The North Wind Doth Blow: U.S. Recession Brings Turbulence to the Mexican Economy Presented to: Maquiladora Industry Outlook Conference May 16, 2008 Presented by: Rafael Amiel, Ph.D. Managing Director, Latin America Service Global Insight Copyright 2007 Global Insight, Inc.
Latin America: not immune but in better shape than in the previous crisis Copyright 2007 Global Insight, Inc.
Interest rates trending downward Tasas de int erés, porcent aje 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jun-99 Jul-00 Aug-01 Sep-02 Oct-03 Nov-04 Dec-05 Jan-07 Feb-08 Embi+ Embi+ Latin America US 10- year Treasury Bonds Embi+ México 3
In better shape 1999 2000 2001 2002 2006 2007 Real Domestic Consumption (% of GDP) 64.84 65.0 65.3 65.1 66.2 67.0 Real Gross Fixed Investment (as % of GDP) 16.44 16.5 16.0 15.0 17.4 18.5 Real Exports (as % of GDP) 22.88 24.5 25.0 25.3 28.4 28.2 Short-Term Interest Rate (%) 21.2 15.6 15.1 16.9 11.3 10.1 Policy Rate (%) 21.7 17.5 17.5 18.2 14.0 12.3 Overall Fiscal Balance (as % of GDP) -0.7-0.6-0.7-0.6 0.3 0.3 Current Account Balance (as % of GDP) Total External Debt (as % of GDP, *top 6 countries) -3.2-2.5-2.7-1.1 1.4 0.2 34.1* 29.7* 31.6* 36.0* 25.4 23.1 Inflation Rate (%) 7.7 7.1 5.9 8.5 5.2 5.3 4
The dark side of high commodities prices High Agriculture Commodities Prices and Inflation Rate in LA 7 120 6 80 5 40 4 0 3 05-Q1 05-Q3 06-Q1 06-Q3 07-Q1 07-Q3 08-Q1 08-Q3 09-Q1 09-Q3 10-Q1 10-Q3-40 cpi (left axis) Wheat Corn Soybeans Rice 5
Wide variations in regional economic growth 8 (Real GDP, percent change) 6 4 2 0 NAFTA Western Europe Japan Other Asia- Pacific Emerging Europe Mideast- N. Africa Other Americas 2006 2007 2008 2009 6
Contagion from the U.S. recession Major risks Demand for Mexican exports, mostly manufactures; exports of light vehicles show a different trend Remittances: housing crisis in the U.S. compounds the risk Interest rates: low interest rates in the U.S. is actually good news Stock markets, consumer confidence and business sentiment Other variables Exchange rate: shock absorbing variable Inflation: not direct contagion Prices of commodities and food products Oil prices and energy reform Tourism 7
Close Commercial Ties Exports to USA (As Percent of Total) 95 90 85 80 75 Jan- 00 Feb- 01 Apr- 02 Jun- 03 Aug- 04 Oct- 05 Dec- 06 Feb- 08 8
Not Decoupling, but Mexico now moves at a faster pace Mexico is far from decoupling (Percent change from a year earlier) 9 6 3 0-3 -6 99-Q1 00-Q4 02-Q3 04-Q2 06-Q1 07-Q4 09-Q3 US Ind. Prod. Mex. GDP Mexico and US GDP Growth (Percent change from a year earlier) 6 5 4 3 2 1 0 05-Q1 05-Q4 06-Q3 07-Q2 08-Q1 08-Q4 09-Q3 US GDP Mexico's GDP 9
U.S. Auto sales are down while US: Light Vehicle Sales (Million units) 18.0 17.0 16.0 15.0 14.0 13.0 2002 2004 2006 2008 2010 2012 10
Mexico s output is increasing 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 Mexico Light Vehicle Production (millions of units) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Export Domestic 11
Oil prices: the wild card North Sea Dated Price Outlook Scenarios (Dollars per barrel) 125 105 Firm demand grow th, particularly in Asia, w hile non-opec increases build up only slow ly. OPEC adopt an aggressive stance on supporting prices. Weak dollar drives financial sector support for oil futures. Geo-politcal tensions resurface w ith problems for supply in Nigeria and Iraq. 85 65 45 Prices w eaken w ith slow ing global economy and dollar strengthens. Demand slow s but OPEC does not reduce output fast enough to keep prices in the upper part of their apparently preferred $80-90/barrel range. 25 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 12
Remittances grew 1% in 2007, down 3% in Q1 2008 Remittances 2400 2050 1700 1350 1000 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 6600 5850 5100 4350 3600 Total $million - left scale Number (000's) -right scale 13
Impact on the economy Remittances totaled 23.98 billion US$ in 2007 Represent almost 4% of total private consumption Grew at an average rate of 21% per year for over five years up until 2006, but only 1% in 2007, thus growth in consumption derived from growth in remittances will be definitely hurt, now that transfers are going down Multiplier of remittances spending in the 1.4 2.0 range If remittances drop 10%, private consumption declines half a percentage point Some specific sectors suffer more than other A 10% drop in remittances is compensated by a $4 increase in the price of oil 14
Macroeconomic Fundamentals Monetary Policy Inflation: in and out of bounds, but relatively low Interest rates: stable Credit: still growing with ample room for further expansion Exchange rate not seriously misaligned Fiscal Accounts: in equilibrium supported by oil External accounts: relatively small deficit, financed mostly by FDI, does not impose constraints Enhanced external debt profile, longer maturities, lower interest rates; pesification of debt 15
Inflationary objectives vs. registered inflation Year Objective Registered Inflation Target 2000 10.0% 9.0% Met 2001 6.5% 4.4% Met 2002 4.5% 5.7% Not Met 2003 3.0% +/- 1 4..0% Met 2004 3.0% +/- 1 5.2% Not Met 2005 3.0% +/- 1 3.3% Met 2006 3.0% +/- 1 4.05% Not Met 2007 3.0% +/- 1 3.74% Met 16
