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The Mexican Economy: Now and in the FutureManuel Sánchez

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Recent developments and outlook

Long‐term opportunities

Consolidation of price stability

Structural strengths

Index

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

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Note: Figures correspond to 2011. PPP at current international dollars for 2003‐2005Source: IMF (2012), World Economic Outlook, April and INEGI


Its youthful labor force and education potentialrepresent 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

4

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

Source: Trade Map, International Trade Centre UNCTAD/WTO (ITC)

5The Mexican Economy: Now and in the Future

Mexico is a leading exporter of several manufacturing products such as automobiles and TV sets

Source: Trade Map, International Trade Centre UNCTAD/WTO (ITC)

0

20

40

60

80

100

120

140

Germany

Japan

USA

Canada

Korea

UK

Spain

Belgium

Mexico

France

0

4

8

12

16

20

Mexico

China

Slovakia

Poland

Hungary

Malaysia

Czech Re

p

USA

Korea

Turkey

World Exports of AutomobilesBillions of dollars, 2010

World Exports of Television SetsBillions of dollars, 2010


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

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The pillars of macroeconomic stability are sound publicfinances, low inflation and a strong banking system

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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

Public debt 37.3% of GDP

Fiscal deficit2.5% of GDP

Annual inflation 3.4%

Net capital/RWA 15.7%

Non‐performing loans/Total2.5%

Provisions/NPL189.6%


Mexico’s perceived sovereign risk has recently been lowerthan that of some developed countries

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Credit Default Swaps5 years, basis points

Source: Bloomberg

0

100

200

300

400

500

600

May‐03

Nov

‐03

May‐04

Nov

‐04

May‐05

Nov

‐05

May‐06

Nov

‐06

May‐07

Nov

‐07

May‐08

Nov

‐08

May‐09

Nov

‐09

May‐10

Nov

‐10

May‐11

Nov

‐11

May‐12

France

Mexico


Yet, the task of stability is continuous and needs to beconsolidated

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

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The Mexican Economy: Now and in the Future 10

Source: CIA, World Fact Book

Mexico is a significant recipient country of foreign direct investment

16

15

12

5

4

3

2

1

0.0 0.5 1.0 1.5 2.0 2.5 3.0

US

China

France

UK

Germany

Brazil

Russia

Mexico

Foreign Direct Investment StockEnd 2011, trillions of dollars

Rank

1

2

3

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Index

After a sharp recession in 2009, Mexico has undergone a continuous process of economic recovery

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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 GDPSource: INEGI

Economic Activity Indicators2003 = 100, s.a.


100

105

110

115

120

125

130

Feb‐08

Jun‐08

Oct‐08

Feb‐09

Jun‐09

Oct‐09

Feb‐10

Jun‐10

Oct‐10

Feb‐11

Jun‐11

Oct‐11

Feb‐12

Total 1/

Services 1/

Industrial Production

Source: INEGI

Manufacturing Production2008=100; s.a.

80

85

90

95

100

105

110

Mar‐08

Jul‐0

8

Nov

‐08

Mar‐09

Jul‐0

9

Nov

‐09

Mar‐10

Jul‐1

0

Nov

‐10

Mar‐11

Jul‐1

1

Nov

‐11

Mar‐12

US

Mexico


A driving force has been the resurgence of external demand, especially through manufacturing exports

Source: Banco de México

Manufacturing Exports2007=100, s.a.

50

70

90

110

130

150

Mar‐08

Jul‐0

8

Nov

‐08

Mar‐09

Jul‐0

9

Nov

‐09

Mar‐10

Jul‐1

0

Nov

‐10

Mar‐11

Jul‐1

1

Nov

‐11

Mar‐12

Total

Automotive

Non‐automotive

50

70

90

110

130

150

170

Mar‐08

Jul‐0

8

Nov

‐08

Mar‐09

Jul‐0

9

Nov

‐09

Mar‐10

Jul‐1

0

Nov

‐10

Mar‐11

Jul‐1

1

Nov

‐11

Mar‐12

TotalU.S.Rest of the world



Source: INEGI

Commercial Establishment Sales2003 = 100, s.a.

