BENXICO-What Mexico’s economy confronts Manuel Sánchez, Deputy Governor 2 de Julio 2014.pdf

AdamSmithSeminar,SchlossSpiez,Switzerland,July2,2014

WhatMexicoseconomyconfrontsManuelSnchez,DeputyGovernor

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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


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%

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Therangeinthelast10years

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Standard&Poor's500Index2/

Currencyindex3/ Commoditiesindex4/

Therangeinthelast10years


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

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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

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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


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Total

Bankdeposits

Governmentsecurities2

8 while privatesector access to market financing hascontinued an upward trend


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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


Mexico:Governmentbondyields%,dailyaverage

Source: Banco de Mxico

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Q12007

Q3 Q12008

Q3 Q12009

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3year

10year

However, there is no evidence of overheating in creditmarkets


Mexico:TotalfinancingtothenonfinancialprivatesectorEndofperiod;%ofGDP

1/ Performing commercial bank credit to the nonfinancial private sectorSource: Banco de Mxico and INEGI

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Q12007

Q3 Q12008

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Totalfinancing

Banklending1

notwithstanding a certain recent deterioration in loanportfolio quality


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

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Total

Consumer

12

Real estate prices have just kept up with consumer prices


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*

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Homes

CPI


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

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EmergingeconomycurrenciesotherthanMXN*

Mexicanpeso

Appreciation


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


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

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Contents



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

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Nonannualizedquarterly(leftaxis)

Annual


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


Although manufacturing has picked up, constructioncontinues to stagnate

Mexico:ManufacturingandconstructionQuarterlyaverages;Q12008=100;s.a.

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Manufacturing

Construction

s.a. /SeasonallyadjustedSource:INEGI

Thetransitoryslowinginmanufacturingappearstostemfromasoftpatchinexportdemand

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ExportsofgoodsandservicesBillionsof2008pesos;s.a.



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Privateconsumptionhasremainedlargelyflatsince2013

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PrivateconsumptionBillionsof2008pesos;s.a.



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reflecting weaker confidence levels

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ConsumerconfidenceQuarterlyaverages;2008=100,s.a.

*/OnlyApriltoMays.a. /SeasonallyadjustedSource:INEGIandBanco deMxico


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Investment has been a drag on the economy

23

GrossfixedcapitalformationBillionsof2008pesos;s.a.

s.a./ Seasonally adjusted1/ Manufacturing Sector Business Confidence IndicatorSource: INEGI


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Private

Public

while the performance of bank lending has followed thatof output


Mexico:BankcreditandeconomicgrowthRealannualchange,%

1/ Performing commercial bank credit to the nonfinancial private sector. Change based on endofperiod figuresSource: Banco de Mxico and INEGI

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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


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


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In the context of slower GDP growth, monetary policyaccommodation has broadened


Mexico:MonetaryPolicyRateAnnual,%

Source: Banco de Mxico

June

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Annual inflation is in the process of converging to the3 percent permanent target

*/ Until MaySource: INEGI

Target

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Averageannualinflation%


A significant risk is upward pressure and volatility in thenoncore component of the consumer price index

Averageannualinflation%

*/ Until MaySource: INEGI

Target

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Core

Noncore

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Contents



Mexicos longterm economic growth has beendisappointing

Source: Own calculations based on INEGI data

Mexico:GDPNaturallogs,billionsof2008pesos

8.6

8.8

9.0

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9.4

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Averageannualchange(%)

GDP 2.4

GDPpercapita 0.8


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


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


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

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750

1,000

1,250

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Mexico

Texas


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

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Mexico

Texas


Mexico cannot import enough natural gas cheaply due to alimited pipeline network, another investment opportunity

Mexico:PipelineNetworkkilometers

8,000

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14,000

16,000

18,000

20,0002

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Gas

Oil

Source: Presidencia de la Repblica (2013), Primer Informe de Gobierno 20122013. Gobierno de los Estados Unidos Mexicanos


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

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UnitedStatesMexico2


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


40Mejoranlasperspectivaseconmicasmundiales

Documents

BENXICO-What Mexico’s economy confronts Manuel Sánchez, Deputy Governor 2 de Julio 2014.pdf