MonFisPol Mexico

8/16/2019 MonFisPol Mexico

1/29

United

States‐

Mexico

Chamber

of

Commerce,

Los

Angeles,

CA,

November

15,

2013

Mexico’s monetary policy and economic outlook

Manuel Sánchez


2/29

Monetary policy and economic outlook themes

Output slowdown and signs of an incipient rebound

More stringent international financial conditions

Lower inflation and monetary flexibility

The possibilities from structural reforms

Mexico’s monetary policy and economic outlook 2


3/29


Since the middle of 2012 the Mexican economy slowed,

and in 2Q13 output fell

3

Real GDP

Quarterly and annual change, %, s. a.

s. a. / Seasonally adjusted

Source: INEGI

‐8

‐6

‐4

‐2

0

2

4

6

8

‐6

‐5

‐4

‐3

‐2

‐1

0

1

2

3

Q1

2007

Q3 Q1

2008

Q3 Q1

2009

Q3 Q1

2010

Q3 Q1

2011

Q3 Q1

2012

Q3 Q1

2013

Quarterly

Annual (left axis)


4/29


The origin of the declining growth seems to have lied first in softer

external demand and then in a contraction of domestic investment

4

Real aggregate demand

Quarterly change, %, s. a.


Source: INEGI

‐3

‐2

‐1

0

1

2

3

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2

Exports of goods and services

Investment


5/29


As for external demand, the slowing of manufacturing

exports translated into stagnant factory output

5

Manufacturing

2008 = 100, s. a.

s. a. / Seasonally adjusted and trend

Source: Banco de México and INEGI

80

85

90

95

100

105

110

70

90

110

130

150

J a n ‐

0 7

M a y ‐

0 7

S e p ‐

0 7

J a n ‐

0 8

M a y ‐

0 8

S e p ‐

0 8

J a n ‐

0 9

M a y ‐

0 9

S e p ‐

0 9

J a n ‐

1 0

M a y ‐

1 0

S e p ‐

1 0

J a n ‐

1 1

M a y ‐

1 1

S e p ‐

1 1

J a n ‐

1 2

M a y ‐

1 2

S e p ‐

1 2

J a n ‐

1 3

M a y ‐

1 3

S e p ‐

1 3

Dollar value of exports

Real production (left axis)


6/29


As for investment, rising purchases of machinery and equipment

have not compensated for the fall in construction investment

6

Total fixed investment2008 = 100, s. a.


Source: INEGI

70

80

90

100

110

120

130

J a n ‐

0 7

M a y ‐

0 7

S e p ‐

0 7

J a n ‐

0 8

M a y ‐

0 8

S e p ‐

0 8

J a n ‐

0 9

M a y ‐

0 9

S e p ‐

0 9

J a n ‐

1 0

M a y ‐

1 0

S e p ‐

1 0

J a n ‐

1 1

M a y ‐

1 1

S e p ‐

1 1

J a n ‐

1 2

M a y ‐

1 2

S e p ‐

1 2

J a n ‐

1 3

M a y ‐

1 3

Construction

Machinery and equipment


7/29


… which mainly reflects lower expenditures in public works

and private housing building

7

Real construction output2008 = 100, s. a.

s. a. / Seasonally adjusted and trend. The seasonal adjustment and the trend were prepared by Banco de México with

data from INEGI

Source: INEGI

40

60

80

100

120

140

J a n ‐

0 7

M a y ‐

0 7

S e p ‐

0 7

J a n ‐

0 8

M a y ‐

0 8

S e p ‐

0 8

J a n ‐

0 9

M a y ‐

0 9

S e p ‐

0 9

J a n ‐

1 0

M a y ‐

1 0

S e p ‐

1 0

J a n ‐

1 1

M a y ‐

1 1

S e p ‐

1 1

J a n ‐

1 2

M a y ‐

1 2

S e p ‐

1 2

J a n ‐

1 3

M a y ‐

1 3

Public

Private housing


8/29


These shocks have weakened labor market conditions

8

38,000

39,000

40,000

41,000

42,000

43,000

44,000

45,000

46,000

47,000

48,000

80

85

90

95

100

105

Q1

2007

Q3 Q1

2008

Q3 Q1

2009

Q3 Q1

2010

Q3 Q1

2011

Q3 Q1

2012

Q3 Q1

2013

Q3

Real wage bill

Employees (left

axis)

Real wage bill and employment

2008 = 100, thousands

Source: Own calculations with data from INEGI


9/29


Lower consumer confidence has coincided with the first

decline of consumption during the post‐crisis period

9

Retail sales and consumer confidence2008 = 100, s. a.