Inflation is going out of the targeted band, but still under control Inflation (Percent change from a year earlier) 6 5 4 3 2 1 0 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Underlying CPI CPI 17
External shocks will be difficult to handle Corn Prices (( $/BUSHEL)) 6.0 5.0 4.0 3.0 2.0 1.0 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Wheat Prices ( $/BUSHEL) 12.00 10.00 8.00 6.00 4.00 2.00 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Soybean Prices ( $/BUSHEL) 11.5 10.0 8.5 7.0 5.5 4.0 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 18
Relative prices Relative Prices (June 2002=100) 170 155 140 125 110 95 Jun-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 Clothing Education Electricity Food and Beverages Rent Health care Transport CPI Household Appliances 19
The strength of the Mexican peso or the weakness of the U.S. dollar? Exchange Rate 18 16 14 12 10 8 6 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Mexican Pesos per U.S. Dollar Mexican Pesos per Euro 20
Short-term capital inflows will put downward pressure on the exchange rate Interest Rates: Mexico vs. U.S.A. (Percent) 10 9 8 7 6 5 4 3 2 1 0 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 US 4-week T Bills Mexico Cetes28 21
and foreign exchange reserves pile up Net International Reserves (Millions of U.S. dollars) 85,000 80,000 75,000 70,000 65,000 60,000 55,000 Jan-04 Nov-04 Sep-05 Jul-06 May-07 Mar-08 22
Strong export growth 75 Exports (Percent change from a year earlier) 60 45 30 15 0-15 -30 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 oil exports non-oil exports 23
External deficit is manageable External Accounts (Billions of U.S.dollars) 2 0-2 -4-6 -8 01- Q1 01- Q4 02- Q3 03- Q2 04- Q1 04- Q4 05- Q3 06- Q2 07- Q1 07- Q4 Current Account Trade Balance 24
Foreign direct investment more than offsets the current account deficit External Financing (Billions of U.S.dollars) 35 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 Cuurent account deficit FDI 25
Balanced fiscal accounts Fiscal Balance (As percent of GDP) 1.0 0.5 0.0-0.5-1.0-1.5-2.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 26
Milking the Cow of PEMEX PEMEX: Financial Results (US$ millions) Total Sales -- Domestic -- Exports 2003 55,726 34,465 21,261 2004 69,119 39,861 29,258 2005 86,146 46,844 39,302 2006 97,244 50,248 46,996 2007 104,451 54,485 49,855 Net Income before taxes and contributions to the government 30,309 40,736 49,669 57,619 60,753 Taxes and contributions to the government 34,028 41,991 53,653 53,714 62,234 Net Income (loss) (3,719) (1,255) (3,984) 3,906 (1,484) 27
Border States Performance and Contagion Copyright 2007 Global Insight, Inc.
Mexico: border states economic growth Regional GSP Growth (Percent change from a year earlier) 15 10 5 0-5 -10 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Chihuahua Coahuila Nuevo Leon Tamaulipas National Avg. Baja California Sonora 29
Texas border Mexican states Regional GSP Growth (Percent change from a year earlier) 14 12 10 8 6 4 2 0-2 -4-6 -8 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Chihuahua Coahuila Nuevo Leon Tamaulipas National Avg. 30
Growth scenarios (Percent change from a year earlier) 2008 2009 2010 Real GDP Baseline scenario 2.6 3.4 4.1 With fiscal stimulus 3.0 3.9 4.5 Total Consumption Baseline scenario 4.4 3.7 3.9 With fiscal stimulus 4.8 4.5 4.3 Investment Baseline scenario 6.7 6.4 6.3 With fiscal stimulus 7.1 7.4 7.2 31
Mexico: Crunch time for President Calderon Copyright 2007 Global Insight, Inc.
Energy reform: Calderon s toughest test Mid-terms scheduled for 2009 make this congressional session crucial. President Calderon is more dependent than ever on the opposition Institutional Revolutionary Party (PRI). Dominant elements of leftist Democratic Revolution Party (PRD) are hardening anti-government stance. 70th anniversary of oil expropriation is fuelling nationalist sentiment. Corruption scandal scorching Government Secretary Juan Camilo Mouriño. Other reforms on the back burner. 33
Social tensions and security risks Periodic protests against NAFTA anticipated. Enhanced economic risk increases threat of social unrest and crime. Suspected links between the illegal drug trade and acts of terrorism. Backlash against police continues. Public perceptions of security crackdown linked to President Calderon s approval ratings. 34
Final remarks Contagion from US economic slowdown will hurt Mexico s economy but will not go into recession. Slow to moderate growth is the most likely outcome in the near future. Oil prices: the wild card, but will keep the Mexican economy rolling; medium term outlook for energy sector is uncertain. China s hard landing is not yet in the baseline scenario Macroeconomic fundamentals in place Mexican economy is better prepared for external shocks, with an enhanced debt profile and higher FX reserves Long-term growth will be just moderate unless deeper and additional reforms are approved and implemented 35
Thank You! Rafael Amiel, Ph.D. E-mail: rafael.amiel@globalinsight.com Visit our Web site at www.globalinsight.com 36