Manuel Sánchez Santander Global Fixed Income Summit London, England, September 20, 2012
Contents 1 Structural features 2 Recent developments and outlook 3 Inflation and monetary policy 4 Economic challenges 2
Mexico has a large and well diversified economy 11th largest economy 1 Middle income country, US$14,610 per capita 1 Population of 112.3 million, more than half under the age of 25 Economy oriented to services: 65% of GDP and 62% of the labor force 30% of GDP and 24% of the labor force in industrial activities High openness to foreign trade and investment 1/ Based on PPP adjusted GDP Note: Data is for 2011, except for population, which is for 2010 Source: IMF, April 2012 World Economic Outlook Databases and INEGI 3
Opening to trade and investment has resulted in highly dynamic export industries World Rankings for Selected Mexican Exports Railway cars 1 Beer 1 Motor vehicles for the transport of goods 2 Refrigerators and freezers 2 Television receivers 2 Tractors 3 Parts for spark ignition type engines 4 Reinsurance services 4 Electric motors and generators 5 Motor cars for the transport of persons 9 Note: Data for 2011, except Reinsurance services, which is for 2010 Source: Trade Map, International Trade Centre Rank 4
The functioning of the economy is based on solid macroeconomic fundamentals, including contained public debt General Government Gross Debt 1 Mexico U.S. Euro area % of GDP 100 Average Maturity of Federal Government Securities 2 Months to maturity Mexico U.S. 85 70 75 55 50 40 25 25 10 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1/ Includes Federal Government, public enterprises, states and municipalities Source: IMF 2/ Denominated in local currency Source: Banco de México and US Treasury 5
relatively low inflation and interest rates Annual Inflation % 55 Interest Rate 1 % 45 Mexico OECD 50 45 40 35 40 35 30 30 25 25 20 20 15 15 10 10 5 0 5 1996 1998 2000 2002 2004 2006 2008 2010 2012 5 1996 1998 2000 2002 2004 2006 2008 2010 2012 0 Source: OECD 1/ 28 day Cetes Source: Banco de México 6
and a well capitalized, provisioned and liquid banking system Banking System Indicators 2Q12 Net Capital (% of risk weighted assets) Tier 1 capital (% of net capital) Past due loans (% of total loans) Provisions for expected losses (% of past due loans) Liquid assets* (% of net cash outflows) 15.94 88.94 2.50 186.50 338.60 */ Calculations based on Basel III liquidity coverage ratio Source: CNBV and Banco de México 7
The credibility of economic policy has fostered the development of financial markets The Mexican peso operates 24 hours and it is the most traded currency in emerging markets Two thirds of Mexican peso trading is conducted by non residents The domestic yield curve includes maturities of up to 30 years Approximately half of total outstanding peso denominated government securities are held by foreign investors 8
Contents 1 Structural features 2 Recent developments and outlook 3 Inflation and monetary policy 4 Economic challenges 9
Since 3Q09, Mexico has shown a continuous process of economic recovery Global Economic Activity 2003=100; s.a. Industrial Production 1 2007=100; s.a. Total Industry Services 130 U.S. Mexico 110 105 120 100 95 110 90 85 100 80 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 s. a. / seasonally adjusted Source: INEGI s.a. / Seasonally adjusted 1/ The correlation of industrial production between the two countries is close to 0.9 Source: INEGI 10
driven by both external and internal demand Manufacturing Exports by Destination 2007=100; s.a. Total U.S. EEUUA Resto of the world 175 150 Retail Sales and Investment 2007 = 100; s.a. Retail sales Investment 120 115 110 125 105 100 100 95 75 90 50 85 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 s.a. / Seasonally and trend adjusted Source: Banco de México s.a. / Seasonally and trend adjusted Source: Commercial establishment survey and Mexico s National Accounts System, INEGI 11
Economic growth momentum has been accompanied by an improvement in labor conditions Formal Private Sector Employment 1 Millions 16 Unemployment and Labor Force Participation 2 s.a. Unemployment (right) Participation (left) 60 15 59 5 14 58 4 13 57 3 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 1/ Workers insured by the Mexican Social Security Institute (IMSS) Source: IMSS s.a. / Seasonally adjusted 2/ Unemployed people relative to Economically Active Population (EAP) and the EAP relative to those 14 and older, respectively Source: INEGI 12