90

95

100

105

110

80

90

100

110

120

J a n ‐

0 7

M a y ‐

0 7

S e p ‐

0 7

J a n ‐

0 8

M a y ‐

0 8

S e p ‐

0 8

J a n ‐

0 9

M a y ‐

0 9

S e p ‐

0 9

J a n ‐

1 0

M a y ‐

1 0

S e p ‐

1 0

J a n ‐

1 1

M a y ‐

1 1

S e p ‐

1 1

J a n ‐

1 2

M a y ‐

1 2

S e p ‐

1 2

J a n ‐

1 3

M a y ‐

1 3

S e p ‐

1 3

Consumer confidence

Retail sales (left axis)


Source: INEGI and Banco de México


10/29

Economic activity decelerated in spite of extraordinarily

favorable financial conditions in the first part of the year

10Mexico’s monetary policy and economic outlook

Source: Proveedor Integral de Precios (PiP)

Yield curve

%

3

4

5

6

7

8

1 ‐

d a y

1 ‐

m o n t h

3 ‐

m o n t h

6 ‐

m o n t h

1 ‐

y e a r

3 ‐

y e a r

5 ‐

y e a r

7 ‐

y e a r

1 0

‐ y e a r

2 0

‐ y e a r

3 0

‐ y e a r

December 30, 2011

December 31, 2012

May 10, 2013


11/29

11

The financial bonanza was shared with other emerging

markets

Emerging economies: accumulated capital inflows1

Billion U.S. dollars

1/ Equity and debt

Source: Emerging Portfolio Fund Research

‐20

0

20

40

60

80

100

1 3 5 7 9 1 1

1 3

1 5

1 7

1 9

2 1

2 3

2 5

2 7

2 9

3 1

3 3

3 5

3 7

3 9

4 1

4 3

4 5

4 7

4 9

5 1

2012

2013

May



12/29

… largely as a result of expansionary monetary policies in

advanced countries


Central bank assets

2007 = 100, local currency

Source: Haver Analytics

0

100

200

300

400

500

J a n ‐

0 7

M a y ‐

0 7

S e p ‐

0 7

J a n ‐

0 8

M a y ‐

0 8

S e p ‐

0 8

J a n ‐

0 9

M a y ‐

0 9

S e p ‐

0 9

J a n ‐

1 0

M a y ‐

1 0

S e p ‐

1 0

J a n ‐

1 1

M a y ‐

1 1

S e p ‐

1 1

J a n ‐

1 2

M a y ‐

1 2

S e p ‐

1 2

J a n ‐

1 3

M a y ‐

1 3

S e p ‐

1 3

Federal Reserve

Bank of

England

ECB

Bank of Japan


13/29

Mexico has been one of the preferred destinations of

portfolio capital flows


Emerging economies: foreign holdings of local government bonds1

Percentage of total government securities in circulation

1/ Federal government debt issued on the domestic market, in local currency

Source: Selected countries´ central banks and finance ministries

0

10

20

30

40

50

60

70

Q4

2010

Q1

2011

Q2 Q3 Q4 Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3

New Zealand

Peru

Malaysia

Mexico

Poland

Turkey

Thailand

Korea

Brazil


14/29

Since May, market anticipation of tapering translated into

lower asset prices for emerging markets, including Mexico


Source: Proveedor Integral de Precios (PiP)

Yield curve

%

3

4

5

6

7

8

1 ‐

d a y

1 ‐

m o n t h

3 ‐

m o n t h

6 ‐

m o n t h

1 ‐

y e a r

3 ‐

y e a r

5 ‐

y e a r

7 ‐

y e a r

1 0

‐ y e a r

2 0

‐ y e a r

3 0

‐ y e a r

May 10, 2013

September 18, 2013

November 14, 2013


15/29

15

It is likely that international financial conditions will be less

benign in the future

So far financial adjustments have occurred in an orderly way

Capital outflows were not extraordinary

Foreign holdings of government bonds declined only

modestly

Foreign exchange market remained highly liquid

However, given the uncertainty over the future course of U.S.

monetary policy, new bouts of volatility cannot be ruled out



16/29


Some indicators suggest that economic activity might have

somewhat picked up in 3Q13

16

107

108

109

110

111

130

135

140

145

A p r ‐ 1 3

M a y ‐

1 3

J u n ‐

1 3

J u l ‐ 1 3

A u g ‐

1 3

S e p ‐

1 3

Dollar value of exports

Production (left axis)

Manufacturing2008 = 100, s. a.


Source: Banco de México and INEGI

93

94

J u n ‐

1 3

J u l ‐ 1 3

A u g ‐

1 3

Construction investment2008 = 100, s. a.


Source: INEGI

Services production2008 = 100, s. a.


Source: Mexican National Accounts System (SCNM), INEGI

112

113

114

115

A p r ‐ 1 3

M a y ‐

1 3

J u n ‐

1 3

J u l ‐ 1 3

A u g ‐

1 3

Global Economic

Activity

Indicator

2008 = 100, s. a.


