country report mexico april 2016

7/26/2019 Country Report Mexico April 2016

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Country Report

Mexico

Generated on April 24th 2016

Economist Intelligence Unit20 Cabot SquareLondon E14 4QWUnited Kingdom

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Mexico

Forecast

Highlights

Outlook for 2016-20 Political stability

Election watch

International relations

Policy trends

Fiscal policy

Monetary policy

International assumptions

Economic growth Inflation

Exchange rates

External sector

Forecast summary

Quarterly forecasts

Data and charts Annual data and forecast

Quarterly data

Monthly data Annual trends charts

Quarterly trends charts

Monthly trends charts

Comparative economic indicators

Summary Basic data

Political structure

Recent analysisPolitics Forecast updates

Analysis

Economy Forecast updates

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Mexico 1

Country Report April 2016 www.eiu.com Economist Intelligence Unit Limited 2016


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HighlightsEditor: Rodrigo Aguilera

Forecast Closing Date: March 23, 2016

Outlook for 2016-20

The president, Enrique Pea Nieto, will focus on the implementation of hisstructural reform agenda, but will struggle to recover credibility amid social

frustration over institutional deficiencies, notably corruption and crime.

The government faces the short-term challenge of boosting economic

growth, which has remained sluggish throughout its term. Drug-related

violence will continue to affect many states.

The economy will continue to grow moderately in 2016, at 2.4%, before

expanding by a more robust 3.1% in 2017-20 as confidence recovers and the

benefits of the structural reforms gradually materialise.

The government will adjust fiscal policy in the light of weaker oil prices, but

overall spending will remain high in comparison with fiscal revenue. This will

cause a deterioration in the debt stock.

Following recent historic lows as a result of the collapse of oil prices anddrop in telecommunication costs, inflation will largely remain below the 4%

target ceiling in 2016-20, despite occasional shocks.

After a sharp depreciation in January, the peso will continue to experience

short-term pressure, but will gradually regain some of its lost strength as

domestic and external conditions improve.

The current-account deficit will continue to widen in 2016, and will start to

ease thereafter, to 1.9% of GDP by 2020. However, it will remain largely

manageable and financed by foreign direct investment.

Review

A group of local non-governmental organisations (NGOs) and think-tanks

has succeeded in gathering the necessary amount of signatures to presentto Congress a proposed law that would force public officials to publish their

tax statements, wealth statements and conflicts of interest

Monthly inflation was 0.44% in February compared with January, and the

annual change was 2.9%. This was mainly driven by a sharp increase in non-

processed agricultural prices and prices of tradeable goods.

The peso has gained considerable ground since the mid-February rate hike,

falling below the Ps18:US$1 threshold. Recent gains, however, have been in

line with trends in other emerging economies.

The current-account balance widened to 2.8% of GDP in 2015, mainly owing

to a sharp increase in the trade deficit that offset improvements in the

services deficit, as well as a rise in remittances from abroad.

Foreign direct investment inflows came in at US$28.4bn in 2015, among thehighest on record, but portfolio inflows more than halved to US$20.4bn.

Mexico 2



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Outlook for 2016-20

Political stability

The president, Enrique Pea Nieto of the Partido Revolucionario Institucional (PRI),will focus the second half of his six-year term (which ends in 2018) on ensuring the

successful implementation of the structural reforms that were passed in 2013-14. He

must do this while confronting the fallout from numerous corruption and crime-

related scandals over the past year and a half, involving both himself and his party.

The PRI and its allies will benefit from the party's majority in the Chamber of

Deputies (the lower house), as well as its control of over two-thirds of Mexico's 31

states. Nevertheless The Economist Intelligence Unit believes that Mr Pea Nietowill face an uphill struggle to recover the credibility lost both at home and abroad as

a result of various scandals, and will also face an increasingly hostile opposition,

which will be a far cry from the broad collaboration that was achieved during his

first two years in office.

This crisis of confidence has not only affected the government, but the political

establishment as a whole, as all the main parties have been criticised for doing little

to address the country's rule of law deficiencies. Indeed, the inability of theopposition to benefit from the PRI's woes stems mainly from an unwillingness to

challenge the status quo of the Mexico's highly entrenched political establishment

in a meaningful way. This has given a boost to anti-establishment parties such as

the radical left-wing Movimiento Regeneracin Nacional (Morena) and independentcandidates. However, there appears to be little appetite for substantial efforts to

address corruption (particularly impunity), despite the passage of anti-corruption

laws in early 2015, the byelaws for which are in the process of being negotiated.

Civil society has responded by becoming more active in seeking to address these

issues, particularly by means of new instruments of direct democracy that were

permitted following the 2013-14 political-electoral reform. Most recently, a group of

think-tanks and non-governmental organisations (NGOs) launched a successful

citizen initiative, which has now been presented to Congress, to force improved

standards of transparency on public officials.

Mr Pea Nietos political problems will be complicated by subpar economic growth,an uptick in poverty and fiscal constraints resulting from weak oil revenue.

Furthermore, despite various years of gradual improvement, the security situation

will continue to be a major challenge. Last year saw a spike in homicides (the first

s u c h r i s e i n f o u r y e a r s ) a n d t h e n o t o r i o u s p r i s o n e s c a p e o f J o a q u n " E l C h a p o "Guzmn, leader of the Sinaloa Cartel, in July (he was later recaptured). Without aclear change in security strategy or major efforts to reinforce institutions and tackle

corruption within the police and other security forces, drug-related violence will

remain a major challenge.

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Election watchLocal elections will be held in 12 states in June, of which all but one will elect a new

governor. The left-wing Partido de la Revolucin Democrtica (PRD) has beenactively seeking alliances with the centre-right Partido Accin Nacional (PAN), andthere are currently five states where such alliances have been successfully

negotiated. These are mainly in states where neither party seems likely to defeat the

PRI on their own. The next presidential election will be in 2018, and polls continue tos u g g e s t t h a t A n d r s M a n u e l L p e z O b r a d o r o f M o r e n a w i l l b e a s t r o n g c o n t e n d e r ,given his anti-establishment rhetoric. Early frontrunners include the current interior

minister, Miguel Osorio Chong, for the PRI, and Margarita Zavala, the wife of a

former president, Felipe Caldern (2006-12), for the PAN. The PRD is likely to looktowards Miguel ngel Mancera, mayor of the capital, Mexico City. However, MrMancera has suggested that he may run as an independent owing to the party's

problems and internal factionalism. Numerous other independents are expected to

run, as this will be the first election in which they are able to do so.

International relations

Relations with the US, Mexicos dominant trade and investment partner, and host tomore than 33m people of Mexican descent, will remain Mr Pea Nietos overridingforeign-policy priority. Immigration reform in the US has been an important issue for

both governments, but progress will depend on the composition of US Congress

after the elections in November (there is strong aversion from the Republican Party).

However, close cooperation with the US on drug policy (including intelligencesharing) will continue. Mexico boasts one of the worlds largest networks of free-trade agreements, linking it with more than 40 countries in three continents. Efforts

to diversify economic linkages away from the USwhich still accounts for overthree-quarters of all Mexican exports and half of its importswill be made throughthe Trans-Pacific Partnership and the Alianza del Pacfico (the Pacific Alliance,which comprises Chile, Peru, Colombia and Mexico). Efforts will also be made on a

bilateral basis with other key economies, such as China and Brazil, notwithstanding

occasional trade disputes with the latter. Relations with Canada are set to improve,

as that country's government has expressed an interest in removing visa

requirements for Mexicans.

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Policy trendsDuring the second half of its term, the government will concentrate on the

implementation of the structural reforms passed in 2013-14 amid concerns about

institutional weaknesses that could dilute their impact. Some of the reforms have

had a disappointing start, particularly the education reform, which has been met

with protests and strikes (mainly in southern states). Others, such as the

telecommunications reform, have shown more promise in the form of visibly lowertariffs and new entrants into the market. After a lacklustre initial phase of tenders,

the energy reform has shown more promise in its second and third phases, the latter

of which saw 100% of all blocs successfully auctioned, with royalties far exceeding

government minimum requirements. Tenders for the fourth round, which will include

the more attractive deepwater blocs, were announced in late 2015, with the date for

the auctions set no later than the third quarter of 2016. There are concerns, however,

that the glut in supply caused by a renewed slump in oil prices could possibly

dampen some interest.

Given that it will take years before the impact of most of the reforms is fully felt, the

country will continue to struggle in the short term with structural bottlenecks such

as poor education outcomes, low levels of lending by the banking system to small

and medium-sized enterprises (SMEs), weak competition in certain key domesticsectors, and a high level of informal employment, which hampers productivity

growth. Nevertheless, Mexico will benefit from a relatively stable macroeconomic

and monetary policy environment, ample international reserves, and a two-year IMF

flexible credit line of US$70bn, although fiscal slippage is a cause for concern in the

light of the rising debt stock.

