Mexicosmonetarypolicyandeconomicoutlook

ManuelSnchez
UnitedStatesMexicoChamberofCommerce,LosAngeles,CA,November15,2013

Monetarypolicyandeconomicoutlookthemes
Output slowdown and signs of an incipient rebound More stringent international financial conditions Lower inflation and monetary flexibility The possibilities from structural reforms

Mexicosmonetarypolicyandeconomicoutlook

Since the middle of 2012 the Mexican economy slowed, and in 2Q13 output fell
RealGDP
Quarterlyandannualchange,%,s.a.
8 6 4 2 0 2 2 4 6 8 Q1 2007 Q3 Q1 2008 Q3 Q1 2009 Q3 Q1 2010 Q3 Q1 2011 Q3 Q1 2012 Q3 Q1 2013 Quarterly Annual(leftaxis) 4 5 6 3 3 2 1 0 1

s.a./Seasonallyadjusted Source:INEGI
Mexicosmonetarypolicyandeconomicoutlook

The origin of the declining growth seems to have lied first in softer external demand and then in a contraction of domestic investment
Realaggregatedemand
Quarterlychange,%,s.a.
3

1 Exportsofgoodsandservices Investment 2

3 Q1 2012 Q2 Q3 Q4 Q1 2013 Q2

s. a. / Seasonally adjusted Source: INEGI

Mexicosmonetarypolicyandeconomicoutlook

As for external demand, the slowing of manufacturing exports translated into stagnant factory output
Manufacturing
2008=100,s.a.
110 150 Dollarvalueofexports Realproduction(leftaxis) 130 100 110

105

95

90 90 85

80 Jan07 May07 Sep07 Jan08 May08 Sep08 Jan09 May09 Sep09 Jan10 May10 Sep10 Jan11 May11 Sep11 Jan12 May12 Sep12 Jan13 May13 Sep13

70

s. a. / Seasonally adjusted and trend Source: Banco de Mxico and INEGI

Mexicosmonetarypolicyandeconomicoutlook

As for investment, rising purchases of machinery and equipment have not compensated for the fall in construction investment
Totalfixedinvestment
2008=100,s.a.
130

120

110

100

90 Construction Machineryandequipment

80

70 Jan07 May07 Sep07 Jan08 May08 Sep08 Jan09 May09 Sep09 Jan10 May10 Sep10 Jan11 May11 Sep11 Jan12 May12 Sep12 Jan13 May13

s. a. / Seasonally adjusted and trend Source: INEGI

Mexicosmonetarypolicyandeconomicoutlook

 which mainly reflects lower expenditures in public works and private housing building
Realconstructionoutput
2008=100,s.a.
140

120

100

80 Public Privatehousing 60

40 Jan07 May07 Sep07 Jan08 May08 Sep08 Jan09 May09 Sep09 Jan10 May10 Sep10 Jan11 May11 Sep11 Jan12 May12 Sep12 Jan13 May13

s. a. / Seasonally adjusted and trend. The seasonal adjustment and the trend were prepared by Banco de Mxico with data from INEGI Source: INEGI
Mexicosmonetarypolicyandeconomicoutlook

These shocks have weakened labor market conditions

Realwagebillandemployment
2008=100,thousands
48,000 47,000 46,000 45,000 44,000 43,000 42,000 41,000 40,000 39,000 38,000 Q1 2007 Q3 Q1 2008 Q3 Q1 2009 Q3 Q1 2010 Q3 Q1 2011 Q3 Q1 2012 Q3 Q1 2013 Q3 80 85 90 95 Realwagebill Employees(leftaxis) 100 105

Source: Own calculations with data from INEGI

Mexicosmonetarypolicyandeconomicoutlook

Lower consumer confidence has coincided with the first decline of consumption during the postcrisis period
Retailsalesandconsumerconfidence
2008=100,s.a.
110 Consumerconfidence Retailsales(leftaxis) 105 110 120

100

100

95

90

90 May07 May08 May09 May10 May11 May12 May13 Jan07 Sep07 Jan08 Sep08 Jan09 Sep09 Jan10 Sep10 Jan11 Sep11 Jan12 Sep12 Jan13 Sep13

80

s. a. / Seasonally adjusted and trend Source: INEGI and Banco de Mxico

Mexicosmonetarypolicyandeconomicoutlook

Economic activity decelerated in spite of extraordinarily favorable financial conditions in the first part of the year
Yieldcurve
%
8 December30,2011 December31,2012 May10,2013 6 7

3 10year 20year 1month 3month 6month 30year 1day 1year 3year 5year 7year

Source: Proveedor Integral de Precios (PiP)

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The financial bonanza was shared with other emerging markets

Emergingeconomies:accumulatedcapitalinflows1
BillionU.S.dollars
100 2012 2013 80

May

60

40

20

20 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

1/ Equity and debt Source: Emerging Portfolio Fund Research

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 largely as a result of expansionary monetary policies in advanced countries

Centralbankassets
2007=100,localcurrency
500 FederalReserve BankofEngland ECB BankofJapan 300 400

200

100

0 May07 May08 May09 May10 May11 May12 May13 Jan07 Sep07 Jan08 Sep08 Jan09 Sep09 Jan10 Sep10 Jan11 Sep11 Jan12 Sep12 Jan13 Sep13

