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Send  Share  RSS  Twitter  17 Nov 2016

ECONOMY: Mexico: a Cloudy Economic Outlook


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Mexico’s economy lost steam in the second quarter of 2016.
According to Mexico’s national statistical institute Inegi, seasonally adjusted activity decelerated to 1.5% in 2Q of 2016, down from 2.5% y/y reported in the previous period. On a quarter-on-quarter basis, GDP dropped by 0.2%, marking the first quarterly contraction since 2013. Industry, which shrank by 1.5 q/q, was the main contributor to this weak result due to the fall in oil production and challenges faced by the manufacturing and construction industries.

The services segment continued to lead growth, backed by consistent consumption indicators. Inflation remains low (at 2.97% for the 12 months to September 2016), credit has seen rapid growth (recording 16.9% Y-o-Y as at July 2016) and both the labour market and remittances are solid. Nevertheless, the services sector slowed during the period to a growth rate of 2.4% Y-o-Y, down from 3.4% for 1Q of 2016.

Income fundamentals are expected to gradually loose strength.
The sharp depreciation the Mexican peso experienced this year, leading to higher import prices and inflation, has reduced consumer purchasing power. According to the Bank for International Settlement (BIS), in a comparison of 61 currencies, the Mexican peso reported the third largest negative variation during the period from January to September 2016 (-12% Y-o-Y).

This was only behind the British pound and the Argentinean peso (both down -14%). This, combined with the recent recovery in oil prices, has put pressure on prices, driving them up from the historical low of 2.1% recorded in December 2015 to 3.0% in September 2016 (chart 2).

The dissipation of base effects related to telecom reforms (which reduced tariffs) and the potential acceleration in the liberalisation of petrol prices (proposed in the 2017 budget) could also drive up inflation. Furthermore, there is a growing probability that the United States will raise interest rates in December.

Mexico’s Central Bank (Banxico) is expected to continue monetary tightening. At the end of September, Banxico raised interest rates for the third time in 2016 - by 50 basis points up to 4.75%. According to the Central Bank, these increases have reduced the credit available for investment and consumption. The rising cost of credit has negatively affected credit demand, while credit supply has shrunk. In this context, consumer confidence has been deteriorating for the last three months, falling from 93.4 in June, to 84.1% in September.


Government debt has climbed rapidly since the 28% recorded in 2005, up to 42.3% in 2015. Government´s efforts to contain the public deficit have not been sufficient to compensate for the combination of several years of disappointing GDP growth (annual average of 1.7% in the period of 2011-2015) and the sharp slump in oil prices seen since mid-2014. Tax revenues emanating from commodities, which previously accounted for over one third of public-sector resources (35% in 2013), now represent 15%, or lower, of total fiscal revenues.

Oil production has steadily decreased over the past 11 years, mainly due to underinvestment in the sector. A few days after Standard and Poor’s decision to put Mexico’s BBB+ rating under negative watch, José Antonio Meade, the country’s newly appointed Finance Minister, presented a 2017 budget that signalled government’s intentions to step up austerity.

The budget announced a 240bn MXN cut in expenditure (approximately $12.9-billion US and 1.2% of GDP). This is well above the cuts of 169 bn MXN for 2016 and 124 bn MXN in 2015. Most of the reductions will come from funding of the state owned oil company PEMEX (-5.3 bn USD). It would therefore seem that the government is shooting itself in the foot, as lower investments in the oil company will further reduce oil production, thus limiting future tax revenues. Despite the landmark energy liberalisation reforms of December 2013, private investment is also being undermined by low oil prices.


Mexico’s current account deficit widened during the second quarter of 2016.
This reached 2.9% of GDP ($31-billion USD) in the 12 months accumulated until the end of 2Q2016, up from 2.1% observed a year earlier. Net oil exports have been the main contributor to this weak result, at -11.7-bn USD in the 12 months accumulated until August 2016 (-1.1% of GDP), compared to -8bn USD (- 0.7% of GDP) over the same period of 2015. Manufacturing exports, which shrank by 2.8% over a year, have also been impacted by weaker demand.

Exports to the country’s premier destination, the United States (which represented approximately 84% of total manufacturing exports in 2015), fell by -1.8%. Demand from other countries during the period was also down 7%. No more than a minor improvement can be hoped for in the short term as US activity is not expected to accelerate in the upcoming period and the recovery in oil prices is likely to be limited Coface forecasts a Brent oil price average of 51 dollars per barrel in 2017.


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