Fiscal policyThe fiscal outlook will be complicated by low oil prices (we forecast an average price

for the dated Brent blend of US$40.3/barrel in 2016), given the large share of oil in

overall revenue. Fiscal performance deteriorated in 2015, leading to a deficit of 3.5%

of GDP (the highest result since the 1980s). On the positive side, the governmenthas benefited from a rise in tax intake as a result of the 2014 fiscal reform. This has

helped to make up for some of the loss in oil revenue, which fell by one-third last

year. The government will try to keep its vow of not enacting new taxes or raising

existing ones over the remainder of its term. As a result, adjustments to the deficit

will fall mainly on the spending side. Already, the loss of oil revenue has forced an

austere 2016 budget and the cancellation of key infrastructure projects.

We estimate that the fiscal deficit will ease slightly in 2016, to 3% of GDP, owing to

the government's austerity measures and higher non-oil tax intake as a result of the

fiscal reform and relatively strong consumer spending. Additional budget cuts were

announced by the Ministry of Finance in mid-February, and most will be focused on

Petrleos Mexicanos (Pemex, the state-owned oil firm). The fiscal deficit will then fall

gradually, to 2.2% of GDP by 2020, as economic conditions improve and oil pricesrecover. At the same time, the public debt stock will rise, from 46.5% of GDP in 2015

(the highest level since 1995) to 55.5% of GDP by 2020, which is still a manageable

level.

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Monetary policyThe Banco de Mxico (Banxico, the central bank) announced a surprisingly strongrate hike in mid-February of 50 basis points, taking the rate to 3.75%. The move sent

a strong signal that the monetary authorities were prepared to defend the peso,

which had depreciated strongly in January-February but has since regained

strength. The move also made it clear that monetary policy will not necessarily be

synchronised with that of the Federal Reserve (Fed, the US central bank). Ourbaseline forecast envisages further gradual tightening throughout 2016-17, in line

with that of the US in order to disincentivise capital outflows that could further

weaken the peso. On the banking side, overall private credit penetration remains low

(24.3% of GDP in 2015). This situation will improve gradually over the forecast

period, owing to a banking reform that seeks to spur lending and more competitive

interest rates through greater competition in the financial system. Private credit

growth picked up to 15.1% at end-2015, its highest level since early 2012.

International assumptions 2015 2016 2017 2018 2019 2020

Economic growth (%)US GDP 2.4 2.0 2.3 2.3 1.0 2.2

OECD GDP 1.9 1.7 1.9 2.0 1.5 2.0

World GDP 2.4 2.3 2.6 2.8 2.3 2.7

World trade 2.5 2.9 3.8 4.0 3.1 3.7

Inflation indicators (% unless otherwise indicated)

US CPI 0.1 1.3 2.0 2.4 1.5 1.8

OECD CPI 0.5 1.2 1.8 2.0 1.7 1.8

Manufactures (measured in US$) -4.9 -2.6 4.1 4.2 3.5 3.5

Oil (Brent; US$/b) 52.4 40.3 55.5 67.5 62.8 61.8

Non-oil commodities (measured in US$) -17.3 -6.8 8.4 7.6 -2.5 -0.6

Financial variables

US$ 3-month commercial paper rate (av; %) 0.2 0.6 1.4 2.1 2.3 2.0

Exchange rate: :US$ (av) 121.0 115.0 114.5 113.9 112.5 110.9

Exchange rate: US$: (av) 1.11 1.10 1.09 1.11 1.15 1.18

Economic growthGDP slowed in the fourth quarter of 2015 to 0.5%, compared with the third quarter,

bringing the full-year expansion to 2.5%. Given further budget cuts and adverse

global headwinds, we now expect that GDP growth will ease slightly in 2016, to

2.4%, before rebounding to 3% in 2017 (still below the country's potential).

Industrial activity has been constrained by a decline in oil and gas production

caused by the fall in prices, but weak public investment will also be a drag on

growth. However, consumer spending has been vibrant, although part of this owes

to pent up demand and the effect of a strong US dollar on remittances from the US.

In the long term, full implementation of the structural reforms could eliminate somecompetitiveness bottlenecks and raise productivity, pushing the structural growth

rate from its current level of 3-3.5% to over 4% by 2020. However, extensive

institutional weaknesses and regulatory challenges make it unlikely that the reforms

will achieve their full potential, and our forecasts therefore reflect a much more

conservative growth outlook into the medium term, of just 3.1% on average annually

in 2017-20 (this figure is marred by a slight downturn in 2019 owing to a forecast US

cyclical slowdown).

Mexico will continue to benefit from the dynamism of its export-based

manufacturing sector, which has profited from relatively strong US demand, a fairly

weak peso, above-average productivity growth and a shrinking gap in average

wages compared with China. As a result, export volume growth will remain robust in

2016-20, as will growth in real imports. Export demand will also serve to drive fixed

i n v e s t m e n t , c o m p l e m e n t i n g s t e a d y g r o w t h i n p r i v a t e c o n s u m p t i o n a s t h e c o u n t r y s

Mexico 6



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middle class expands. After some moderation in 2013-15, upticks in private

consumption and gross investment will be more evident in 2016-20, aided by a

recent public-private partnership (PPP) law. However, declining public capital

spending as a share of GDP into the medium term will be detrimental to growth.

On the supply side, export-oriented industries will continue to benefit from Mexicoslow wages, relatively skilled labour force in these sectors, a weak peso and strategic

closeness to the US. This will be most evident in the automobile industry and the

nascent aerospace sector. Tourism is performing well, although some importantresort cities have been afflicted by drug-related violence. Other potentially dynamic

sectors (such as telecoms) have underperformed, owing to weak competition and

regulation, but the structural reforms could bring improvement, provided that the

stranglehold of local dominant firms can be loosened. Likewise, the oil sector will

receive an important boost from the energy reform, assuming that it manages to

attract private investment in the eventual exploitation of Mexicos considerabledeepwater reserves and its shale potential. A fall in electricity prices and greater

interconnection with the North American energy grid will also help to bring down

input costs for businesses. Expansion of financial services will remain below

potential because of low levels of financial inclusion, but the banking reform is

expected to improve competition in the sector and boost lending in the medium term.

Poor rural infrastructure and low productivity (hampered by high levels of poverty)

will cap any significant rise in agricultural production.

Economic growth% 2015a 2016b 2017b 2018b 2019b 2020b

GDP 2.5 2.4 3.0 3.3 3.0 3.2

Private consumption 3.1 2.9 3.0 3.4 3.0 3.4

Government consumption 2.4 0.9 2.1 2.3 1.9 1.9

Gross fixed investment 3.9 3.4 4.5 4.8 4.3 4.7

Exports of goods & services 9.1 5.0 5.1 5.2 2.8 5.0

Imports of goods & services 5.1 5.9 6.1 6.3 3.4 6.2

Domestic demand 3.1 2.6 3.3 3.6 3.1 3.6

Agriculture 3.1 4.9 4.8 4.8 4.7 4.7

Industry 1.0 3.3 3.7 3.9 3.9 3.9

Services 3.3 1.8 2.6 2.8 2.4 2.7aActual. bEconomist Intelligence Unit forecasts.

InflationA continuous nine-month slide culminated in the lowest inflation rate in January

(2.1%) since the current series began. Following this, annual inflation finally ticked

back up in February, to 2.9%, but easing base-year effects suggest that consumer

prices will be on an upward trend over the next few months. Pass-through effects

from higher import prices are also a cause for concern, and Banxico has highlighted

this risk as one of the reasons for the recent rate hike. In the longer term, restrained

increases in real wages and ample spare capacity will prevent firmer domestic

demand growth from exerting significant pressure on prices. These factors will alsohelp to keep expectations anchored close to the mid-point of Banxicos 24% targetrange, despite occasional domestic supply-side shocks.

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Exchange ratesThe peso slumped considerably in January-February, losing almost 8% of its

nominal value, before rebounding after the mid-February rate hike. The peso has

since gained further ground in line with a trend towards strengthening seen in many

emerging economies, falling below Ps18:US$1. Although our baseline forecast sees

risks of continued volatility, we expect the peso to strengthen gradually from 2017

as global uncertainty eases and the economy strengthens, reaching Ps16.9:US$1 byend-2020. Mitigating exchange-rate risks is a substantial reserves cushion

(US$171.9bn in January), which is high by historical comparison, albeit over

US$20bn below its January 2015 peak. A weakening of the peso in real terms

compared with the previous decade will support export competitiveness.

