The Mexican Economy: Now and in the Future
Manuel Sánchez
BBVA Investor conference "LATAM: Growth at your fingertips"
Milan, Italy, May 10 2012 Index
1
Structural strengths
2
Recent developments and outlook
3
Long‐term opportunities
4
Consolidation of price stability
The Mexican Economy: Now and in the Future
Mexico has a large and well‐diversified economy
 GDP of US$1.2 trillion
 11th largest economy in the world based on PPP
 2nd largest economy in Latin America
 Middle‐income country
 PPP‐adjusted per‐capita annual income of US$14,610
 Economy oriented to services and industry which respectively
account for 65% and 30% of GDP
 Highly open economy, free trade agreements with 43 countries
 High productivity standards, especially in manufacturing
Note: Figures correspond to 2011. PPP at current international dollars for 2003‐2005
Source: IMF (2012), World Economic Outlook, April and INEGI The Mexican Economy: Now and in the Future
3
Its youthful labor force and education potential
represent a source of comparative advantage
 Working‐age population accounts for 64% of the total
 Average schooling of 8.6 years
 Dependency ratio of 0.55, tending to boost savings and
investment in human capital
Note: Figures correspond to 2010. “Working‐age population” is defined as persons aged 15‐64 years. “Dependency ratio” is an age‐population ratio of those typically not in the labor force (ages under 15 and over 64) and those typically in the labor force (ages 15 to 64). “Average schooling” is the years of formal schooling received, on average, by persons over age 15 Source: Working‐age population and dependency ratio are based on data from INEGI and average schooling is directly from INEGI
The Mexican Economy: Now and in the Future
4
Mexico is a leading exporter of several manufacturing products such as automobiles and TV sets
World Exports of Automobiles
World Exports of Television Sets
Billions of dollars, 2010
Billions of dollars, 2010
140
20
120
16
100
12
80
60
8
40
4
20
Source: Trade Map, International Trade Centre UNCTAD/WTO (ITC) Turkey
Korea
USA
Czech Rep
Malaysia
Hungary
Poland
Slovakia
China
0
Mexico
France
Mexico
Belgium
Spain
UK
Korea
Canada
USA
Japan
Germany
0
Source: Trade Map, International Trade Centre UNCTAD/WTO (ITC) The Mexican Economy: Now and in the Future
5
Mexico’s economic environment is business friendly
 Most sectors are open to private investment
 Government intervention in entrepreneurial activities is low
 Business and market regulation is moderate
 The macroeconomic context is stable
The Mexican Economy: Now and in the Future
6
The pillars of macroeconomic stability are sound public
finances, low inflation and a strong banking system
Public debt 37.3% of GDP
Annual inflation 3.4%
Fiscal deficit
2.5% of GDP
Net capital/RWA 15.7%
Non‐performing loans/Total
2.5%
Provisions/NPL
189.6%
Note: Figures correspond to 2011, the average for inflation, and end‐of‐period for public debt and the banking system Source: Banco de México and SHCP
The Mexican Economy: Now and in the Future
7
Mexico’s perceived sovereign risk has recently been lower
than that of some developed countries
Credit Default Swaps
5 years, basis points
600
France
Mexico
500
400
300
200
100
May‐12
Nov‐11
May‐11
Nov‐10
May‐10
Nov‐09
May‐09
Nov‐08
May‐08
Nov‐07
May‐07
Nov‐06
May‐06
Nov‐05
May‐05
Nov‐04
May‐04
Nov‐03
May‐03
0
Source: Bloomberg
The Mexican Economy: Now and in the Future
8
Yet, the task of stability is continuous and needs to be
consolidated
 Fiscal reform
 The efficiency of public revenues
 Stabilization funds
 Expenditures focused on public goods, e.g., security and
infrastructure
 Convergence to inflation target
 Enhance regulatory and supervisory framework of the
financial system
 Basel‐principle‐based rules
The Mexican Economy: Now and in the Future
9
Mexico is a significant recipient country of foreign direct investment
Foreign Direct Investment Stock
End 2011, trillions of dollars
Rank
1
US
2
China
3
France
4
UK
5
Germany
12
Brazil
15
Russia
16
Mexico
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Source: CIA, World Fact Book
The Mexican Economy: Now and in the Future
10
Index
1
Structural strengths
2
Recent developments and outlook
3
Long‐term opportunities
4
Consolidation of price stability
The Mexican Economy: Now and in the Future
11
After a sharp recession in 2009, Mexico has undergone a continuous process of economic recovery
Economic Activity Indicators
Manufacturing Production
2003 = 100, s.a.
