effects of the us crisis in mexico
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Effects of the US Crisis in Mexico. By Pedro Aspe, Sergio Sánchez and Fernando Aportela October 14 th , 2011. Contents. US Current Conditions: “The View from the Tropics” The Transmission Mechanism Mexico’s economic cycle and its link to the US manufacturing cycle - PowerPoint PPT PresentationTRANSCRIPT
Effects of the US Crisis in MexicoEffects of the US Crisis in Mexico
By Pedro Aspe, Sergio Sánchez and By Pedro Aspe, Sergio Sánchez and Fernando AportelaFernando AportelaOctober 14October 14thth, 2011, 2011
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ContentsContents
I.I. US Current Conditions: “The View from the Tropics”US Current Conditions: “The View from the Tropics”II.II. The Transmission MechanismThe Transmission Mechanism
1.1. Mexico’s economic cycle and its link to the US Mexico’s economic cycle and its link to the US manufacturing cyclemanufacturing cycle
2.2. Exports and Imports: Mexico is a very open economyExports and Imports: Mexico is a very open economy3.3. Labor FiguresLabor Figures4.4. Foreign Direct InvestmentForeign Direct Investment5.5. Tourism TrendsTourism Trends
III.III. Mexican Policy ResponsesMexican Policy Responses1.1. Fiscal policyFiscal policy2.2. Monetary policyMonetary policy3.3. The Taylor RuleThe Taylor Rule4.4. Mexico’s currency depreciation vs. Latin AmericaMexico’s currency depreciation vs. Latin America
IV.IV. OpportunitiesOpportunities1.1. China’s Competitiveness Trend and its ConsequencesChina’s Competitiveness Trend and its Consequences2.2. The Demographic Bonus in MexicoThe Demographic Bonus in Mexico
i.i. Migration into US is and will be “cap” by demographic Migration into US is and will be “cap” by demographic factorsfactors
ii.ii. Development of a significant domestic marketDevelopment of a significant domestic marketV.V. Final RemarksFinal RemarksAppendixAppendix
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I.I. US Current Conditions: “ The View US Current Conditions: “ The View from the Tropics”from the Tropics”
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Employment in the Recovery: a major problem
Continuing weakness of the labor market: – Unemployment rate at 9.1%.
– 8.75 million jobs lost in the recession, only 1.89 million recovered.
– 6.0 million unemployed for 27 weeks and overNonfarm jobs (monthly, percentage change since the end of recession)
Source: (percentage change since the end of recession) Bloomberg, Wall Street Journal, IMF.
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Housing Sector and Bank Lending in the Recovery: two additional problems
Source: (percentage change since the end of recession) Bloomberg, Wall Street Journal, IMF.
Home prices (quarterly) Bank lending (monthly)
Housing prices are still declining and bank lending’s growth rate is negative.
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Exports and Corporate Profits: two good news from the Recovery
Exports, goods & services (quarterly) Corporate profits (quarterly)
Source: (percentage change since the end of recession) Bloomberg, Wall Street Journal, IMF.
Corporate profits and exports are performing at least as well, as they did in several other recoveries.
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II.II. The Transmission MechanismThe Transmission Mechanism
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Mexico’s economic cycle and its link to the US manufacturing cycle Mexican manufacturing follows closely
this US sector. Nevertheless, since 2009 Mexican dynamism has been stronger.
Production is at pre-crisis level in Mexico and below in the US.
Employment in Mexico has recovered from pre-crisis levels.
Mexican exports have shown significant increases.
Source: INEGI, Federal Reserve, Bureau of Labor Statistics.
Manufacturing production index (2007=100)
Mexican Exports (2007=100)
Employment (Mexico)
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Exports and Imports: Mexico is a very open economy
Mexico is the second manufacturing exporter to the US, only after China.
80% of Mexican Exports are traded with the US.
Mexico has 21 preferential trade agreements and, except for Chile, is the most open economy in Latin America.
Mexico’s total exports account for 30% of GNP, while exports just to the US account for about 24% of GNP.
Percentage of US imports (year to date, July 2011)
Source: INEGI, Chile’s Central Bank, World Trade Organization
Mexico’s exports as % of the GNP
Percentage of US exports (year to date, July 2011)
Note: Trade data includes manufacturing exports.
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Labor Figures
Employment in Mexico has recovered since the 2008 crisis. Nevertheless, that is not the case in the US:
Unemployment rate (August 2011): 5.8% in Mexico vs. 9.1% in the US.
