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BNP ParibasNew York, March 21, 2016
Mexico: External conditions and economic outlookManuel Sánchez
Since mid-2014, international risk aversion has risen, affecting emerging markets especially hard
2
1/ JP Morgan’s index tracking total returns for traded external debt instruments in the emerging markets. It includes U.S. dollar-denominated Brady bonds, loans, and Eurobonds with an outstanding face value of at least $500 million. */ To March 16Source: JP Morgan
EMBI global1
Basis points
447.0
200
300
400
500
600
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Mar
-16
Mexico: External conditions and economic outlook
*
Portfolio capital flows to emerging economies has become negative
3Mexico: External conditions and economic outlook
Total portfolio flows to emerging economies1
Billions of U.S. dollars
-0.2
-30
-15
0
15
30
45Ju
n-14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
1/ Net purchases by nonresidents of emerging-market shares and bonds posted to the balance of payments. Emerging economies are Argentina, Brazil, Bulgaria, Chile, China, Colombia, the Czech Republic, Ecuador, Egypt, Hungary, India, Indonesia, South Korea,Lebanon, Malaysia, Mexico, Morocco, Nigeria, Peru, the Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Turkey, Ukraine, the United Arab Emirates, and Venezuela. Source: IIF
… while prices for commodities and financial assets have continuously fallen
4
Prices for commodities, shares, and currencies in U.S.-dollar termsJune 2014 = 100
1/ Float-adjusted market capitalization index based on U.S. dollars for Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary,India, Indonesia, South Korea, Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.2/ Non-weighted average of dollar exchange rates for the Mexican peso, Chinese yuan, Russian ruble, Turkish lira, Korean won, South Africanrand, Brazilian real, Indian rupee, Polish zloty, Hungarian florin, Malaysian ringgit, Thai baht, Chilean peso, Indonesian rupee, Philippine peso,Colombian peso, and Peruvian solSource: Banco de México, Bloomberg, Haver Analytics and the IMF
45.8
70.573.4
40
60
80
100
120
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
IMF all commodity price indexMSCI emerging markets share price indexEmerging-market currency prices in dollar terms
Mexico: External conditions and economic outlook
2
1
Mexico: External conditions and economic outlook
Mexico’s exchange rate has recently been hit by volatility above that of other emerging-market currencies
5
1/ Non-weighted average for the Chinese yuan, Russian ruble, Turkish lira, Korean won, South African rand, Brazilianreal, Indian rupee, Polish zloty, Hungarian florin, Malaysian ringgit, Thai baht, Chilean peso, Indonesian rupee,Philippine peso, Colombian peso, and Peruvian sol*/ To March 17Source: Bloomberg
Mexico and emerging economies: U.S. dollar exchange rate in local currency termsJune 2014 = 100
1
133.9
129.2
90
100
110
120
130
140
150
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Mar
-16
Mexico
Emerging economies excl. Mexico
*
Mexico: External conditions and economic outlook 6
Mexico: Oil price and exchange rateU.S. dollars per barrel and pesos per U.S. dollar
*/ To March 17Source: Banco de México and PMI
32.0
17.4
12
13
14
15
16
17
18
19
20
10
30
50
70
90
110
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Mar
-16
Mexican oil mix price
MXN / USD
*
The correlation between the exchange rate and oil prices has strengthened
Mexico: External conditions and economic outlook
… which has coincided with the deterioration of Pemex’s credit risk premium, lately attenuated by improved oil prices
7
164.3
360.5
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Mar
-16
50
150
250
350
450
Mexico
Pemex
*/ To March 11Source: Bloomberg
Mexico: Sovereign and Pemex credit risk premium5-year CDS, basis points
*
Mexico: External conditions and economic outlook
In contrast, market interest rates have remained relatively stable
8
*/ To March 11Source: Banco de México
Mexico: Government bond interest rates%
4.9
6.2
4
5
6
7
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Mar
-16
3-year 10-year
*
Nonresident holdings of peso-denominated government securities have stayed roughly constant in peso terms since 2015
9
Mexico: Nonresident holdings of peso-denominated government securities1
June 2, 2014 = 100
109.4
95
100
105
110
115
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Mar
-16
Mexico: External conditions and economic outlook
1/ Cetes, Bondes D, Bonos M and Undibonos*/ To March 10Source: Banco de México
*
Mexico: External conditions and economic outlook
… while those holdings relative to the total outstanding have declined moderately
10
1/ Unweighted average of ratios for Brazil, Colombia, Hungary, Indonesia, Israel, Malaysia, Peru, Poland, Russia, SouthAfrica, South Korea, Thailand and Turkey. 2/ Total outstanding includes Bonos M, Cetes, Bondes D, Udibonos and BPASource: Finance ministries, central banks and other national authorities
23.3
30.7
22
25
28
31
34
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Emerging economies excluding Mexico
Mexico
Emerging economies and Mexico: Nonresident holdings of local-currency-denominated government securities
% of total outstanding
February
1
January
2
So far, the most negative external impact on Mexico’s output stems from U.S. manufacturing
11
s.a. / Seasonally adjusted*/ Only January for Mexico and January-February for the United StatesSource: INEGI and the U.S. Federal Reserve
Mexico and the United States: Manufacturing productionAnnual % change, s.a.