Source: Mexican National Accounts System (SCNM), INEGI

108

109

110

A p r ‐ 1 3

M a y ‐

1 3

J u n ‐

1 3

J u l ‐ 1 3

A u g ‐

1 3


17/29

17

The 2014 fiscal package will impact inflation, economic

activity, and the use of financial resources


Estimated effects of fiscal package for 2014

Effects

Annual inflation (end of year) 40 basis points

GDP

growth 0.2

percentage

points

Increase in public sector borrowing requirements 1.2 percentage points of GDP

Source: Banco de México (2013), Informe sobre la Inflación Julio – Septiembre 2013, November


18/29

18

The economy is expected to recover gradually in 2014 and

2015

GDP forecastAnnual growth, %

1/ Maximum, average and minimum

Source: Banco de México (2013), Encuesta sobre las expectativas de los especialistas en economía del sector privado,October; Banco de México (2013), Informe sobre la Inflación Julio – Septiembre 2013, November; and Latin‐AmericanConsensus Forecasts, October


0.9

3.0 3.2

1.41.7

4.0

4.5

4.2

5.2

1.2

3.4

4.0

0

1

2

3

4

5

6Banxico Survey1

0.5

2.5

3.4

Banxico Inflation Report

2013 2014 2015


19/29

Downside risks to this scenario seem to prevail

A pause in the U.S. economic recovery

Heightened global risk aversion

Further deterioration of the construction sector in Mexico

Weakening consumer confidence



20/29

During the last decade, monetary policy has been focused

on achieving a 3 percent permanent inflation target

Monetary policy interest rate1

Annual, %


1 / Since January 21, 2008

Source: Banco de México

20

3

4

5

6

7

8

9

J a n ‐

0 8

M a y ‐

0 8

S e p ‐

0 8

J a n ‐

0 9

M a y ‐

0 9

S e p ‐

0 9

J a n ‐

1 0

M a y ‐

1 0

S e p ‐

1 0

J a n ‐

1 1

M a y ‐

1 1

S e p ‐

1 1

J a n ‐

1 2

M a y ‐

1 2

S e p ‐

1 2

J a n ‐

1 3

M a y ‐

1 3

S e p ‐

1 3


21/29


Annual headline inflation has consistently remained below

historical levels

Annual headline inflation

%

0

3

6

9

12

15

18

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

Source: INEGI


22/29

22

Monetary accommodation during 2013 has not endangered

the convergence to the 3 percent inflation target


Factors behind monetary policy decisions

Significant deceleration of the economy

Foreseeable decline in inflation

Given the current fiscal policy no further cuts in the policy

interest rate are warranted in the future

Closing future output gap

Real monetary policy interest rate already close to zero


23/29

0

1

2

3

4

5

6

7

J a n ‐

1 3

F e

b ‐

1 3

M a r ‐

1 3

A p r ‐

1 3

M a y ‐

1 3

J u n ‐

1 3

J u l ‐ 1 3

A u g ‐

1 3

S e p ‐

1 3

O c t ‐

1 3

Headline

Core


In 2013, after a temporary spike resulting from agricultural

price shocks, annual inflation has recently fallen

Annual inflation

%

Source: INEGI


24/29

24

Source: Banco de México

Inflation expectations%

The persistent gap between medium‐ and long‐term

inflation expectations and the target remains a challenge

0

1

2

3

4

5

6

7

J a n ‐

1 1

M a r ‐

1 1

M a y ‐

1 1

J u l ‐ 1 1

S e p ‐

1 1

N o v ‐

1 1

J a n ‐

1 2

M a r ‐

1 2

M a y ‐

1 2

J u l ‐ 1 2

S e p ‐

1 2

N o v ‐

1 2

J a n ‐

1 3

M a r ‐

1 3

M a y ‐

1 3

J u l ‐ 1 3

S e p ‐

1 3

Next 4 years Next

5‐8 years



25/29

25

Short‐term inflation risks should continue to be monitored


Second‐round effects from

Higher than expected impact from tax changes

Higher financial volatility

Upward pressures from non‐core price components


26/29


Mexico should tackle the most important problem that has

inhibited long‐term economic growth

Mexico: growth accounting1

Average annual change, %

1/ Own calculations based on data from World Development Indicators, International Financial Statistics, Conference Board Total

Economy Database; and data and theoretical formulation of Kehoe, T.J. and F. Meza, (2011), “Catch‐up Growth Followed by

Stagnation: Mexico, 1950‐2010,” Latin American Journal of Economics, 48(2). The sum of the parts may not add up due to rounding

1950‐1980 1980‐2012

GDP per

capita 3.4 0.8

Total factor productivity 2.8 ‐0.6

Capital contribution 0.6 0.7

Labor contribution 0.0 0.6

Labor intensity 0.2 ‐0.1

Proportion of

working

‐age

population

‐0.2 0.7


27/29

27

The current reform agenda seeks to bring significant

productivity gains

Some salient features

Hiring and firing flexibility will increase labor productivity

Competitive conditions for teachers may eventually favor thequality of education

The entry of new players could provide wider and cheaper

access to telecommunications services

Private participation in energy may lower key input prices

Full benefits require

Efficient secondary legislation

Adequate implementation



28/29

28

Summary

Sustained economic recovery will require the support of external

demand and the revival of the construction industry

It is likely that international financial conditions will be less

supportive in the future

Medium‐ and long‐term inflation expectations have remained

stable in spite of recent spikes in agricultural prices

Given the current fiscal policy no further cuts in the policy

interest rate are warranted in the future

Adequate implementation of structural reforms may foster long‐

term economic growth



29/29

29Mejoran las perspectivas económicas mundiales

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