AdamSmithSeminar,SchlossSpiez,Switzerland,July2,2014
WhatMexicoseconomyconfrontsManuelSnchez,DeputyGovernor
12
3
Mexicoscyclicalrecovery
Structuralchallenges
Thereturnofmarketoptimism
WhatMexicoseconomyconfronts 2
Contents
3WhatMexicoseconomyconfronts
International financial conditions reflect the perceivedpostponement of monetary tightening by major central banks
The Fed will likely continue tapering asset purchases, but it will
probably maintain the current target range for the Fed funds rate
for a considerable time
The ECB recently lowered its monetary policy rates, launched
targeted longterm refinancing operations, and decided to
intensify work for outright purchases in the ABS market
The Bank of Japan is to continue quantitative and qualitative
monetary easing
Other advanced countries central banks have followed suit
4WhatMexicoseconomyconfronts
The renewed search for yield has boosted overall and highrisk financial asset prices
UnitedStates Europe
*Bonds with a rating below BBB. The duration of AAArated U.S. and European corporate bonds, BBBrated U.S. corporate bonds, and mortgagebacked securities is approximately 7 years. The agency bonds, European BBBrated corporate bonds, and U.S. and European highyield bondshave a duration of about 4 years. The duration of asset backed securities is 2 yearsSource: Bank of America Merrill Lynch Indices
Interestratesforselectfixedratemarketinstruments%
0
5
10
15
20
25
30
A
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A
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A
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*
June30
Therangeinthelast10years
020
40
60
80
100
Standard&Poor's500Index2/
Currencyindex3/ Commoditiesindex4/
Therangeinthelast10years
5WhatMexicoseconomyconfronts
and has also dampened financial market volatilityFinancialmarketvolatility
1/ MOVE, index of implied volatility in at the money" options at a maturity of one month over Treasury bonds with maturities of 2, 5, 10and 30 years. 2/ VIX , index of average implied volatility at one month in the options market for the S&P 500. 3/ CVIX , implied volatility at 3months for currency rates. 4/Historic volatility for the CRB (index of futures for commodities comprised of 19 contracts)Source: Own calculations with Bloomberg data
Basispoints Percentages
0
50
100
150
200
250
300
TreasuryBills1/
June30
6At the same time, portfolio capital flows to emergingmarkets have recently regained steam
Portfolioflowsfromnonresidentstoemergingeconomies1Billionsofdollars
1/ Includes 30 emerging economies. Data from April to June 2014 to be updated by the IIFSource: Institute of International Finance (2014), EM Portfolio Flows Tracker for June 2014, IIF Research Note, May
45
30
15
0
15
30
45
J
a
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1
3
F
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1
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WhatMexicoseconomyconfronts
7InMexico,asinotheremergingmarkets,foreignholdingsoflocalcurrencygovernmentbondshaverebounded
1/ M4 is defined as domestic financial assets and domestic privatesector bank deposits plus deposits in Mexican banks agenciesabroad, held both by residents and nonresidents. 2/ Marked to marketSource: Banco de Mxico
M4heldbynonresidents1TrillionsofpesosatDecember2010prices
WhatMexicoseconomyconfronts
0.0
0.5
1.0
1.5
2.0
Q12007
Q3 Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Total
Bankdeposits
Governmentsecurities2
8 while privatesector access to market financing hascontinued an upward trend
WhatMexicoseconomyconfronts
5
15
25
35
150
200
250
300
350
Q12007
Q3 Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Domesticmarkets
Internationalmarkets(rightaxis)
OutstandingnonfinancialprivatesectordebtEndofperiod;billionsofpesosatDecember2010andbillionsofdollarsat198284
1/Includes commercial paper, IOUs, stock certificates, and ordinary participation certificates. 2/Includes bonds and commercial paperSource: Banco de Mxico
1
2
9As a result, interest rates remain at alltime or nearly alltime lows
WhatMexicoseconomyconfronts