2.2
1.5
-2
0
2
4
6
Q12011
Q2 Q3 Q4 Q12012
Q2 Q3 Q4 Q12013
Q2 Q3 Q4 Q12014
Q2 Q3 Q4 Q12015
Q2 Q3 Q4 Q12016*
Mexico
U.S.
Mexico: External conditions and economic outlook
Mexico: External conditions and economic outlook
Consequently, Mexico’s exports to the U.S. have slowed and even contracted
12
s.a. / Seasonally adjusted*/ Only JanuarySource: Banco de México
Mexico: U.S. dollar value of manufacturing exportsAnnual % change, s.a.
-0.5
-7.5
-20
-10
0
10
20
30
Q12011
Q2 Q3 Q4 Q12012
Q2 Q3 Q4 Q12013
Q2 Q3 Q4 Q12014
Q2 Q3 Q4 Q12015
Q2 Q3 Q4 Q12016*
To the United States
To the rest of the world
However, as in the U.S., mining has been the most significant drag on industrial production
13
s.a. / Seasonally adjustedSource: INEGI
Mexico: Industrial GDPAnnual % change, s.a.
Mexico: External conditions and economic outlook
0.2
-4.1
-0.5
-8
-4
0
4
Q12011
Q2 Q3 Q4 Q12012
Q2 Q3 Q4 Q12013
Q2 Q3 Q4 Q12014
Q2 Q3 Q4 Q12015
Q2 Q3 Q4
Industrial
Mining
Construction
Mexico: External conditions and economic outlook
The key drivers of an ongoing upturn in the economy are services and private consumption
14
s.a. / Seasonally adjustedSource: INEGI
Mexico: GDPAnnual % change, s.a.
2.5
3.5
3.7
0
2
4
6
Q12011
Q2 Q3 Q4 Q12012
Q2 Q3 Q4 Q12013
Q2 Q3 Q4 Q12014
Q2 Q3 Q4 Q12015
Q2 Q3 Q4
GDP
Private consumption
Services
Mexico: External conditions and economic outlook
… while private investment has decelerated
15
s.a. / Seasonally adjustedSource: INEGI
Mexico: InvestmentAnnual % change, s.a.