Source:Haver Analytics

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Mexico has been one of the preferred destinations of portfolio capital flows
Emergingeconomies:foreignholdingsoflocalgovernmentbonds1
Percentageoftotalgovernmentsecuritiesincirculation
70 NewZealand 60 Peru Malaysia Mexico Poland 30 Turkey Thailand Korea Brazil 0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2010 2011 2012 2013 1/Federalgovernmentdebtissuedonthedomesticmarket,inlocalcurrency Source:Selectedcountries centralbanksandfinanceministries
Mexicosmonetarypolicyandeconomicoutlook

50 40

20 10

Q2

Q3

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Since May, market anticipation of tapering translated into lower asset prices for emerging markets, including Mexico
Yieldcurve
%
8 May10,2013 September18,2013 November14,2013 6 7

3 10year 20year 1month 3month 6month 30year 1day 1year 3year 5year 7year

Source: Proveedor Integral de Precios (PiP)

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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

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Some indicators suggest that economic activity might have somewhat picked up in 3Q13
GlobalEconomicActivityIndicator
2008=100,s.a.
110 111 110 140 109 109 135 108 108 Apr13 Jun13 Jul13 May13 Aug13 107 May13 Aug13 Sep13 94 93 Aug13 Jun13 Jul13 Apr13 Jun13 Jul13 Dollarvalueofexports Production(leftaxis) 130

Manufacturing
2008=100,s.a.
145

s. a. / Seasonally adjusted Source: Mexican National Accounts System (SCNM), INEGI

s. a. / Seasonally adjusted Source: Banco de Mxico and INEGI

Servicesproduction
2008=100,s.a.
115 114 113 112 May13 Aug13 Apr13 Jun13 Jul13

Constructioninvestment
2008=100,s.a.

s. a. / Seasonally adjusted Source: Mexican National Accounts System (SCNM), INEGI

s. a. / Seasonally adjusted Source: INEGI

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The 2014 fiscal package will impact inflation, economic activity, and the use of financial resources

Estimatedeffectsoffiscalpackagefor2014
Effects Annualinflation(endofyear) GDPgrowth Increaseinpublicsectorborrowingrequirements 40basispoints 0.2percentagepoints 1.2percentagepointsofGDP

Source:BancodeMxico(2013), InformesobrelaInflacinJulio Septiembre2013,November

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The economy is expected to recover gradually in 2014 and 2015

GDPforecast
Annualgrowth,%
BanxicoSurvey1 BanxicoInflationReport 4.5 4.0 3.4 3.0 2.5 1.4 0.9 0.5 0 201320142015 1/ Maximum, average and minimum Source: Banco de Mxico (2013), Encuesta sobre las expectativas de los especialistas en economa del sector privado, October; Banco de Mxico (2013), Informe sobre la Inflacin Julio Septiembre 2013, November; and LatinAmerican Consensus Forecasts, October
Mexicosmonetarypolicyandeconomicoutlook

6 5.2 4.2 3.2

4.0 3.4

1.7 1.2

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Downsideriskstothisscenarioseemtoprevail
A pause in the U.S. economic recovery Heightened global risk aversion Further deterioration of the construction sector in Mexico Weakening consumer confidence

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During the last decade, monetary policy has been focused on achieving a 3 percent permanent inflation target
Monetarypolicyinterestrate1
Annual,%
9

3 Jan08 May08 Sep08 Jan09 May09 Sep09 Jan10 May10 Sep10 Jan11 May11 Sep11 Jan12 May12 Sep12 Jan13 May13 Sep13 20

1 / Since January 21, 2008 Source: Banco de Mxico

Mexicosmonetarypolicyandeconomicoutlook

Annual headline inflation has consistently remained below historical levels

Annualheadlineinflation
%
18

15

12

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source:INEGI

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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

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In 2013, after a temporary spike resulting from agricultural price shocks, annual inflation has recently fallen
Annualinflation
%
7 Headline Core 6 5 4 3 2 1 0 Feb13 Mar13 Apr13 May13 Jun13 Aug13 Sep13 Oct13 Jan13 Jul13

Source:INEGI

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The persistent gap between medium and longterm inflation expectations and the target remains a challenge
Inflationexpectations
%
7 6 Next4years Next58years 5 4 3 2 1 0 Nov11 Mar11 May11 Mar12 May12 Nov12 Jan11 Jul11 Sep11 Jan12 Jul12 Sep12 Jan13 Mar13 May13 Jul13 Sep13

Source:BancodeMxico
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Shortterminflationrisksshouldcontinuetobemonitored
Secondround effects from Higher than expected impact from tax changes Higher financial volatility Upward pressures from noncore price components

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Mexico should tackle the most important problem that has inhibited longterm economic growth
Mexico:growthaccounting1
Averageannualchange,% 19501980 GDPpercapita Totalfactorproductivity Capitalcontribution Laborcontribution Laborintensity Proportionofworkingagepopulation 3.4 2.8 0.6 0.0 0.2 0.2 19802012 0.8 0.6 0.7 0.6 0.1 0.7

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), Catchup Growth Followed by Stagnation: Mexico, 19502010, Latin American Journal of Economics, 48(2). The sum of the parts may not add up due to rounding

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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 the quality 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
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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 longterm 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
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Mejoranlasperspectivaseconmicasmundiales

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