Mexico:Governmentbondyields%,dailyaverage
Source: Banco de Mxico
Q2
4
5
6
7
8
9
Q12007
Q3 Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
3year
10year
However, there is no evidence of overheating in creditmarkets
10WhatMexicoseconomyconfronts
Mexico:TotalfinancingtothenonfinancialprivatesectorEndofperiod;%ofGDP
1/ Performing commercial bank credit to the nonfinancial private sectorSource: Banco de Mxico and INEGI
10
15
20
25
30
35
40
Q12007
Q3 Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Totalfinancing
Banklending1
notwithstanding a certain recent deterioration in loanportfolio quality
11WhatMexicoseconomyconfronts
Mexico:Adjusteddelinquencyratesinthenonfinancialprivatesector1Quarterlyaverages;%
1/ The adjusted delinquency rate is the pastdue loan portfolio plus writeoffs over the previous twelve months divided by the total loanportfolio plus writeoffs over the previous twelve monthsSource: Banco de Mxico
0
5
10
15
20
25
Q12007
Q3 Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Total
Consumer
12
Real estate prices have just kept up with consumer prices
WhatMexicoseconomyconfronts
Homepricesvs.theCPI12012=100
1/ Quarterly average for the CPI and quarterly data for home prices. */ Only includes April and MaySource: Sociedad Hipotecaria Federal and INEGI
Q2*
60
70
80
90
100
110
Q12005
Q3 Q12006
Q3 Q12007
Q3 Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Homes
CPI
13WhatMexicoseconomyconfronts
and no significant FX appreciation from the financial bonanzahas occurred, thereby limiting carry trades somewhat
Mexicoandemergingeconomies:NominalexchangerateLocalcurrencypricesintermsofUSD,December2012=100
*/ Includes Brazil, Chile, Colombia, Russia, Turkey, Poland, the Czech Republic, India, Indonesia, South Korea, Thailand,South Africa, Peru, Hungary and MalaysiaSource: Bloomberg
85
90
95
100
105
110
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EmergingeconomycurrenciesotherthanMXN*
Mexicanpeso
Appreciation
14WhatMexicoseconomyconfronts
Yet global risktaking poses challenges to emergingeconomies, including Mexicos
Market calm seems to increase with bad news from the pace ofrecovery in advanced economies
Addiction to lax monetary policy leads to a search for yield in theform of leverage, or lowerquality, illiquid assets
As disequilibria may build, significant asset price corrections mayoccur
Given that investors may anticipate and act ahead of monetarypolicy decisions in advanced countries, capital flows couldunwind in a disorderly way
Authorities in emerging markets should remain alert toburgeoning vulnerabilities
15WhatMexicoseconomyconfronts
Some factors in the Mexican economy could mitigatedisturbances from possible capital flow reversals
Modest and stable external debt to GDP Moderate corporate leverage and FX exposure Deep and liquid FX and sovereign bond markets Macroeconomic fundamentals
Reduced inflation Relatively stable public debt Low current account deficit more than financed by FDI Solid banking sector
12
3
Mexicoscyclicalrecovery
Structuralchallenges
Thereturnofmarketoptimism
Contents
WhatMexicoseconomyconfronts 16
17WhatMexicoseconomyconfronts
Since mid2012, Mexicos GDP growth has taken a decliningpath and become stuck at low rates
GrossDomesticProduct%change,s.a.
s.a. /SeasonallyadjustedSource: Own calculations with data from INEGI
4
3
2
1
0
1
2
3
4
8
4
0
4
8
Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Nonannualizedquarterly(leftaxis)
Annual
18WhatMexicoseconomyconfronts
Economic deceleration reflects a sequence of negativeshocks
The U.S. slowdown A drop in government spending due to a new administration A shortage in the natural gas supply stemming from
distribution bottlenecks, as well as greater demand andlower production
The bankruptcy of the three largest housing developmentfirms
Tax reform which includes hikes and the elimination ofimmediate capital expenditure deductibility
19WhatMexicoseconomyconfronts
Although manufacturing has picked up, constructioncontinues to stagnate
Mexico:ManufacturingandconstructionQuarterlyaverages;Q12008=100;s.a.