New jobs (Jan-Sept 2011): 600,000 (1.2% of labor force) in Mexico vs. 1.07 million (0.7% of labor force) in the US. Manufacturing employment (2007=100)
Source: INEGI,. Bureau of Labor Statistics.
Employment (2007=100)
Notes: Using Social Security Affiliates in Mexico and Non farm payroll in the US.
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Foreign Direct Investment
Foreign Direct Investment (FDI) received by Mexico increased 26% in 2010 with respect to 2009 (the worst year).
Not surprisingly, investments in manufacturing represents 57.7% of total FDI.
Source: INEGI
Foreign Direct Invesment (million USD)
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Tourism Trends
Tourism into Mexico showed a rebound in 2010. During that year, revenues from tourism were 9.2 billion.
Mexico had 12.6 million tourists in the same period.
Tourism revenues (billion USD) Number of tourists (million people)
Source: Mexico’s Central Bank, INEGI
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III.III.Mexican Policy ResponsesMexican Policy Responses
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Fiscal Policy
Fiscal deficit in 2011 is expected to be 2.2% of GDP, including Pemex’s investment (at 84.9 dollars per barrel), and 0.2% of the GDP without it. But in 2008 and 2009 Mexico had a Balanced Budget.
Government debt remains at 30% of GDP
81.3% is internal debt and only 18.7% is external.
Total sub-sovereign debt in Mexico was 2.4% of GDP in 2010.Total Public Sector Budget Balance % of
GDP
Source: OECD, International Monetary Fund.
Total Central Government Debt % of GDP
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Fiscal Policy: Balanced budget policy under historically high oil prices Since 2009, Government budget has been approved with a
deficit reaching its peak in 2011 (2.7% of GDP, according to the Ministry of Finance forecast).
When revenues have surpassed the budgeted figures, extraordinary expenditures have been applied.
Extraordinary oil revenues have represented between one and two thirds of overall extraordinary revenues. As it is well known, this does not represent a good indicator of sound public finances.
Source: Mexican Ministry of Finance.
Government Budget (MXP billion) Extraordinary entries (MXP billion)
-200
-100
0
100
200
300
400
2008 2009 2010 2011E
Extraordinary revenues
Extraordinary expenditures
Extraordinary oil revenues
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2008 2009 2010 20110.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%Revenues Expenditures
Deficit (% GDP)
E
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Fiscal Policy: Balanced budget policy under historically high oil prices In 2007, the Government enacted a new budget law that
allowed oil surpluses to be used for fiscal stabilization purposes.
Nevertheless, even if during 2010 extraordinary revenues summed up to MXP 163 billion, the balance of stabilization funds was reduced.
Under historically high oil prices, balanced budget policy seems fairly reachable, but is a biased indicator of fiscal contention.
Source: Mexican Ministry of Finance.
Mexican Mix oil prices (USDB)
0102030405060708090
100
2008 2009 2010 2011E
Price used for budget purposes
Average observed price
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Monetary Policy
Mexico has shown a consistent monetary policy. Its Central Bank became independent in 1994. The Central Bank Law laid a legal foundation with the following principal strengths: the governor was to be appointed for a fixed term, it established staggered terms of office for other board members, and it took measures to ensure that the Bank’s financial base could not be undermined.
Mexico’s monetary policy regime has undergone significant evolution in the last two decades, with the adoption of the inflation targeting (IT) scheme in the early 2000s, representing a key milestone.
It is under the IT regime, along with the support of prudent fiscal policies, that Mexico’s Central Bank has succeeded in controlling inflation in the last decade.
1Tang, M. and Yu, X., Communication of Central Bank Thinking and Inflation Dynamics, IMF working paper series, August 2011
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The Taylor Rule
In the period from January 1999 to January 20081, among the seven largest Latin American economies (Brazil, Argentina, Mexico, Chile, Colombia, Venezuela and Peru), only Mexico followed the Taylor principle, although not continuously.
Exchange rate major adjustments seem to be a relevant variable for interest rate decisions
1De Carvalho, A. and Moura, M., “What Can Taylor Rule Say About Monetary Policy in Latin America?”, 2010
Mexico’s actual and Taylor-implied policy rate
Note: *Using actual inflation; **using expected inflation.