Domestic demand has also posted significant growth rates

100

105

110

115

120

125

Feb‐08

Jun‐08

Oct‐08

Feb‐09

Jun‐09

Oct‐09

Feb‐10

Jun‐10

Oct‐10

Feb‐11

Jun‐11

Oct‐11

Feb‐12

Wholesale

Retail

Gross Fixed Investment 2003 = 100, s.a.

Source: INEGI

120

130

140

150

160

Feb‐08

Jun‐08

Oct‐08

Feb‐09

Jun‐09

Oct‐09

Feb‐10

Jun‐10

Oct‐10

Feb‐11

Jun‐11

Oct‐11

Feb‐12


… which have been supported by job creation and the expansion of bank lending

*/ Workers insured by the Mexican Social Security System (IMSS)Source: IMSS

Formal Employment*Millions of workers


13.5

14.0

14.5

15.0

15.5

Apr‐08

Aug‐08

Dec‐08

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

70

85

100

115

130

145

Mar‐08

Jul‐0

8

Nov

‐08

Mar‐09

Jul‐0

9

Nov

‐09

Mar‐10

Jul‐1

0

Nov

‐10

Mar‐11

Jul‐1

1

Nov

‐11

Mar‐12

ConsumerMortgageCommercialTotal

Real Commercial Banks’ Performing Loans

2007=100


The improvement of global financial conditions has resulted in large capital inflows

100

300

500

700

900

1,100

Apr‐07

Jul‐0

7

Oct‐07

Jan‐08

Apr‐08

Jul‐0

8

Oct‐08

Jan‐09

Apr‐09

Jul‐0

9

Oct‐09

Jan‐10

Apr‐10

Jul‐1

0

Oct‐10

Jan‐11

Apr‐11

Jul‐1

1

Oct‐11

Jan‐12

Apr‐12

Foreign investors

Pension Funds

Government Securities Holdings*Billions of nominal pesos

*/ Includes CETES and fixed‐rate bondsSource: Banco de México

… which partly explain downward shifts of the yield curve and the relative strengthening of the currency

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*/ May 4, 2012Source: Banco de México

Mexico: Yield CurveEnd of year, %

The Mexican Economy: Outlook and Challenges


Exchange Rate2008=100, Pesos/USD

90

100

110

120

130

Apr‐08

Aug‐08

Dec‐08

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

Nominal

Real

3

4

5

6

7

8

9

1‐day

1‐mon

th

3‐mon

th

6‐mon

th

1‐year

2‐years

3‐years

5‐years

7‐years

10‐years

20‐years

30‐years

2009

2010

2011

2012*

Appreciation


The Mexican economy is expected to continue growing ata stable, moderate pace

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GDP Annual growth, %

Source: IMF (2012), World Economic Outlook, April

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

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3

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Index


However, Mexico could clearly increase its growthpotential by enhancing its total factor productivity

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1/ Sánchez, M. (2012) "Economía mexicana: una mirada de largo plazo", www.banxico.org.mx

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


The agenda for pending reforms is ample and promising

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ducto

Deregulate and simplify requirements for business

operations

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

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Index


Since 2001, monetary policy has adhered to a formalinflation 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

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The convergence of inflation to the target is a very closeand attainable result

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Source: INEGI and Banco de México

Headline InflationCPI annual change, %

0

10

20

30

40

50

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

3% current target


Banco de México will continue to monitor risks toconvergence toward the permanent 3% target

Increased global financial volatility

Upsurge of international prices of commodities and food

Demand pressures

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Conclusions


Mexico has a large and diversified economy, young workers, higheducational potential and a friendly business environment

Mexican financial stability, a continuous task, rests on soundpublic finances, low inflation and strong banks

Despite Mexico’s ongoing strong economic recovery, reformefforts are needed to overcome informality and obstacles tocompetition 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 thepermanent 3% target

27Mejoran las perspectivas económicas mundiales

economy: now and in the future - banxico.org.mx48744bd2... · the mexican economy: now and in the...

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