85
90
95
100
105
110
Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Manufacturing
Construction
s.a. /SeasonallyadjustedSource:INEGI
Thetransitoryslowinginmanufacturingappearstostemfromasoftpatchinexportdemand
20
ExportsofgoodsandservicesBillionsof2008pesos;s.a.
s.a. /SeasonallyadjustedSource:INEGI
WhatMexicoseconomyconfronts
2,500
3,000
3,500
4,000
4,500
Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Privateconsumptionhasremainedlargelyflatsince2013
21
PrivateconsumptionBillionsof2008pesos;s.a.
s.a. /SeasonallyadjustedSource:INEGI
WhatMexicoseconomyconfronts
7,500
8,000
8,500
9,000
9,500
Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
reflecting weaker confidence levels
22
ConsumerconfidenceQuarterlyaverages;2008=100,s.a.
*/OnlyApriltoMays.a. /SeasonallyadjustedSource:INEGIandBanco deMxico
WhatMexicoseconomyconfronts
85
90
95
100
105
110
115
Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Q2*
Investment has been a drag on the economy
23
GrossfixedcapitalformationBillionsof2008pesos;s.a.
s.a./ Seasonally adjusted1/ Manufacturing Sector Business Confidence IndicatorSource: INEGI
WhatMexicoseconomyconfronts
500
1,000
1,500
2,000
2,500
Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Private
Public
while the performance of bank lending has followed thatof output
24WhatMexicoseconomyconfronts
Mexico:BankcreditandeconomicgrowthRealannualchange,%
1/ Performing commercial bank credit to the nonfinancial private sector. Change based on endofperiod figuresSource: Banco de Mxico and INEGI
20
10
0
10
20
Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3 Q12012
Q3 Q12013
Q3 Q12014
Credit
GDP
1
Given improved global conditions, Mexicos GDP should risegradually this year, and the next few years
25
Mexico:GDPgrowthforecasts%
Source: Banco de Mxico, Blue Chip Economic Indicators and the World Bank
2014 2015 2016
Banco deMxico 2.3 3.3 3.2 4.2 n.a.
Banco deMxicoSurvey 2.8 3.9 4.1
BlueChip 2.9 3.9 n.a.
TheWorldBank 2.3 3.5 4.0
WhatMexicoseconomyconfronts
However,someriskspersist
In the short term, risks are to the downside Possible additional weakening in consumer confidence Greater deterioration in the construction sector Increased global risk aversion
In the long term, risks are to the upside Momentum from structural reforms
26WhatMexicoseconomyconfronts
27
In the context of slower GDP growth, monetary policyaccommodation has broadened
WhatMexicoseconomyconfronts
Mexico:MonetaryPolicyRateAnnual,%
Source: Banco de Mxico
June
2
3
4
5
6
7
8
9
J
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0
8
M
a
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0
8
S
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0
8
J
a
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0
9
M
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0
9
S
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p
0
9
J
a
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1
0
M
a
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1
0
S
e
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1
0
J
a
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1
1
M
a
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1
1
S
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1
1
J
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1
2
M
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1
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S
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1
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J
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1
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S
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J
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1
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M
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1
4
28WhatMexicoseconomyconfronts
Annual inflation is in the process of converging to the3 percent permanent target
*/ Until MaySource: INEGI
Target
0
1
2
3
4
5
6
7
8
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
*
2
0
1
4
Averageannualinflation%
29WhatMexicoseconomyconfronts
A significant risk is upward pressure and volatility in thenoncore component of the consumer price index
Averageannualinflation%
*/ Until MaySource: INEGI
Target
0
1
2
3
4
5
6
7
8
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
*
2
0
1
4
Core
Noncore
12
3
Mexicoscyclicalrecovery
Structuralchallenges
Thereturnofmarketoptimism
Contents
WhatMexicoseconomyconfronts 30
31WhatMexicoseconomyconfronts
Mexicos longterm economic growth has beendisappointing
Source: Own calculations based on INEGI data