External sectorAfter widening to 2.8% of GDP in 2015 on account of the fall in oil prices, we expect

the current account to widen further, to 3% of GDP in 2016, before gradually

narrowing to 1.9% of GDP by the end of the forecast period as global oil prices

rebound from their current lows. The trade balance will suffer from lower oil export

revenue, owing to weaker prices and a decline in production in 2016, and fromhigher imported goods costs. However, this will be offset by a more favourable

outlook for manufactures, which represent a far larger share of Mexicos exportprofile (85%), and which will benefit from the weak peso. The services deficit will

remain broadly stable as a share of GDP, despite some improvement in tourism

revenue, while the primary income deficit will remain large, particularly if additional

investment feeds in over the coming years. Remittances rose further in 2015, and

should continue to rise in absolute terms, but will decline relative to GDP, pushing

the secondary income (transfers) surplus below the 2% of GDP mark from 2017.

The current-account deficit will remain manageable, and largely financed by foreign

direct investment (FDI) and portfolio inflows. FDI inflows rose to US$28.4bn in 2015,

one of the highest levels on record. The opening-up of the telecoms and energy

sectors will help to boost FDI inflows, although high entry barriers in otherdomestic sectors will result in Mexico having a lower share of FDI relative to GDP

than countries such as Brazil and Chile. Portfolio inflows have been large in recent

years (well above FDI), but eased to US$20.4bn in 2015. These will decrease further

once global spreads begin to narrow. Import cover will average a comfortable

4.4 months in 2016-20.

Mexico 8



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Forecast summaryForecast summary(% unless otherwise indicated)

2015a 2016b 2017b 2018b 2019b 2020b

Real GDP growth 2.5 2.4 3.0 3.3 3.0 3.2

Industrial production growth 1.0c 3.3 3.7 3.9 3.9 3.9

Gross fixed investment growth 3.9 3.4 4.5 4.8 4.3 4.7Unemployment rate (av) 4.4 4.4 4.4 4.4 4.7 4.6

Consumer price inflation (av) 2.7 3.2 3.5 3.5 3.4 3.4

Consumer price inflation (end-period) 2.1 4.0 3.2 3.7 3.6 3.5

Lending interest rate 3.4 3.6 4.3 4.7 4.8 4.8

Budgetary public-sector balance (% of GDP) -3.5 -3.0 -2.5 -2.3 -2.2 -2.2

Exports of goods fob (US$ bn) 381.2 384.4 416.2 449.9 474.8 511.8

Imports of goods fob (US$ bn) 395.6 400.8 431.3 459.4 483.1 519.5

Current-account balance (US$ bn) -32.4 -31.8 -31.0 -29.7 -29.1 -29.8

Current-account balance (% of GDP) -2.8 -3.0 -2.6 -2.3 -2.1 -1.9

External debt (end-period; US$ bn) 442.6c 491.7 548.6 614.0 686.6 759.8

Exchange rate Ps:US$ (av) 15.85 17.88 17.58 17.47 17.26 17.06

Exchange rate Ps:US$ (end-period) 17.21 17.73 17.53 17.37 17.16 16.96

Exchange rate Ps: (av) 17.59 19.58 19.21 19.39 19.90 20.13Exchange rate Ps: (end-period) 18.73 19.33 19.28 19.54 20.08 20.18aActual. bEconomist Intelligence Unit forecasts. cEconomist Intelligence Unit estimate.

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Quarterly forecastsQuarterly forecasts

2015 2016 2017

1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

GDP

% change, quarter on quarter 0.5 0.6 0.8 0.5 0.5 0.5 0.7 0.7 0.7 0.8 0.9 0.9

% change, year on year 2.5 2.4 2.7 2.5 2.5 2.4 2.2 2.4 2.7 2.9 3.2 3.4

Private consumption



Government consumption



Gross fixed investment

% change, quarter on quarter 0.7 0.7 0.4 -1.1 1.4 1.5 1.6 1.6 0.7 0.8 0.9 1.0


Exports of goods & services

% change, quarter on quarter 2.2 0.8 2.5 -0.5 1.5 1.2 2.1 1.8 0.8 1.3 0.5 0.9


Imports of goods & services

% change, quarter on quarter 0.6 0.5 2.0 -0.8 2.1 2.1 2.2 2.2 1.0 1.1 1.2 1.2% change, year on year 6.6 5.6 5.8 2.4 3.8 5.4 5.6 8.9 7.7 6.7 5.6 4.6

Domestic demand



Consumer prices



Producer prices

% change, quarter on quarter -0.6 1.2 0.4 0.4 1.4 1.6 1.6 1.8 1.1 1.0 0.7 0.5

% change, year on year -0.4 0.3 0.5 1.3 3.4 3.8 5.0 6.5 6.2 5.5 4.6 3.3

Exchange rate Ps:US$

Average 14.93 15.31 16.40 16.75 17.61 17.86 17.99 18.07 17.96 17.66 17.43 17.27

End-period 15.15 15.57 17.01 17.21 17.73 17.92 18.03 17.73 17.81 17.54 17.35 17.53

Interest rate (%; av)

Money market rate 3.3 3.3 3.3 3.4 3.2 3.4 3.8 3.9 4.6 4.7 3.9 3.6

Long-term bond yield 3.3 3.5 3.7 3.6 3.6 3.7 4.1 4.4 4.2 4.3 4.4 4.4

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Data and charts

Annual data and forecast 2011a 2012a 2013a 2014a 2015a 2016b 2017b

GDP

Nominal GDP (US$ bn) 1,170.8 1,186.4 1,261.5 1,297.5 1,144.1 1,071.2 1,182.4

Nominal GDP (Ps bn) 14,545 15,624 16,111 17,247 18,132 19,155 20,787

Real GDP growth (%) 4.0 3.8 1.6 2.3 2.5 2.4 3.0

Expenditure on GDP (% real change)

Private consumption 4.8 4.7 2.5 1.8 3.1 2.9 3.0

Government consumption 2.5 3.3 1.3 2.4 2.4 0.9 2.1

Gross fixed investment 7.8 4.8 -1.5 2.8 3.9 3.4 4.5

Exports of goods & services 8.3 5.9 2.2 7.0 9.1 5.0 5.1

Imports of goods & services 8.1 4.7 3.5 5.9 5.1 5.9 6.1

Origin of GDP (% real change)

Agriculture -2.3 7.4 0.9 4.3 3.1 4.9 4.8

Industry 3.4 2.9 -0.5 2.6 1.0 3.3 3.7

Services 4.7 4.5 2.4 1.9 3.3 1.8 2.6

Population and income

Population (m) 120.4 122.1 123.7 125.4 127.0 128.6 130.2GDP per head (US$ at PPP) 15,748 16,287 16,244 17,352 17,338 17,824 18,406

Recorded unemployment (av; %) 5.2 4.9 4.9 4.8 4.4 4.4 4.4

Fiscal indicators (% of GDP)

Public-sector revenue 22.5 22.5 23.6 23.1 23.5 21.5 21.6

Public-sector expenditure 25.0 25.1 25.9 26.3 27.0 24.5 24.1

Public-sector balance -2.5 -2.6 -2.3 -3.2 -3.5 -3.0 -2.5

Net public debt 34.9 35.2 38.0 41.9 46.5 49.7 51.3

Prices and financial indicators

Exchange rate Ps:US$ (end-period) 13.99 13.01 13.08 14.72 17.21 17.73 17.53

Consumer prices (end-period; %) 3.8 3.6 4.0 4.1 2.1 4.0 3.2

Producer prices (av; %) 6.0 4.7 1.1 1.9 0.4 3.4 3.9

Stock of money M1 (% change) 13.6 9.5 10.3 14.5 16.4 5.6 8.5

Stock of money M2 (% change) 11.9 8.4 8.8 10.9 7.2 6.0 10.6

Money market interest rate (av; %) 4.8 4.8 4.3 3.5 3.3 3.6 4.2

Current account (US$ m)

Trade balance -1,205 291 -909 -2,573 -14,375 -16,371 -15,093

Goods: exports fob 350,004 371,442 380,729 397,866 381,198 384,425 416,160

Goods: imports fob -351,209 -371,151 -381,638 -400,440 -395,573 -400,796 -431,253

Services balance -14,793 -14,005 -10,983 -12,451 -9,448 -8,876 -10,103

Primary income balance -20,373 -25,405 -40,083 -32,736 -32,844 -33,337 -32,998

Secondary income balance 22,974 22,559 21,653 22,915 24,287 26,756 27,169

Current-account balance -13,397 -16,559 -30,322 -24,846 -32,381 -31,829 -31,025

External debt (US$ m)

Debt stock 291,833 348,945 406,042 432,602 442,568c 491,703 548,574

Debt service paid 42,156 70,828 41,614 52,242 50,946c 48,565 55,640

Principal repayments 28,708 35,413 20,200 29,391 33,225c 29,369 32,434

Interest 13,448 35,415 21,414 22,851 17,721c 19,196 23,206

International reserves (US$ m)

Total i nternational r eserves 149,339 167,098 181,019 195,917 177,975 168,821 180,611aActual. bEconomist Intelligence Unit forecasts. cEconomist Intelligence Unit estimate.Source: IMF, International Financial Statistics.

