The Mexican Economy: Tackling the problems
Manuel Sánchez
Bank of Japan, Tokyo, March 31, 2015
Contents
1
The problem of long-term growth
2
Two short-term challenges
3
The economic outlook
The Mexican Economy: Tackling the problems
2
Despite the modernization of the last few decades, Mexico’s
long-term economic performance has been less than stellar
GDP per capita at chained PPPs1
2005 U.S. dollars
60,000
South Korea
China
50,000
Mexico
Singapore
40,000
30,000
20,000
10,000
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0
1/ GDP per capita at current dollars in 2014 was US$10,837
Source: Penn World Table 8.0
The Mexican Economy: Tackling the problems
3
The key problem is stagnant total factor productivity
Mexico: Growth accounting from 1981 to 20131,2
Annual average % change
0.65
-0.51
0.03
0.81
0.70
Working-age population Hours worked as % of Contribution to capital Total factor productivity
as % of the total
working-age population
GDP per capita
Contribution to labor
1/ Own calculations with data from the World Development Indicators, International Financial Statistics, Conference
Board Total Economy Database and data and theory from Kehoe, T.J. and F. Meza, (2011), “Catch-up Growth Followed
by Stagnation: Mexico, 1950-2010,” Latin American Journal of Economics, 48(2)
2/ Sums might not be equivalent to totals due to rounding
The Mexican Economy: Tackling the problems
4
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 Mexican Economy: Tackling the problems
5
The telecoms reform seeks to widen access to services at
lower 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 Mexican Economy: Tackling the problems
6
The energy reform allows private participation in
virtually 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
The Mexican Economy: Tackling the problems
7
Deep-seated results from the reforms require
fundamental 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
The Mexican Economy: Tackling the problems
8
Contents
1
The problem of long-term growth
2
Two short-term challenges
3
The economic outlook
The Mexican Economy: Tackling the problems
9
The first challenge comes from lower oil prices and
declining production
Mexico: Price for the Mexican oil mix and crude production
Dollars per barrel, 3-month moving average; millions of barrels on a daily basis, trend
140
3.5
Mexican oil mix price
Crude production (right axis)
120
100
3.0
80
60
2.5
40
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
2.0
Jan-04
20
Source: Bloomberg and INEGI
The Mexican Economy: Tackling the problems
10
… which have weakened the public-sector financial
position
Mexico: Oil-related public revenues
% of total revenue
Annual real change (right axis)
2014
2013
-40
2012
10
2011
-20
2010
20
2009
0
2008
30
2007
20
2006
40
2005
40
2004
50
Source: Haver Analytics
The Mexican Economy: Tackling the problems
11
The government has sent investors a sign of fiscal
responsibility
 Proactive spending cuts announced amounting to 0.7 percent of
GDP
 Austerity measures taken across government ministries and the
state oil and electricity companies
 Some investment projects cancelled or postponed
 The above despite the fact 2015 budgeted oil revenue is almost
fully hedged
The Mexican Economy: Tackling the problems
12
Although still important for the government, oil accounts
for a declining share of Mexico’s total exports and output
Mexican oil indicators
2004
2014
2015*
Mexican oil mix price
Dollars per barrel, daily average
31.1
87.7
43.0
Oil production
Million 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 balance
Millions of dollars
12,434
1,489
-1,423
*/ January-February, except oil production, which is to January
Source: Banco de México, Haver Analytics and INEGI
The Mexican Economy: Tackling the problems
13
The second challenge stems from future U.S. monetary
normalization, the pace of which remains highly uncertain
Federal Reserve: Implied forward overnight rate and FOMC fed funds rate
forecasts
%
4.5%
December 2014 median FOMC forecast
4.0%
March 2015 median FOMC forecast
3.5%
Implied forward overnight rate 1
3.0%
― December 2014 FOMC forecast interval
―
― March 2015 FOMC forecast interval
―