as well as financing to the private sector Total Financing to the Non Financial Private Sector 1 % of total; June 2012 Annual real growth, % 25 Total Consumer 20 Corporate 15 Corporate 57.3% Consumer 42.7% 10 5 0 5 I 2007 III I 2008 III I 2009 III I 2010 III I 2011 III I 2012 10 1/ Includes foreign financing, and domestic financing from commercial banks, development banks and non bank financial intermediaries Source: Banco de México 13
Mexico has also attracted an increasing proportion of capital inflows directed to emerging markets Foreign Holdings of Peso Government Bonds % of Local Government Bonds held by Foreigners in EM 1 Yield Curve % 9 21 2009 2010 2011 8 2012* 18 7 6 15 5 12 4 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 1/ Include Brazil, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Thailand and Turkey Source: Barclays 1 day 1 month 3 months 6 months 1 year */ September 14, 2012 Source: Banco de México 5 years 7 years 10 years 20 years 30 years 14
Consensus forecasts posit Mexico's continued moderate growth for the near term GDP Outlook Growth, % 2011 2012 F 2013 F World 3.1 2.6 2.8 United States 1.8 2.2 2.1 Euro zone 1.5 0.5 0.2 China 9.2 7.9 8.3 Brazil 2.7 1.8 4.0 Mexico 3.9 3.8 3.5 F/ Forecast Source: Consensus Forecasts, September 2012; and Latin America Consensus Forecasts and Asia Consensus Forecasts, August 2012 15
The most important risks for Mexico s economic scenario come from the United States and Europe United States Risks The Fiscal Cliff could lead to a fall of 0.3% for GDP in 2013 1 As industrial production in the U.S. slows, the impact on the Mexican economy could be significant 2 Europe The difficulty resolving underlying problems could generate new bouts of volatility and risk aversion 1/ Congressional Budget Office (2012) An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, August 2/ For an estimate of the possible impact of U.S. industrial production on Mexican exports, see Garcés, D. (2002) Análisis de las Funciones de Importación y Exportación de México, Documento de investigación No. 12, Banco de México, December. 16
Contents 1 Structural features 2 Recent developments and outlook 3 Inflation and monetary policy 4 Economic challenges 17
Since mid 2011, inflation has been gradually increasing Consumer Price Index Annual; % Headline Core 8 6 4 2 0 18 8 6 4 2 0 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Core Core Merchandise Core Services Source: INEGI Source: INEGI
which reflects some exchange rate pass through and pressures from food and agricultural prices Gradual increase in core inflation Pass through from peso depreciation in tradable goods Higher food and agricultural product prices that could last longer than expected Drought Bird flu outbreak in Mexico 19
Monetary policy will have to be adjusted in a timely way if convergence of inflation to the 3% target is endangered Risks Second round effects of supply shocks Further FX volatility Rising demand pressures Some signs of slack have disappeared Possible deterioration of inflation expectations 20
Contents 1 Structural features 2 Recent developments and outlook 3 Inflation and monetary policy 4 Economic challenges 21
The task of macroeconomic stability is continuous and needs to be consolidated Fiscal reform The efficiency of public revenues Stabilization funds Expenditures focused on public goods, e.g., security and infrastructure Convergence to inflation target Enhanced regulatory and supervisory framework of the financial system Basel principle based rules for capitalization and liquidity Macroprudential supervision 22
Furthermore, Mexico could increase its growth potential if barriers to total factor productivity are reduced Given their size in the economy, significant opportunities for productivity enhancement arise in services and nonmanufacturing industries Key elements behind lagging productivity Insufficient competition in crucial economic areas Widespread informality Education and skill gaps 1/ Sánchez, M. (2012) "Desafíos de crecimiento y estabilidad", www.banxico.org.mx 23
Conclusions Mexico has a large and well diversified economy Theeconomicrecoveryisdrivenbybothexternalandinternal demand Expected moderate near term growth is threatened by U.S. economic uncertainty and strains in global financial markets due to persistent problems in Europe Since mid 2011, inflation has been gradually increasing, reflecting foreign exchange rate pass through and pressures from agricultural prices Monetary policy will have to be adjusted in a timely way if convergence of inflation to the 3% target is endangered 24
Mejoran las perspectivas económicas mundiales 25