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Quarterly data 2014 2015

1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Non-financial public sector (Ps bn)

Revenue 964.0 947.9 942.6 1,128.5 1,086.6 959.8 987.2 1,230.9

Expenditure 1,023.2 1,144.5 1,105.3 1,255.0 1,185.1 1,220.0 1,093.5 1,393.3

Balance -59.2 -196.6 -162.7 -126.5 -98.5 -260.2 -106.3 -162.4

Industrial production (2003=100)

General 103.0 105.4 107.9 109.4 104.7 106.0 109.3 109.6

Manufacturing 110.8 114.2 114.8 115.6 114.4 117.8 118.4 117.9

Mining 96.6 96.0 96.2 93.9 91.2 88.7 90.8 89.6

Employment, wages and prices

Employment (% change, year on year)a 1.5 0.0 0.3 -0.2 1.5 2.1 2.6 n/a

Unemployment rate (% of the labour force) 4.8 4.9 5.3 4.4 4.2 4.4 4.6 4.2

Consumer prices (Jun 16-30 2002=100) 112.1 113.0 114.1 115.2 115.5 116.3 117.1 117.8

Consumer prices (% change, year on

year)4.2 3.6 4.1 4.2 3.1 2.9 2.6 2.3

Producer prices (Dec 2003=100) 102.6 103.1 103.2 102.7 102.1 103.3 103.7 104.1

Producer prices (% change, year on year) 1.7 2.4 2.2 1.3 -0.4 0.3 0.5 1.3

Financial indicators

Exchange rate Ps:US$ (av) 13.23 13.00 13.11 13.83 14.93 15.31 16.40 16.75Exchange rate Ps:US$ (end-period) 13.08 13.03 13.45 14.72 15.15 15.57 17.01 17.21

Deposit rate (av; %) 1.1 1.0 0.6 0.6 0.6 0.6 0.6 0.6

Lending rate (av; %) 3.9 3.7 3.3 3.3 3.4 3.4 3.4 3.5

3-month money market rate (av; %) 3.8 3.7 3.3 3.3 3.3 3.3 3.3 3.4

M1 (end-period; Ps bn) 2,448 2,508 2,559 2,879 2,887 2,970 3,059 3,352

M1 (% change, year on year) 12.5 13.3 13.8 14.5 17.9 18.4 19.5 16.4

M2 (end-period; Ps bn) 9,752 10,010 10,183 10,540 10,678 10,950 11,081 11,302

M2 (% change, year on year) 9.4 11.5 10.0 10.9 9.5 9.4 8.8 7.2

BMV stockmarket index (% change, year

on year)-13.3 6.5 8.3 -10.3 -6.7 -11.7 -25.0 -14.8

Sectoral trends

Crude oil production (m barrels/day) 2.49 2.47 2.40 2.36 2.30 2.23 2.27 2.28

Crude oil production (% change, year onyear) -2.1 -1.9 -4.3 -6.5 -7.7 -9.8 -5.5 -3.5

Foreign trade and payments (US$ m)

Exports fob 90,759101,871101,120103,379 90,404 98,134 96,094 96,141

Manufacturingb 74,615 85,551 86,949 90,183 79,198 86,772 86,698 87,308

Oil 11,501 11,483 10,718 8,885 6,267 6,565 5,907 n/a

Imports fob 92,064100,864102,840104,209 92,605 99,985102,563100,080

Intermediate goodsb 69,590 77,018 77,879 77,544 70,137 76,139 76,706 74,273

Trade balance -1,306 1,007 -1,720 -830 -2,201 -1,852 -6,469 -3,939

Services balance -2,504 -3,357 -3,548 -3,042 -1,973 -2,156 -3,401 n/a

Primary income balance -9,643 -11,544 -3,676 -7,874 -10,384 -9,855 -4,718 n/a

Net transfer payments 5,552 6,262 6,061 6,150 5,839 6,464 6,642 n/a

Current-account balance -8,013 -7,875 -3,125 -5,831 -8,891 -7,613 -8,179 -7,698

Reserves excl gold (end-period) 180,369187,324188,516190,923193,092189,704177,567173,445aRegistered with the Mexican Social Security Institute. bIncluding maquila.Sources: IMF, International Financial Statistics Banco de Mxico, Indicadores Econmicos Instituto Nacional de Estadstica

y Geografa Secretara del Trabajo y Previsin Social.

Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exchange rate Ps:US$ (av)

2014 13.20 13.29 13.22 13.07 12.95 12.98 12.97 13.15 13.20 13.48 13.58 14.43

2015 14.68 14.92 15.20 15.22 15.26 15.46 15.89 16.49 16.84 16.60 16.63 17.00

2016 17.98 18.48 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Exchange rate Ps:US$ (end-period)

2014 13.37 13.30 13.08 13.14 12.87 13.03 13.06 13.08 13.45 13.42 13.72 14.72

2015 14.69 14.92 15.15 15.22 15.36 15.57 16.21 16.89 17.01 16.45 16.55 17.21


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Public sector budget revenue (Ps m)

2014 366.8 281.0 316.3 346.8 296.0 305.1 325.5 306.7 310.4 327.5 359.9 441.1

2015 365.1 290.5 431.1 330.0 302.7 327.1 354.1 315.1 318.0 299.4 415.5 516.0

2016 370.6 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Public sector budget expenditure (Ps m)

2014 376.2 324.5 322.5 340.8 343.6 460.2 412.3 325.7 367.2 362.9 378.2 513.9

2015 460.7 349.9 374.5 354.9 363.4 501.7 397.3 341.6 354.7 343.4 423.5 626.4


Public sector budget balance (Ps m)

2014 -9.4 -43.6 -6.2 6.0 -47.5 -155.1 -86.8 -19.0 -56.8 -35.4 -18.3 -72.8

2015 -95.6 -59.4 56.5 -24.8 -60.8 -174.6 -43.2 -26.5 -36.7 -44.0 -8.0 -110.4

2016 -47.3 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

M1 (% change, year on year)

2014 12.9 13.2 12.5 14.9 14.7 13.3 14.7 13.6 13.8 18.3 15.6 14.5

2015 17.7 17.7 17.9 18.7 18.1 18.4 19.4 19.9 19.5 18.5 15.4 16.4


M2 (% change, year on year)

2014 9.3 9.5 9.4 10.6 10.8 11.5 10.8 10.3 10.0 10.0 10.1 10.9

2015 11.4 10.5 9.5 10.1 10.7 9.4 10.0 9.1 8.8 8.4 6.3 7.2


Industrial production (% change, year on year)

2014 1.7 1.4 1.2 2.9 3.3 2.9 2.9 2.6 3.0 3.0 2.9 2.6

2015 1.4 1.9 1.7 1.5 0.0 0.7 1.0 1.2 1.4 0.9 0.1 0.02016 1.8 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Retail sales (% change, year on year)

2014 2.9 1.5 5.0 0.4 -0.4 4.7 0.9 5.8 2.4 6.1 2.6 1.5

2015 3.8 5.5 5.6 5.4 5.6 3.3 6.2 6.7 5.1 3.8 6.6 3.3

2016 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Unemployment rate (% of the labour force)

2014 5.1 4.7 4.8 4.9 4.9 4.8 5.5 5.2 5.1 4.8 4.5 3.8

2015 4.5 4.3 3.9 4.3 4.5 4.4 4.7 4.7 4.5 4.6 4.0 4.0


Deposit rate (av; %)

2014 1.1 1.1 1.1 1.1 1.2 0.8 0.6 0.6 0.6 0.6 0.6 0.6

2015 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 n/a

2016 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLending rate (av; %)

2014 3.8 3.8 3.9 3.9 3.8 3.4 3.4 3.3 3.4 3.3 3.2 3.4

2015 3.3 3.4 3.5 3.4 3.5 3.3 3.4 3.3 3.5 3.4 3.6 3.6

2016 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Stockmarket index (BMV; end-period, October 1978=0.78)

2014 40,880 38,783 40,462 40,712 41,363 42,737 43,818 45,628 44,986 45,028 44,190 43,146

2015 40,951 44,190 43,725 44,582 44,704 45,054 44,753 43,722 42,633 44,543 43,419 42,978

2016 43,631 43,715 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Consumer prices (av; % change, year on year)

2014 4.5 4.3 3.8 3.5 3.5 3.7 4.1 4.1 4.2 4.3 4.2 4.1

2015 3.1 3.0 3.1 3.1 2.9 2.9 2.7 2.6 2.5 2.4 2.2 2.1


Producer prices (av; % change, year on year)

