec-

14Ja

n-15

Feb-

15M

ar-1

5Ap

r-15

May

-15

Jun-

15Ju

l-15

Aug-

15Se

p-15

Oct

-15

Nov

-15

Dec-

15Ja

n-16

Feb-

16

Headline

Core

Noncore

Year-end 2017

1 1


Monetary policy will continue to be on guard for any obstacles that may hinder the consolidation of convergence of inflation to the target

Amplified FX depreciation and greater pass-through to inflation, with second-round effects

Larger increases in noncore price components, with contamination to other prices

Aggregate demand pressures as the economy recovers, given uncertainty over measures of slack such as the output gap

Some risks to watch


Conclusions

The adverse international scenario has hurt the Mexican economy through lower oil prices and slower U.S. industrial production, making it necessary for Mexico to fortify its economic fundamentals

Fiscal and monetary measures undertaken in February have been geared toward safeguarding price and financial stability in this difficult global environment

Current benign inflation represents an unprecedented opportunity to consolidate convergence of inflation to the permanent target

27Mejoran las perspectivas económicas mundiales

Mexico: External conditions and economic outlook

Documents

Transcript of Mexico: External conditions and economic outlook