Mexico:GDPNaturallogs,billionsof2008pesos
8.6
8.8
9.0
9.2
9.4
9.6
1
9
8
0
1
9
8
1
1
9
8
2
1
9
8
3
1
9
8
4
1
9
8
5
1
9
8
6
1
9
8
7
1
9
8
8
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
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
Averageannualchange(%)
GDP 2.4
GDPpercapita 0.8
32WhatMexicoseconomyconfronts
The main challenge to sustained economic improvementis how to enhance total factor productivity growth
Mexico:Growthaccountingfrom1981to20131Annualaverage%change
1/ Own calculations with data from the World Development Indicators, International Financial Statistics, Conference Board Total EconomyDatabase and data and theory from Kehoe, T.J. y F. Meza, (2011), Catchup Growth Followed by Stagnation: Mexico, 19502010, LatinAmerican Journal of Economics, 48(2). Sums might not be equivalent to totals due to rounding
0.70
0.03
0.650.51
0.81
Workingagepopulationrelativetothetotal
Hoursworkedrelativetoworkingagepopulation
Contributionofcapital Totalfactorproductivity GDPpercapita
Contributionoflabor
33WhatMexicoseconomyconfronts
The current reform agenda seeks to bring aboutinvestment and productivity gains
The scope of the reforms is broad The opening of the energy sector to private agents is noteworthy Contracts in exploration and extraction for oil and
hydrocarbons Permits in gas processing and oil refining, transportation,
storage, distribution, and commercialization Participation in electricity generation and sales
Telecommunications reform is also promising Players can offer all types of services provided market non
concentration requirements are met Limits on FDI reduced
34WhatMexicoseconomyconfronts
With geologic conditions similar to those of Texas, Mexicohas a big opportunity for a more efficient oil sector
MexicoandTexas:CrudeOilProductionMillionsofbarrels
*/ Data annualized for Texas January to March and for Mexico, January to AprilSource: The U.S. Energy Information Administration (EIA) and Petrleos Mexicanos
250
500
750
1,000
1,250
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
*
2
0
1
4
Mexico
Texas
35WhatMexicoseconomyconfronts
Despite abundant natural gas reserves, Mexico achievesonly minimum and declining production
MexicoandTexas:NaturalGasProductionBillionsofcubicfeet
*/ Data annualized for Texas January to March and for Mexico, January to AprilSource: The U.S. Energy Information Administration (EIA) and Petrleos Mexicanos
1,500
3,000
4,500
6,000
7,500
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
*
2
0
1
4
Mexico
Texas
36WhatMexicoseconomyconfronts
Mexico cannot import enough natural gas cheaply due to alimited pipeline network, another investment opportunity
Mexico:PipelineNetworkkilometers
8,000
10,000
12,000
14,000
16,000
18,000
20,0002
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
Gas
Oil
Source: Presidencia de la Repblica (2013), Primer Informe de Gobierno 20122013. Gobierno de los Estados Unidos Mexicanos
37WhatMexicoseconomyconfronts
More readily available and cheaper natural gas andelectricity would boost economic total productivity
MexicoandtheUnitedStates:Electricityprices1U.S.dollarcentsof2008perkilowatthour
1/ Includes residential, commercial, services and agricultural. 2/ PPP adjusted, data up to October 2013Source: Own calculations with information from the Energy Information Administration, SENER and OECD
8
10
12
14
16
18
20
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
UnitedStatesMexico2
38WhatMexicoseconomyconfronts
The telecom sector needs more competition to broadenaccess, improve quality, and reduce prices
MexicoandtheUnitedStates:Broadbandforconsumers1
Speed(megabytesper second)
Price(USDpermegabyteper second)
Subscribers(per100
inhabitants)
Opticfiberconnections
(%subscribers)
Mexico 12.9 5.82 11.9 4.73
United States 24.7 3.49 29.3 7.72
1/ Speed and price of broadband as of June 2014, and subscribers and fiber connections as of 2013Source: OOKLA (2014), June; OECD Broadband Portal
Finalremarks
Authorities need to remain alert given market calm due topostponed tighter monetary policy in advanced nations
Long positions in the search for yield pose risks Mexicos GDP growth reflects negative transitory shocks, and the
rebound still has to overcome drags from stagnant construction,lower investment, and soft private consumption
With disappointing longterm economic growth, the mainchallenge is how to enhance productivity
Reforms, currently in progress, have to be highquality and wellimplemented to draw investors and bring about productivity gains
39WhatMexicoseconomyconfronts
40Mejoranlasperspectivaseconmicasmundiales
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