2014 1.6 1.7 1.8 2.5 2.9 1.9 2.2 2.5 1.8 1.5 1.5 1.0

2015 -0.5 -0.8 -0.1 0.2 0.0 0.6 0.6 0.3 0.7 1.3 1.4 1.3


Total exports fob (US$ m)

2014 27,052 30,462 33,245 34,060 34,374 33,436 33,687 33,287 34,147 36,879 32,356 34,144

2015 26,554 29,716 34,134 32,954 31,340 33,840 32,804 31,048 32,241 34,155 31,025 30,961

2016 24,536 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Total imports cif (US$ m)

2014 30,234 29,544 32,287 33,562 34,251 33,051 34,691 34,484 33,666 36,943 33,405 33,861

2015 29,816 29,124 33,664 33,040 32,357 34,589 35,071 33,830 33,661 35,599 32,594 31,887

2016 27,978 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Trade balance fob-cif (US$ m)

2014 -3181.1 918.0 957.5 498.5 122.7 385.7 -1003.7 -1196.9 480.8 -63.8 -1049.0 282.8

2015 -3262.0 591.5 470.0 -85.4 -1017.4 -749.0 -2266.9 -2782.1 -1419.9 -1443.8 -1568.8 -926.52016 -3441.1 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

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Foreign-exchange reserves excl gold (US$ m)

2014 178,054 178,521 180,369 183,758 185,649 187,324 187,798 188,281 188,516 192,422 192,047 190,923

2015 194,192 193,439 193,092 193,677 191,770 189,704 189,025 182,713 177,567 172,655 168,528 173,445

2016 171,983 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aSources: IMF, International Financial Statistics; Haver Analytics.

Annual trends charts

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Quarterly trends charts

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Monthly trends charts

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Comparative economic indicators

Basic data

Land area

1,964,375 sq km

Population

125.5m (2014; UN estimate)

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Main towns

Population (m), 2010 (INEGI data for metropolitan areas)

Mexico City (capital): 20.1

Guadalajara: 4.4

Monterrey: 4.1

Puebla: 2.7

Climate

Tropical in the south, temperate in the highlands, dry in the north

Weather in Mexico City (altitude 2,309 metres)

Hottest month, May, 12-26C (average daily minimum and maximum) coldest month,January, 6-19C driest month, February, 5 mm average rainfall wettest month, July,170 mm average rainfall

Languages

Spanish is the official language. Over 60 indigenous languages are also spoken,mainly Nhuatl (1.2m speakers), Maya (714,000), Zapotec (403,000) and Mixtec(387,000)

Measures

Metric system

Currency

Peso (Ps). Average exchange rates in 2015: Ps15.85:US$1 Ps17.53:1

Time

Six hours behind GMT in Mexico City

Public holidays

January 1st (New Year); February 1st (Constitution Day); March 21st (Benito

Jurez) March 24th (Maundy Thursday) March 25th (Good Friday) May 1st(Labour Day) and 5th (Battle of Puebla); September 16th (Independence Day);

November 2nd (Day of the Dead) and 21st (Mexican Revolution); December 25th

(Christmas) and 31st (New Year's Eve)

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Political structure

Official name

United Mexican States

Political divisions

31 states and the Federal District (Mexico City); states are divided into

municipalities

Form of government

Presidential, with a constitutionally strong Congress

The executive

The president is elected for a non-renewable six-year term and appoints the cabinet

National legislature

Bicameral Congress: 128-member Senate (the upper house), elected for a six-year

term, with 64 seats elected on a first-past-the-post basis, 32 using the first minority

principle and 32 by proportional representation; 500-member Chamber of Deputies

(the lower house), elected for a threeyear term, with 300 seats elected on a first-past-the-post basis and 200 by proportional representation

Regional governments

State governors are elected for six-year terms; each state has a local legislature and

has the right to levy state-wide taxes; municipal presidents are elected for three-year

terms

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Legal system

There are 68 district courts and a series of appellate courts with a Supreme Court;

federal legal system, with states enjoying significant autonomy

National elections

Next elections June 2018 (presidential and congressional)

National governmentThe president, Enrique Pea Nieto of the Partido Revolucionario Institucional (PRI),heads a minority government

Main political organisations

Government: PRI

Opposition: Partido Accin Nacional (PAN) Partido de la Revolucin Democrtica(PRD) Partido Verde Ecologista de Mxico (PVEM) Convergencia Partido delTrabajo (PT) Partido Nueva Alianza (Panal) Movimiento Regeneracin Nacional(Morena)

President: Enrique Pea Nieto

Cabinet members

Agrarian reform: Rosario Robles Berlanga

Agriculture: Jos Calzada Rovirosa

Attorney-general: Arely Gmez Gonzlez

Communications & transport: Gerardo Ruiz Esparza

Economy: Ildefonso Guajardo Villarreal

Energy: Pedro Joaqun Coldwell

Environment & natural resources: Rafael Pacchiano

Finance & public credit: Luis Videgaray Caso

Foreign relations: Claudia Ruiz Massieu

Health: Mercedes Juan Lpez

Interior: Miguel Osorio Chong

Labour & social welfare: Alfonso Navarrete Prida

National defence: Salvador Cienfuegos Zepeda

Naval: Vidal Sobern Salas

Public education: Aurelio Nuo MayerP u b l i c s e c u r i t y : M a n u e l M o n d r a g n y K a l b

Social development: Jos Antonio Meade Kuribrea

Tourism: Enrique de la Madrid

Central bank governor

A g u s t n C a r s t e n s

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Recent analysisGenerated on April 24th 2016

The following articles have been written in response to events occurring since our most recent forecast was released, a

indicate how we expect these events to affect our next forecast.

Politics

Forecast updates

April 14, 2016: Political stability

Government not keen on extending Ayotzinapa investigation

Event

The government has declared that it has no intention of renewing the mandate of

the Grupo Interdisciplinario de Expertos Independientes (GIEI), an international task

force investigating the 2014 Ayotzinapa kidnappings of 43 students.

Analysis

The GIEI's mandate stretches until April 30th, after which it will require government

approval to continue. However, there have been some recent clashes between the

group, which is composed of experts from the Inter-American Commission on

Human Rights (IACHR), and government authorities. In March the IACHR released

a damning report on the state of human rights in Mexico, making note of the high

number of murders (over 100,000) and disappearances (around 27,000) in the nearly

decade-long drug war, as well as torture by police and extra-judicial killings.The

report was immediately criticised by the government, which claimed that there was

not, in fact, a "human rights crisis" as the IACHR suggested.

The debate has now centred on whether the GIEI should extend its mandate,

something that is strongly supported by the families of the 43 disappeared students,

who have stated that they are no closer to finding out their fate. The GIEI's findings

have been at odds with those of the government, and it has particularly questioned

the official view that the bodies of the students were disposed of in a fire in a

garbage dump near the town of Cocula, in the state of Guerrero. On April 1st the

government held a press conference in which it announced results of a further

investigation which suggested that there was indeed evidence that a fire in Cocula

could have charred as many as 17 bodies. The GIEI was not granted the right to

discuss the findings owing to confidentiality issues, and consequently stated that it

would no longer co-operate with the government on any investigation related to the

fire.

According to the IACHR, the GIEI should retain its mandate to investigate the

Ayotzinapa kidnappings until conclusive answers are obtained. The government

has not stated what other forms of collaboration with the GIEI could take shape after

April. Given the sensitive nature of the GIEI's work, and that its conclusions have

been somewhat embarrassing to national authorities, it is highly likely that the

government will prefer to take back control of the investigation.

Impact on the forecast

The lack of closure in the Ayotzinapa kidnapping case will continue to fuel

dissatisfaction with the government, underpinning our forecast of risks to political

stability.

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Analysis

April 1, 2016

Auditor highlights lack of transparency in state finances

The Auditora Superior de la Federacin (ASF, the congressional audit office) in

February disclosed the results of its most recent public accounts audit, covering

2014. The report has highlighted the problem of public-sector corruption andreignited calls from opposition parties in particular to move ahead with approval of

byelaws linked to anti-corruption legislation that was passed in early 2015.

Nevertheless, much more remains to be done if the fight against corruption is to be

effective, particularly regarding institutional independence and enforcement of the

law at all levels of government.

The latest ASF report comprises 1,641 audits of federal spending, with observations

made wherever irregularities need to be clarified. The ASF's observations covered

Ps77.4bn (US$4.5bn) of spending, equivalent to 13% of all audits. The report

identifies that most problems were found in instances of federal funds being sent to

the states. Underspending is particularly prevalent, which not only leads to

unfulfilled goals and objectives of federal programmes, but also to the possibility of

misused resources. When local administrations fail to respond satisfactorily to theASF's observations within the established deadline, they are formally accused of

corruption by the ASF, which files a criminal lawsuit with the Procuradura Generalde la Repblica (the attorney-general's office). During the presentation of the 2014report, Juan Manuel Portal, the ASF's head auditor, said that it is likely that the ASF

will issue around 100 lawsuits related to unclarified observations.