2.5%
2.0%
1.5%
1.0%
0.5%
Dec-17
Sep-17
Jun-17
Mar-17
Dec-16
Sep-16
Jun-16
Mar-16
Dec-15
Sep-15
Jun-15
Mar-15
0.0%
1/ As of March 20, 2015
Source: Bloomberg with calculations by Banco de México
The Mexican Economy: Tackling the problems
14
The Mexican peso has been hit by international volatility
mainly reflecting broad dollar strength
Mexico: Changes in MXN/USD rate explained by oil prices and the U.S. dollar
%
80
WTI
70
DXY
1
60
50
40
30
20
10
17-Mar-15
02-Mar-15
15-Feb-15
31-Jan-15
16-Jan-15
01-Jan-15
17-Dec-14
02-Dec-14
17-Nov-14
02-Nov-14
18-Oct-14
03-Oct-14
18-Sep-14
03-Sep-14
0
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
The Mexican Economy: Tackling the problems
15
The yield curve has shifted upward, largely along with
that of the United States
Government securities yield curve1
%
7
Mexico
6
United States
5
4
3
2
1
30-year
20-year
10-year
7-year
5-year
3-year
2-year
1-year
6-month
3-month
1-month
0
1/ Solid line, April 30, 2013. Dotted line, March 27, 2015
Source: Banco de México and U.S. Treasury
The Mexican Economy: Tackling the problems
16
Although nonresident holdings of peso government securities have
continued to rise, future portfolio adjustments cannot be ruled out
Nonresident holdings of peso-denominated government securities1
Billions of pesos
2,250
2,000
February
1,750
1,500
1,250
ene.-15
nov.-14
sep.-14
jul.-14
may.-14
mar.-14
ene.-14
nov.-13
sep.-13
jul.-13
may.-13
mar.-13
ene.-13
nov.-12
sep.-12
jul.-12
may.-12
mar.-12
ene.-12
1,000
1/ Cetes, Bondes D, Bonos and Udibonos
Source: Banco de México
The Mexican Economy: Tackling the problems
17
Contents
1
The problem of long-term growth
2
Two short-term challenges
3
The economic outlook
The Mexican Economy: Tackling the problems
18
In Mexico, economic activity has begun to gain some
steam
Mexico: GDP growth
Annual % change, trend
8
Q4
4
0
-4
-8
Q1
2008
Q3
Q1
2009
Q3
Q1
2010
Q3
Q1
2011
Q3
Q1
2012
Q3
Q1
2013
Q3
Q1
2014
Q3
Source: INEGI
The Mexican Economy: Tackling the problems
19
The current upturn has been driven largely by external
demand
Mexico: Aggregate demand
Annual % change, trend
30
Domestic spending
External spending
20
Q4
10
0
-10
-20
Q1
2008
Q3
Q1
2009
Q3
Q1
2010
Q3
Q1
2011
Q3
Q1
2012
Q3
Q1
2013
Q3
Q1
2014
Q3
Source: INEGI
The Mexican Economy: Tackling the problems
20
An important source of impetus has come from manufacturing exports
to the U.S., which have recently weakened due to temporary factors
Mexico: Manufacturing exports
2008=100; s.a.
160
To the U.S.
140
Q1*
To the rest of the world
120
100
80
60
Q1
Q3
Q1
Q3
Q1
Q3
Q1
2008
2009
2010
2011
*/ Estimated on the basis of January and February data
s.a. / Seasonally adjusted
Source: Banco de México
Q3
Q1
2012
Q3
The Mexican Economy: Tackling the problems
Q1
2013
Q3
Q1
2014
Q3
Q1
2015
21
Going forward, Mexico should benefit from a stronger
U.S. economy
U.S. and Mexican GDP forecasts
YoY % change
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
Source: Blue Chip Economic Indicators, March 2015 and Banco de México (2015), Quarterly Report, OctoberDecember 2014, Summary, February
The Mexican Economy: Tackling the problems
22
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
The Mexican Economy: Tackling the problems
23
In the wake of soft economic activity, Mexico’s
monetary policy accommodation increased
Mexico: Monetary policy rate
%
9
8
7
6
5
4
3
Jan-15
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
2
Source: Banco de México
The Mexican Economy: Tackling the problems
24
After an off-track period reflecting mainly noncore components,
inflation has returned to a path toward the 3 percent permanent target
Annual inflation
%
7
Headline
6
Core
First half
of March
5
4
3
Target
2
1
Jan-15
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
0
Source: INEGI
The Mexican Economy: Tackling the problems
25
In this context, inflation risks should be carefully monitored
to consolidate convergence to the target
 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
The Mexican Economy: Tackling the problems
26
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
The Mexican Economy: Tackling the problems
27
Mejoran las perspectivas económicas mundiales
28