2008=100; s.a.
Total 1/
130
Services 1/
Mexico
1/ Figures correspond to the Global Economic Activity index which incorporates economic sectors with an 87.4% coverage of annual GDP. Therefore, growth rates can differ from those of GDP
Source: INEGI
Mar‐12
Nov‐11
80
Jul‐11
100
Mar‐11
85
Nov‐10
105
Jul‐10
90
Mar‐10
110
Nov‐09
95
Jul‐09
115
Mar‐09
100
Nov‐08
120
Jul‐08
105
Mar‐08
125
Feb‐12
Oct‐11
Jun‐11
Feb‐11
Oct‐10
Jun‐10
Feb‐10
Oct‐09
Jun‐09
Feb‐09
Oct‐08
Jun‐08
Industrial Production
Feb‐08
110
US
Source: INEGI
The Mexican Economy: Now and in the Future
12
A driving force has been the resurgence of external demand, especially through manufacturing exports
Manufacturing Exports
2007=100, s.a.
Total
U.S.
Rest of the world
Total
150
Automotive
Non‐automotive
170
150
130
130
110
110
90
90
70
70
Source: Banco de México
Mar‐12
Nov‐11
Jul‐11
Mar‐11
Nov‐10
Jul‐10
Mar‐10
Nov‐09
Jul‐09
Mar‐09
Nov‐08
Jul‐08
50
Mar‐08
Mar‐12
Nov‐11
Jul‐11
Mar‐11
Nov‐10
Jul‐10
Mar‐10
Nov‐09
Jul‐09
Mar‐09
Nov‐08
Jul‐08
Mar‐08
50
Source: Banco de México
The Mexican Economy: Now and in the Future
13
Domestic demand has also posted significant growth rates
Commercial Establishment Sales
Gross Fixed Investment 2003 = 100, s.a.
2003 = 100, s.a.
160
125
Wholesale
Retail
120
150
115
140
110
130
105
Source: INEGI
Feb‐12
Oct‐11
Jun‐11
Feb‐11
Oct‐10
Jun‐10
Feb‐10
Oct‐09
Jun‐09
Feb‐09
Oct‐08
Jun‐08
120
Feb‐08
Feb‐12
Oct‐11
Jun‐11
Feb‐11
Oct‐10
Jun‐10
Feb‐10
Oct‐09
Jun‐09
Feb‐09
Oct‐08
Jun‐08
Feb‐08
100
Source: INEGI
The Mexican Economy: Now and in the Future
14
… which have been supported by job creation and the expansion of bank lending
Formal Employment*
Real Commercial Banks’ Performing Loans
Millions of workers
2007=100
15.5
145
130
15.0
115
14.5
Consumer
Mortgage
Commercial
Total
14.0
100
85
*/ Workers insured by the Mexican Social Security System (IMSS)
Source: IMSS
Mar‐12
Nov‐11
Jul‐11
Mar‐11
Nov‐10
Jul‐10
Mar‐10
Nov‐09
Jul‐09
Mar‐09
Nov‐08
Jul‐08
70
Mar‐08
Apr‐12
Dec‐11
Aug‐11
Apr‐11
Dec‐10
Aug‐10
Apr‐10
Dec‐09
Aug‐09
Apr‐09
Dec‐08
Aug‐08
Apr‐08
13.5
Source: Banco de México
The Mexican Economy: Now and in the Future
15
The improvement of global financial conditions has resulted in large capital inflows Government Securities Holdings*
Billions of nominal pesos
1,100
Foreign investors
Pension Funds
900
700
500
300
Apr‐12
Jan‐12
Oct‐11
Jul‐11
Apr‐11
Jan‐11
Oct‐10
Jul‐10
Apr‐10
Jan‐10
Oct‐09
Jul‐09
Apr‐09
Jan‐09
Oct‐08
Jul‐08
Apr‐08
Jan‐08
Oct‐07
Jul‐07
Apr‐07
100
*/ Includes CETES and fixed‐rate bonds
Source: Banco de México
The Mexican Economy: Now and in the Future
16
… which partly explain downward shifts of the yield curve and the relative strengthening of the currency
Mexico: Yield Curve
Exchange Rate
End of year, %
2008=100, Pesos/USD
9
130
Nominal
8
Real
2009
120
7
2010
2011
6
2012*
110
5
100
4
Appreciation
*/ May 4, 2012
Source: Banco de México
Apr‐12
Dec‐11
Aug‐11
Apr‐11
Dec‐10
Aug‐10
Apr‐10
Dec‐09
Aug‐09
Apr‐09
Dec‐08
Aug‐08
90
Apr‐08
30‐years
20‐years
10‐years
7‐years
5‐years
3‐years
2‐years
1‐year
6‐month
3‐month
1‐month
1‐day
3
Source: Banco de México
The Mexican Economy: Outlook and Challenges
17
The Mexican economy is expected to continue growing at
a stable, moderate pace
GDP Annual growth, %
2011
2012F
2013F
2014F
World
3.9
3.5
4.1
4.4
U.S.