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Mexico's currency depreciation vs. Latin America Currently, Mexico is the only country in Latin America with
sustained currency depreciation since the 2008 crisis (post-Lehman), relative to the US dollar.
Mexico has achieved a higher degree of competitiveness from the weaker peso, higher global transport costs, and lower unit labor cost differential between Mexico and other Asian countries.
Exchange Rate (Sept/15/08=1) Inflation (annual change, %)
Source: Bloomberg.
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IV.IV. OpportunitiesOpportunities
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China Competitiveness Trend and its Consequences
Manufacturers are moving away from outsourcing and are starting to embrace near sourcing.
China is loosing competitiveness– Wage and benefit rises of 15%
to 20% annually in USD in the last decade.
– Transportation costs and the continued appreciation of the yuan.
Unit labor costs (USD / Hours)Transportation costs (USD)
Monterrey to Chicago
4-5 days ground (53-ft truck container)
Shanghai to Chicago22 days marine and
ground (40-ft shipping
container)
Source: Bloomberg, Boston Consulting Group , JP Morgan, ILO, Mexican Ministry of Finance.
Exports to the US (annual growth %)
3
8
13
18
23
28
33
38
43
Jun-
10
Jul-1
0
Aug
-10
Sep-
10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb-
11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
China Mexico
9.6%
0.5
1
1.5
2
2.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
China Mexico
238%
17%
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Fertility rate in Mexico and the demographic dividend
Mexican fertility rate is approaching advanced economies level.
Favorable dependency ratio: more people at working-age (15-64 years) than dependents.
Accumulation of savings and wealth development of a larger domestic market.Total fertility rate
Average number of children, women 15-49 years
Population data
1.60
1.70
1.80
1.90
2.00
2.10
2.20
2.30
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Source: INEGI, CONAPO, World Bank.
Dependency ratio (% of working-age population)
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Demographic transition
Mexico will not have more than 138 million people.
Life expectancy has increased 4 years in two decades.
Infant mortality has gone down significantly.
Life expectancy (years) Infant mortality rate (per thousand)
Total Population Growth (thousands)Population data
- 400
- 200
200
400
600
800
1 000
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Source: INEGI, CONAPO.
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Migration and Remittances
Mexico received a total of USD 21.27bn in remittances in 2010, an increase of 0.12% over the year before.
This source still represents the second largest source of foreign currency
Migration to the US will decline steadily overtime.
Less than 100,000 illegal border-crossers and visa-violators from Mexico settled in the US in 2010, down from about 525,000 annually from 2000 to 2004.
Source: INEGI
Remittances (billion USD) International migration (thousands)*
300
350
400
450
500
550
600
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
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V.V. Final RemarksFinal Remarks
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Final Remarks
1. The ongoing Banking and Real Estate crisis in the US had made the recovery very anemic. Banks in the US have been capitalized but their negative impact on the economy will last some years. The household debt problem in the US has not been solved and its impact will affect the economy in the years to come.
2. The Mexican recovery has been led by investment and exports, backed by an expansionary fiscal deficit around 2% of GNP and a monetary policy which has followed the Taylor rule. With a low debt/GNP ratio and a small fiscal deficit Mexico’s macro picture is in good shape.
3. However, in order to sustain and enhance this recovery, Mexico will have to maintain its international competitiveness making additional reforms to enhance productivity growth in areas like Energy, Fiscal, Basic Education, Science and Technology and Labor.
4. Given the recent events in Japan, Europe and the US, Mexico has to move fast on its Reforms to be prepared for a prolonged period of Global Stagnation.
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AppendixAppendix
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Historic Oil Production
Oil Production (daily thousand barrels)
Source: PEMEX.
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Insecurity
*Source: Instituto Ciudadano de Estudios sobre la Inseguridad A.C., United Nations Office on Drugs and Crime Homicide Statistics.
Murders per 100,000 inhabitants, 2010 *
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Europe banks CDS
Credit Default Swaps 5 years
Source: Bloomberg.
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Sovereign Debt CDS
Credit Default Swaps 5 years
Source: Bloomberg.
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Risk for French Banks has risen
There are three main factors that are contributing to the vulnerability of French banks: large balance sheets with high leverage, significant liquidity needs and reduced capital rebuild prospects due to the economic slowdown.
Financial leverage (%)
Source: Bloomberg.
Note: Financial Leverage = Average Total Assets / Average Total Common Equity (first semester of 2011)