Dire situation

The report shows that the 19 states that in 2014 were governed by the ruling Partido

Revolucionario Institucional (PRI) accounted for Ps17.7bn in federal funds that need

to be clarified. Shockingly, 60% of these refer to Veracruz alone, which accumulated

Ps10. 8bn in unaccounted funds during 2014. According to Minerva Hernndez, a

congresswoman who sits on the ASF's vigilance committee, the auditors havealready issued criminal lawsuits for irregularities in the public finances of Veracruz

between 2008 and 2013 for underspending, refusal to return unspent federal funds,

refusal to deliver funds to public universities, and "simulation" of the return of

unused federal funds.

The ASF report shows that the Veracruz state government provided false

information regarding the use of federal funds destined to combat crime in the state,

which has escalated enormously during the administration of the current governor,

Javier Duarte. The audit claims that although by the end of December 2014 Veracruz

authorities reported that 71% of the objectives of the funds for crime reduction had

been achieved, in reality only Ps23m of the funds had been used, equivalent to 6.3%

of the total. Nevertheless, Veracruz is far from being the only state with

dubious public accounts. Irregularities were also significant in Michoacn, Jalisco,Mxico state, Chiapas, Guerrero and Oaxaca. In Chiapas, the only state ruled by thePartido Verde Ecologista de Mxicoa close ally of the PRIthe ASF report foundthat more than Ps886m was unaccounted for.

Problems extend beyond the PRI

Lack of transparency and accountability is not exclusive to PRI-run state

administrations. Indeed, the report shows that states ruled by the main opposition

parties, both the leftist Partido de la Revolucin Democrtica (PRD) and theconservative Partido Accin Nacional (PAN), also have highly deficient publicaccounts. Irregularities in the four PRD-run governments (in the capital,

Mexico City, and Morelos, Oaxaca and Tabasco states) amounted to Ps3.7bn. These

were led by Oaxaca, with Ps1.7bn. Irregularities there were mostly identified in funds

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f o r e d u c a t i o n a s w a s t h e c a s e i n M o r e l o s a n d T a b a s c o . M e x i c o C i t y r e c o r d e d t h esmallest number of irregularities, totalling Ps433m, mostly regarding funds for social

infrastructure.

PAN governments in Baja California, Baja California Sur, Guanajuato, Puebla,

Sinaloa and Sonora states also racked up anomalies equivalent to around Ps3.7bn in

2014. In these states, most irregularities revolved around programmes in the

education, health, and public security sectors. The administration of the Guanajuato

governor, Miguel Mrquez Mrquez, was the worst offender, with Ps1. 5bn, followed by that of Guillermo Padrs in Sonora, with Ps646m.

The problem also extends to the federal legislature, with the report showing that

both chambers of Congress failed to account for significant amounts. The Chamber

of Deputies recorded anomalies equivalent to more than Ps1. 9bnequivalent toon equarter of its total budget in 2014while the Senate was missing appropriated o c u m e n t a t i o n t o j u s t i f y P s 1 . 3 b n , e q u i v a l e n t t o o n et h i r d o f i t s b u d g e t .

Little impact on corruption

The number of lawsuits issued by the ASF has been growing significantly in the

past few years, from seven in 2010, to 53 in 2011, 80 in 2012, 134 in 2013, 186 in 2014

and 157 in 2015. This has been partly the result of increasingly exhaustive audits,

which have led to greater numbers of irregularities detected. However, these

lawsuits have not translated into sanctions. Between 1998 and 2015 the ASF

presented a total of 656 criminal reports for corruption, of which only 19 led to penal

action. This is equivalent to an impunity rate of 97%.

Eduardo Bohrquez, head of the Transparencia Mexicana, the Mexican chapter of an anti-corruption NGO, Transparency International, has pointed out that this level

of impunity illustrates the ineffectiveness of transparency when not accompanied

by anti-corruption measures. In this regard, the new anti-corruption framework

signed into law by Mr Pea Nieto on May 27th 2015, which no longer relies on asingle entity to take charge of all aspects of anti-corruption efforts, is a very

positive development. Despite its improvements, however, the framework has yet to

become applicable, as it is still missing its byelaws, which must be voted on by

Congress by May 28th this year.

Similarly, efforts to rein in state governments' lack of accountability have made some

progress. The Ley de Disciplina Financiera a las Entidades Federativas y

Municipios (law of fiscal discipline of the states and municipalities) was presented

by the government in August 2015, and includes procedures to curb the use of state

resources for illegitimate uses. But, just as with the anti-corruption byelaws, it

remains stuck in Congress.

Citizens take a stand

Mr Portal has repeatedly highlighted that inadequate implementation of internal

controls and poorly designed rules are at the root of the problem. However, there is

also a clear lack of political will to allow for greater accountability. The ASF reporthas shown that no single political party is without blame. Indeed, the introduction

of a citizen-led initiative to create a new administrative responsibilities law, dubbed

"Ley 3de3" (Law 3 of 3), on March 17th illustrates the extent to which civil society

mistrusts politicians to put conditions in place in order to address corruption more

effectively.

Although all political parties welcomed this initiative, which has to be debated in

Congress (both the PAN and the PRD are claiming that they would endorse the

proposal as their own), it remains unclear whether or not its provisions will be

diluted. Moreover, even if this legislation is approved largely unchanged, more

changes need to be made within Mexico's law enforcement system in order to make

the new anti-corruption measures successful.

Without effectively sanctioning public officials who fail to account for the use of

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public money, impunity will persist, and even the promising new framework will fail

to curb a problem that is becoming increasingly sensitive. Ultimately, it is in

politicians' interest to address the issue of corruption before it exacerbates already

growing frustration with the establishment and leads to more significantand potentially disruptingleve ls of popular, anti-establishment mobilisation, as tookplace in 2014, when thousands of Mexicans took to the streets.

April 11, 2016Panama Papers release has region-wide implications

The Panama Papers expos came to light on April 3rd, when a German newspaper,

Sddeutsche Zeitung, and the International Consortium of Investigative

Journalists (ICIJ, a US-based non-profit organisation) made a vast trove of

confidential documents public. It will take some time before the full implications of

the leak of 11.5m documents obtained from Mossack Fonseca, a Panama-based law

firm with a global practice, fully emerge. However, the leak has sparked an

immediate global response, with governments launching investigations into

possible wrongdoing and potential illicit activities. The repercussions are already

reverberating across Latin America and the Caribbean, but the greatest medium-

term impact will be felt in tax havens themselves.

The release of the documents emerged after a year-long investigation by

Sddeutsche Zeitunginto offshore tax havens, the creation of shell companies, and

alleged tax evasion, money-laundering and bribery. The files included financial

records, legal documents and correspondence dating back over 40 years that

exposed the financial affairs of some of the world's richest and most powerful

individuals, including a number of leaders in Latin America. These include the

names of current and former leaders from Argentina, Brazil, Ecuador, Mexico,

Panama, Peru and Venezuela.

Legality of schemes no barrier to political fallout

Carefully structured tax-avoidance schemes have long served as a legal loophole

allowing companies and wealthy individuals to legally reduce or avoid the payment

of corporation tax and other levies on their foreign earnings. The secretive nature of

most offshore jurisdictions has also served to mask the ownership of such wealth, a

characteristic that has been increasingly exploited by those benefiting from illicit

income, such as corrupt public officials and drug traffickers.

The information revealed may ultimately not provide evidence that any laws have

been broken, and Mossack Fonseca insists that all of its activit ies taken on behalf

of its clients are lawful. However, the revelations of wealth accrued by figures in

public office and the perceived hypocrisy of storing funds offshore in order to

avoid domestic taxes will put pressure on politicians to stamp out such practices. It

will also focus renewed attention on countries in Latin America and the Caribbean

that derive a substantial part of their income from offshore financial services drivenby a low- or no-tax fiscal policy regime.

Spotlight on Latin American and Caribbeanleaders

The list of Latin American and Caribbean leaders and public officials who will now

be required to account for their offshore financial activities is long and will continue

to grow. The Panama Papers affair will add to the woes of Panama itself, which for

years has been struggling with a plethora of corruption scandals. At the end of

January this year, Mossack Fonseca was the subject of an investigation into

involvement in a scandal involving the Brazilian state oil firm, Petrleo Brasileiro(Petrobras), and alleged participation in money laundering. During the investigation

a Brazilian prosecutor, Carlos Fernando dos Santos Lima, claimed that the law firmwas a criminal organisation responsible for money laundering, bribery, and secret

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offshore accounts and shell companies.