1.7
2.1
2.4
2.9
Mexico
4.0
3.6
3.7
3.8
Source: IMF (2012), World Economic Outlook, April The Mexican Economy: Now and in the Future
18
Index
1
Structural strengths
2
Recent developments and outlook
3
Long‐term opportunities
4
Consolidation of price stability
The Mexican Economy: Now and in the Future
19
However, Mexico could clearly increase its growth
potential by enhancing its total factor productivity
 Key elements behind lagging productivity
 Insufficient competition in crucial economic areas
 Widespread informality
Inadequate levels of technology, investment and high‐
skilled labor, and inefficient allocation of resources 1
1/ Sánchez, M. (2012) "Economía mexicana: una mirada de largo plazo", www.banxico.org.mx The Mexican Economy: Now and in the Future
20
The agenda for pending reforms is ample and promising
 Deregulate and simplify requirements for business
operations
ducto
 Remove legal obstacles to labor market flexibility and
competition in the markets for inputs and services,
including education1
 Strengthen the rule of law
1/ Botero, J. C., S. Djankov, R. La Porta, F. Lopez‐de‐Silanes y A. Shleifer, (2004), “The Regulation of Labor”, Quarterly Journal of Economics 119(4): 1339‐82
The Mexican Economy: Now and in the Future
21
Index
1
Structural strengths
2
Recent developments and outlook
3
Long‐term opportunities
4
Consolidation of price stability
The Mexican Economy: Now and in the Future
22
Since 2001, monetary policy has adhered to a formal
inflation targeting regime
 3% inflation target measured by the headline CPI index
 Gradual stabilization process to minimize possible social
costs
 Accountability in terms of the commitment to the target
 Stabilization of inflation expectations around the target is a
challenge
 Transparency and communication by the central bank key
to the effectiveness of monetary policy
The Mexican Economy: Now and in the Future
23
The convergence of inflation to the target is a very close
and attainable result
Headline Inflation
CPI annual change, %
50
40
30
20
3% current target
10
Oct‐95
Apr‐96
Oct‐96
Apr‐97
Oct‐97
Apr‐98
Oct‐98
Apr‐99
Oct‐99
Apr‐00
Oct‐00
Apr‐01
Oct‐01
Apr‐02
Oct‐02
Apr‐03
Oct‐03
Apr‐04
Oct‐04
Apr‐05
Oct‐05
Apr‐06
Oct‐06
Apr‐07
Oct‐07
Apr‐08
Oct‐08
Apr‐09
Oct‐09
Apr‐10
Oct‐10
Apr‐11
Oct‐11
Apr‐12
0
Source: INEGI and Banco de México
The Mexican Economy: Now and in the Future
24
Banco de México will continue to monitor risks to
convergence toward the permanent 3% target
 Increased global financial volatility
 Upsurge of international prices of commodities and food
 Demand pressures
The Mexican Economy: Now and in the Future
25
Conclusions
 Mexico has a large and diversified economy, young workers, high
educational potential and a friendly business environment
 Mexican financial stability, a continuous task, rests on sound
public finances, low inflation and strong banks
 Despite Mexico’s ongoing strong economic recovery, reform
efforts are needed to overcome informality and obstacles to
competition in order to enhance long‐term growth potential
 Convergence to the inflation target is very close and attainable
 Banco de Mexico will continue to monitor risks to the
permanent 3% target
The Mexican Economy: Now and in the Future
26
Mejoran las perspectivas económicas mundiales
27