0.7
-11.3
3.6
-12
-6
0
6
12
Q12011
Q2 Q3 Q4 Q12012
Q2 Q3 Q4 Q12013
Q2 Q3 Q4 Q12014
Q2 Q3 Q4 Q12015
Q2 Q3 Q4
Total
Public
Private
16Mexico: External conditions and economic outlook
The Mexican economy is expected to recover gradually, along with U.S. industrial production
0.9
2.42.5
2.9
0
1
2
3
2016 2017
U.S. industrial production
Mexican GDP
Source: Blue Chip, March 2016
The United States and Mexico: Growth forecasts Mean, %
17Mexico: External conditions and economic outlook
The economic growth scenario holds risks
To the downside Slower-than-expected recovery for U.S. industrial
production A sudden swoon in Chinese economic momentum A drop in Mexican oil production beyond current
forecasts To the upside Greater-than-expected benefits from structural
reforms
18Mexico: External conditions and economic outlook
Mexico needs to confront an adverse international scenario by strengthening its economic fundamentals
Strong macroeconomic stance
The finances of the public sector and Pemex adjusted to reflect lower oil prices
Convergence of inflation to the target safeguarded by monetary policy
Solid financial system maintained
Structural reforms that stoke greater productivity adequately implemented
19Mexico: External conditions and economic outlook
After an unprecedented decline to an all-time low,inflation has slightly risen, approaching the target
Mexico: Annual inflation%
2.87
0
1
2
3
4
5
6De
c-14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Source: INEGI
20Mexico: External conditions and economic outlook
Benign inflation has been supported by positive relative price shocks
8.08
-0.65
-6.94
-16
-12
-8
-4
0
4
8
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Agricultural
Energy
Telecommunication services
Mexico: Agricultural, energy and telecommunication services pricesAnnual % change
Source: INEGI
21Mexico: External conditions and economic outlook
Also, the impact from peso depreciation on inflationhas been modest, confined to tradable goods
Mexico: Exchange rate and prices of some durable goodsAnnual % change
23.9
4.3
-5
0
5
10
15
20
25
30De
c-14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Exchange rateFurnitureDomestic accessoriesDomestic appliancesTextile accessories for home use
4.2
4.54.6
Source: Banco de México and INEGI
22Mexico: External conditions and economic outlook
To face adverse international conditions, monetary policy has been adjusted twice
Source: Banco de México
3.75
2.0
2.5
3.0
3.5
4.0
May
-14
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Mar
-16
Mexico: Policy interest rate targetovernight funding rate, %
23Mexico: External conditions and economic outlook
These interest rate hikes have sought to safeguard price stability
Maintain the relative monetary stance vis-à-vis that of the United States
Prevent inflation expectations from getting out of line in the face of peso depreciation
Buttress economic fundamentals, action taken in conjunction with the announcement of preventive public-sector spending cuts
24Mexico: External conditions and economic outlook
Last year’s improvement in inflation expectations depended crucially on declines foreseen in the noncore component
1/ Implicit based on CPI weightsSource: Banco de México, Encuesta sobre las Expectativas de los Especialistas en Economía del Sector Privado
Mexico: Inflation expectationsMedian, %
3.4
3.0
4.6
0
2
4
6
Dec-
14Ja
n-15
Feb-
15M
ar-1
5Ap
r-15
May
-15
Jun-
15Ju
l-15
Aug-
15Se
p-15
Oct
-15
Nov
-15
Dec-
15Ja
n-16
Feb-
16Headline
Core
Noncore
Year-end 2016
3.33.2
3.9
0
2
4
6
Dec-
14Ja
n-15
Feb-
15M
ar-1
5Ap
r-15
May
-15
Jun-
15Ju
l-15
Aug-
15Se
p-15
Oct
-15
Nov
-15
Dec-
15Ja
n-16
Feb-
16
Headline
Core
Noncore
Year-end 2017
1 1
25Mexico: External conditions and economic outlook
Monetary policy will continue to be on guard for any obstacles that may hinder the consolidation of convergence of inflation to the target
Amplified FX depreciation and greater pass-through to inflation, with second-round effects
Larger increases in noncore price components, with contamination to other prices
Aggregate demand pressures as the economy recovers, given uncertainty over measures of slack such as the output gap
Some risks to watch
26Mexico: External conditions and economic outlook
Conclusions
The adverse international scenario has hurt the Mexican economy through lower oil prices and slower U.S. industrial production, making it necessary for Mexico to fortify its economic fundamentals
Fiscal and monetary measures undertaken in February have been geared toward safeguarding price and financial stability in this difficult global environment
Current benign inflation represents an unprecedented opportunity to consolidate convergence of inflation to the permanent target
27Mejoran las perspectivas económicas mundiales