In Argentina the recently elected president, Mauricio Macri, has been associated

with an offshore company, Fleg Trading, which was incorporated in the Bahamas in

1998 and dissolved in January 2009, a period in which Mr Macri served as mayor of

the Argentinian capital, Buenos Aires. Mr Macri's official spokesman,

Ivan Pavlovsky, insists that the Argentinian president had no investment

participation in the company and was not a shareholder. A former finance minister

of Buenos Aires, Nstor Grindetti, is also linked to the Panama Papers, but hasrefused to comment. In Ecuador the documents name Pedro Delgado, a formergovernor of the Banco Central del Ecuador (the Central Bank) and cousin of the

president, Rafael Correa. Mr Delgado is a fugitive in the US and is facing an

extradition request from Ecuadorean authorities for forging a university degree.

The impact of the released papers is also being felt in the Peruvian presidential

elections, with most but not all of Peru's major presidential candidates having been

named in the leaked documents. Keiko Fujimori, who won the first-round

presidential election on April 10th and is likely to face Pedro Pablo Kuczynski in a

runoff election in June, has been linked to her father's financial activities.

Alberto Fujimori, the former Peruvian president (19902000), is in jail forembezzlement and corruption, and his former financial backers were clients of

Mossack Fonseca. The information covered in the Panama papers could possiblydelegitimise the electoral process. It is highly likely in the coming weeks that more

information regarding the candidates' involvement will emerge ahead of the second-

round runoff.

The documents also name Juan Armando Hinojosa, known as the "favourite

contractor" of the Mexican president, Enrique Pea Nieto. The ICIJ reports thatduring 2015 the law firm Mossack Fonseca aided Mr Hinojosa and members of his

family to create three trusts that seemingly took over accounts valued at US$100m.

In Venezuela those implicated by the Panama Papers include a former security chief

of the Venezuelan presidency, Adrin Jos Velsquez Figueroa, a former head of thetreasury, Claudia Daz Guilln, and a former commander-in-chief of the Venezuelanarmed forces, Victor Cruz Weffer.

The full implications of the Panama Papers leak are yet to be seen, but the

revelations made so far have already taken many governments and tax and legal

authorities by surprise. The depth and response capacity to investigate any

potential wrongdoing and adopt measures will test the capacity, independence and

strength of local institutions and should be closely monitored.

Pressure for reform will grow

The offshore finance and hidden bank accounts used by wealthy individuals and

corporations to hide their income and ownership of assets are not confined to tiny

Caribbean Islands or small Latin American countries. Of Latin American and

Caribbean nations, only the Cayman Islands is included in the top ten global tax

havens, according to the Tax Justice Network (TJN, a UK-based advocacy group).Panama, home to the headquarters of Mossack Fonseca, comes 13th on the TJN list.

Other jurisdictions instrumental in aiding offshore company formation are also being

tainted by association. These include the Bahamas, Bermuda and the British Virgin

Islands, all of which obtain more than onequarter of their total GDP from offshorefinancial services.

Pressure on offshore financial centres to improve transparency has been growing

for some time. The two main instruments used to tackle opaque offshore company

registration have been the signing of Tax Information Exchange Agreements and the

Foreign Account Tax Compliance Act (FATCA), a US tax-reporting initiative

designed to assist the US Internal Revenue Service to prevent tax evasion by US

persons living overseas. Although the potential political impact of the Panama

Papers leaks is as yet unquantifiable, pressure to beef up and accelerate theimplementation of initiatives to clamp down on offshore financial services seems

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inevitable. The potential impact on Panama and some small Caribbean economies

that depend on this trade is likely to be significant.

Economy

Forecast updates

April 6, 2016: Exchange rates

Peso recovers some ground

Event

The peso has regained ground after hitting historic lows in the first quarter.

Analysis

During much of the first three months of 2016, the peso was under strong pressure,

and slid to a record low level of Ps19.18:US$1 by February 11th. Thereafter, it slowly

recovered ground and ended the quarter at Ps17.25:US$1, which marked a 1.3%

depreciation relative to its level at the end of 2015. Nonetheless, volatility wassignificant, and the average exchange rate during the quarter was Ps18.08:US$1, a

7.3% depreciation with respect to the previous quarter.

Two key factors help to explain these trends. First, concerns about economic

performance around the world prompted a sharp rebalancing in global portfolios as

investors switched to less risky markets. This increased flight-to-safety resulted in

significant pressure on currencies across many emerging markets, including Mexico.

In fact, the correlation between weakness in the peso and movements in the

currencies of other Latin American countries such as Brazil, Colombia and Peru, was

very high during the period. Likewise, the correlation with currencies in some Asian

economies such as China, Taiwan, the Philippines and India was also elevated.

Second, the sharp decline in commodity prices, particularly oil prices, was also an

important contributing factor to peso weakness during the quarter, as oil exports are

a significant source of foreign currency that is used to build foreign reserves and

finance public spending. For this reason, the correlation between the movement of

the peso and that of the currencies of commodity-dependent nations like Russia,

Australia and Canada was also very high. As the economic uncertainty began to

ease and commodity prices edged back up towards the end of the first quarter, the

pressures on the peso started to recede, allowing an important recovery that

continued until the end of the first quarter.


Despite the risk of continued volatility in the markets, a more stable environment in

the second quarter will be positive to build confidence for economic growth, as

reflected in our forecast.

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April 12, 2016: Inflation

Inflation eased in March

Event

Annual consumer inflation eased to 2.6% in March, according to the Instituto

Nacional de Estadstica y Geografa (the national statistics institute), after severalmonths of increases. In month-on-month terms, prices were up by just 0.15%.

Analysis

Core inflation remained the primary driver of annual consumer inflation in March,

growing by 2.8%. Goods prices were roughly similar, with prices for both food,

beverages and tobacco and for non-food items expanding by 3.2%. Services

showed greater variation, with education costs up by 4.4%, while inflation in rent

and household services came in at just 2.2%, and other services at 2.1%. In contrast,

non-core inflation was lower than the core figure, rising by just 2.1%. This owed to a

2.2% decline in energy costs, which offset a 3.1% rise in government-set prices

(utilities). On the agricultural side, fruit and vegetables were up by a massive 20.9%

mostly on account of a sharp rise in the prices of lemonsbut fish prices weredown by 1.3%.

The March results suggest that benign inflationary conditions may yet persist, after

fears that the peso's weakness was finally set to spill over into import costs. This

was one of the main considerations for the Banco de Mxico (Banxico, the centralbank) when it made a surprise 50 basis point rate increase in mid-February. Since

then, the peso has strengthened noticeably, in line with many other emerging-

market currencies. Given the slack still evident in the Mexican economy, further rate

rises are unlikely as long as the peso remains at current levels (or strengthens

further) and inflation does not begin to creep up. Inflation has come in at under 3%

(the target rate, plus or minus 1 percentage point) for almost a year, having

persistently hovered in the 3-5% range during 201214.

At current levels, inflation will be supportive of Banxico's efforts to focus ongrowth, and further rate increases are unlikely under current conditions.


Our forecast of 3.2% average inflation in 2016 may be downgraded in the light of the

lower than expected figures seen so far this year.

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April 12, 2016: Economic growth

Consumer confidence contracts in March

Event

Consumer confidence contracted further in March, by 4.1% year on year, according

to the Instituto Nacional de Geografa y Estadstica (the national statistics agency).In seasonally adjusted terms, confidence contracted by 1.8%.

Analysis

In year-on-year terms, consumer confidence has been edging downwards over the

past few months. Since September, it has been positive in only two months (October

and January), but the March contraction is the deepest since 2014. All five

categories of the index contracted in March. Household conditions and

expectations decreased by 2.1% and 4.5% respectively, whereas national conditions

and expectations fell to 4.4% and 8.6% respectively. The latter is particularly

concerning, as the average contraction so far this year has been 7%, and suggests a

very grim view of the country's economic outlook. Prospects for high-ticket

purchases were also down by 1.3%, which was the most benign decline among thefive categories. However, this is the first time that it has been negative since mid-

2014.

The seasonally adjusted figures show roughly the same trend, the only difference is

that prospects for high-ticket purchases were the only positive category, growing

by 0.7%. All others were negative, and national expectations also showed the

steepest contraction, falling by 3.1%.

Despite the gloomy March (and first-quarter) results, the link between consumer

confidence and economic performance has been somewhat patchy over the past

year, as highlighted by the relatively strong levels of consumer spending and retail

sales. This persisted into the first quarter: retails sales were up by a nominal 11% in

the first three months of the year, although they slowed somewhat in March. It is

possible that consumer spending is being propped up by factors unrelated toconfidence; for example, a weakening of the peso has raised the purchasing power

of dollar-based remittances from the US. Likewise, there is still some pent up

demand from 2014, when consumer spending eased considerably. Finally,

consumers may also not be acting upon their pessimistic views of the economic

outlook, which is clouded by the slump in oil prices and subsequent budget cuts.


Our forecast of 2.4% GDP growth in 2016 remains unchanged, and we will continue

to expect that confidence figures will underestimate the real state of consumer

demand.

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April 18, 2016: Fiscal policy outlook

Government offers financial support to Pemex

Event

The federal government has announced that it will capitalise Petrleos Mexicanos(Pemex, the state-owned oil firm) with Ps73.5bn (US$4.2bn) in order to bolster its

finances, which have been badly affected by the plunge in global oil prices since

2014.

Analysis

Pemex's profitability has been severely affected by weak oil prices, exacerbating the

firm's already difficult financial position; it has recorded losses for 13 consecutive

quarters, and its loss in the fourth quarter of 2015 was its largest yet (Ps168.9bn).

Total losses for 2015 as a whole amounted to Ps521.6bn. Adding to the problem of

lower oil prices is the fact that Pemex's crude production has also been sliding for a

decade, ever since it reached peak output in 2004 of 3.3m barrels/day (b/d).

Of the total provided by the federal government, Ps47bn will be in the form of a

credit facility to help to finance the company's pensions liabilities in 2016; theremaining Ps26.5bn is a standard capital infusion. New changes to Pemex's fiscal

regime will leave a further Ps50bn in Pemex's coffers. In February the Ministry of

Finance announced that Pemex would bear the brunt of a new round of budget cuts,

of which Ps100bn will have to be borne by the firm.

The sum of these resources and cuts is Ps223.5bn, which is less than half of Pemex's

losses in 2015; this suggests that the company will be in the red for at least another

year, and probably longer, given the expected persistence of low oil prices and

stagnating production. Nevertheless, the financial assistance that the government

will provide gives a strong message that it will support Pemex during this period of

transition triggered by the energy reform, via which it hopes to transform the

company from essentially being a government cash cow to a "productive state

firm".


Although the announced support will help to ease Pemex's finances in 2016, we

continue to expect the company to suffer further losses while oil prices remain so

low.

Analysis

April 4, 2016

Panama Papers: Impacts will be widespread, but unevenThe impacts of the Mossack Fonseca leak will vary considerably, but The

Economist Intelligence Unit expects significant political fallout.

This will largely affect countries that are already politically fragile, or

facing institutional challenges.

Significant emerging markets may face renewed political uncertainty as a

result.

Russia, and other large authoritarian states, will not be heavily affected.

The Kremlin will dismiss the allegations as politically motivated.

The number of resignations directly linked to the leak may be limited.

However, the revelations will help to undermine establishment parties.

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There is a possibility of some indirect impacts on the Brexit debate.

Papers seen by the International Consortium of Investigative Journalists (ICIJ), a

US-based non-profit organisation, have revealed alleged financial impropriety

involving public figures from a large number of countries. There will be significant

political fallout from these revelations, with more information expected to be

revealed shortly from the leak at the Panama-based law firm Mossack Fonseca.

It will take some time before the full implications are clear; more than 11m documents

from Mossack Fonseca's database have been leaked. In many cases, the informationrevealed may not show that leaders have broken laws. But the revelations of wealth

accrued while in public office, and the hypocrisy of storing this offshore in order to

avoid domestic taxes, will put pressure on politicians named in the leak. We expect

six main areas of impact from the information that has been released so far. These

are set out below.

Overall, we expect the political impact on flawed democracies, hybrid regimes and

weak states to be more substantive than that in either full democracies or

authoritarian regimes linked to the allegations. For those governments that are

already facing significant political challenges, the allegations have the potential to

be serious. For others, they are likely to be manageable; indeed, we expect most of

the impacts of the leaks to be indirect. The potential impacts are as follows:

i) Some leaders might be forced from office

It is possible that some serving political leaders may be forced from office as a direct

consequence of the Panama leaks. Iceland's prime minister, Sigmundur

Gunnlaugsson, is the likeliest candidate. Mr Gunnlaugsson, who has been accused

of impropriety involving an investment vehicle, Wintris, leads a coalition

government of the centrist Progressive Party and the centre-right Independence

Party (IP). Bjarni Benediktsson, the finance minister and leader of the IP, is also

implicated in the leak. A vote of no confidence on April 4th would trigger new

elections in which the Pirate Party (PIR) could secure the largest share of the vote.

ii) Political risks will increase in a number offragile economies

The leaders of several politically fragile states are implicated in the allegations,

among which Ukraine and Pakistan stand out. It is alleged that the Ukrainian

president, Petro Poroshenko, sought to avoid domestic taxation on the sale of his

assets in Roshen, the country's largest confectioner. This is damaging both because

of the implication of trying to evade taxes in a time of war and fiscal strain, and

because it smacks of the "old" corrupt politics that Mr Poroshenko came to office

promising to tackle. More critical is the timing; local media have made much of the

juxtaposition of the president approving the details of the offshore restructuring

plan and the Ilovaisk incidentthe turning point in the war in the southe a s t , i nwhich large numbers of Ukrainian volunteer forces were killed or captured by

proR u s s i a n f o r c e s . T h e a c c u s a t i o n m a y d o s i g n i f i c a n t d a m a g e t o t h e p r e s i d e n t ' spatriotic credentials, weakening further his popular support, and probably

exacerbating an already serious government crisis. We do not expect him to be

removed from office, but the allegations complicate an already fragile domestic

environment, where policymakers are focused on managing the departure of the

prime minister, Arseny Yatsenyuk.

In Pakistan, it is alleged that the prime minister, Nawaz Sharif, concealed ownership

of a number of assets revealed in the disclosures, notably including London

property held in the name of family members. The Sharif family has long faced

corruption allegations, albeit unproven. This will limit the political fallout from the

new revelations. Still, opposition politicians will use the new claims to put pressure

on the government (possibly in the form of public protests) and urge the country's

anti-corruption agency and electoral commission to take action against the family.We do not expect any change of government as a result.

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iii) Government legitimacy may be underminedin key emerging markets

There are a number of allegations affecting leaders in large emerging markets,

notably Argentina's new president, Mauricio Macri. Mr Macri has come to office on

a reform platform with a commitment to fight corruption. His reformist and anti-

corruption credentials are likely to be damaged by the allegations, and there may be

an impact on the speed and effectiveness of the reform agenda in Argentina as aresult. The context for other major emerging markets is challenging, with

impeachment proceedings under way in both Brazil and South Africa, where large

corruption scandals affecting political and business leaders are already being

investigated. We have recently changed our forecast on Brazil and expect the

president, Dilma Rousseff, to fail to see out her term. In South Africa, Jacob Zuma's

presidency is already looking increasingly shaky. The Constitutional Court ruled on

March 31st that South Africa's president had breached the constitution in relation

to the use of state resources to fund improvements to his private Nkandla

homestead. Any suggestion of involvement from policymakers in either country

could worsen existing political instability.

iv) Another source of volatility in the Brexitdebate

The Panama allegations that have surfaced thus far have little direct impact on the

UK, and they do not alter our forecast that the UK will vote to remain in the EU in

the referendum on June 23rd. However, coming in the wake of significant domestic

d i s r u p t i o n s a c h a o t i c 2 0 1 6 b u d g e t a n d a s e n i o r r e s i g n a t i o n f r o m g o v e r n m e n t t h eleaks again highlight the inauspicious backdrop against which the electorate will be

voting on June 23rd. Our Brexit call rests in part on an assessment that despite

being elevated at present, anti-establish ment sentiment in the UKa country with a broadly conservative political cultureis too inchoate to swing the referendum infavour of those campaigning to leave the EU. Nevertheless, we acknowledge the

potential cumulative impactfor example on turnout, which could be crucial to the

r e s u l t o f d e v e l o p m e n t s t h a t m a y i n t e n s i f y d i s c o n t e n t w i t h t h e p o l i t i c a l s t a t u s q u o .We will therefore be monitoring the reception of the Panama leaks in the UK

carefully. And if the leaks lead to any allegations with a more direct focus on senior

figures in the UK or the EU, we will review our assessment of their impact on the EU

referendum result.

v) Political populists and non-traditional partiesare well placed to benefit

The leak comes at a time when establishment political parties are under stress in a

number of regionsnotably Europe. The critique offered by populist parties of theradical left and right, that the political mainstream is corrupt, is likely to be bolstered

by the allegations. This will have resonance in countries such as Italy and Spain (amember of the Spanish royal family has been specifically identified by the ICIJ). The

direct impact is unlikely to be large, but if the scandal continues to develop we

would expect to see the indirect impact supporting gains for parties such as Italy's

FiveStar Movement and France's Front national. In Greece, allegations surroundingthe previous New Democracy government could potentially complicate an already

fraught political environment, where leaders are struggling to pull together a new

deal with the IMF.

vi) Pressure on offshore centres is likely toincrease

Pressure on offshore financial centres has been growing for some time, and we

expect the leak to exacerbate this. States that in the past have relied on lax oversightand plausible deniability when it comes to the criminal misuse of their financial

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