Mexican Economy: Recent Performance and Outlook

Gerardo Esquivel Hernández*

Deputy Governor, Banco de Mexico
6th BBVA Latin America Conference, London, United Kingdom
January 20, 2020

*/ The views expressed here are exclusively the responsibility of the author and do not necessarily reflect the institutional view of Banco de México or its Governing Board.
Summary of Mexico’s economic performance in 2019.

a) Strong macroeconomic fundamentals.

i. Fiscal responsibility (primary surplus was approximately 1% of GDP).

ii. Low inflation (2.83%).

b) No growth (0%).

Mexican Economy: Recent Performance and Outlook 2

How did Mexican financial assets performed in 2019?
Asset Performance in 2019
%, basis points

10Y
Stock 2Y Interest
Region Country Currencies Interest CDS
indices rates
rates
Mexico 3.68% 4.56% -194 -204 -76
Brazil -4.02% 31.58% -210 -255 -108
Latin America Chile -8.38% -8.53% -155 -114 -20
Colombia -1.01% 19.26% -20 -58 -85
Argentina -58.95% 37.56% 5,238 809 2,497
Russia 11.08% 28.55% -324 -224 -98
Poland -1.53% 0.25% -6 -63 -9
Europe Turkey -12.51% 25.37% -852 -394 -79
Czech Rep. -1.16% 13.08% 24 -3 -6
Hungary -5.45% 17.74% -44 -68 -19
China -1.23% 22.30% -13 -48 -36
Malaysia 1.03% -6.02% -43 -17 -75
India -2.30% 14.38% -65 -67 -45
Asia
Philippines 3.67% 4.68% -241 -248 -55
Thailand 7.93% 1.02% -64 -84 -19
Indonesia 3.64% 1.70% -152 -90 -70
Africa South Africa 2.42% 8.24% -75 -51 -60
North America United States 2.22% 28.88% -92 -77 -8

Note: Interest rates correspond to swap rates for a period of two and ten years, except for Indonesia and Turkey, where the government values of these terms are used as a reference. Additionally, for Argentina, the
sovereign debt rates denominated in US dollars of 2- and 9-year terms are used, as they are the most liquid and those that best reflect the performance of this country’s fixed income market.
Source: Banco de México using data from Bloomberg.

Mexican Economy: Recent Performance and Outlook 3

Summary of perspectives for 2020.

a) Strong macroeconomic fundamentals.

i. Fiscal Responsibility (committed primary surplus of 0.7% of GDP).

ii. Low inflation (approximately 3% by the end of the year).

b) Slight recovery (expected GDP growth of 1.3% /1).

1/ See Quarterly Report, July-September 2019, Banco de México .

Mexican Economy: Recent Performance and Outlook 4

Mexico’s current fiscal stance.

Debt to GDP Ratio1/ Fiscal (RFSP) Primary Balance 2/

Thousands of millions of pesos of 2018
%
55 800

Central Bank operating surplus transferred

50 to the government 600
RFSP primary balance without Central Bank
45 transfers
400
RFSP primary balance /2

40
200

35
0

/3
2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019
30
INFORMACIÓN
CONFIDENCIAL -200
Estado: En proceso / Versión final 25

2019*
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Unidad Administrativa: 2018
Fecha de última actualización:
Fecha de impresión (si aplica): -400
1/ The debt concept used to compute this ratio corresponds to the “Saldo Histórico de los 2/ The fiscal RFSP primary balance corresponds to the primary result of the “Requerimientos
Requerimientos Financieros del Sector Público” or SHRFSP which is the widest concept of public debt Financieros del Sector Público” or RFSP, which is the widest concept of fiscal deficit in Mexico.
in Mexico. 3/ Cumulated balance January-November, 2019.
*/ For the year 2019, the ratio is estimated by the author based on the latest figures. Source: Author’s own calculations, using data from SHCP.
Source: Author’s own calculations using data from SHCP.

Mexican Economy: Recent Performance and Outlook 5

Mexico’s current inflation.

Inflation Rate (Monthly Frequency) Inflation Rate (Annual Frequency)

% %

9 9
Inflation target range
8 8
Mid-point of inflation target range 2/ Average = 4.13%
6.77 7
7 6.53

CPI1/
6
6 5.19
4.83
5
4.40
5
3.98 4.05 3.97 4.08
3.76 3.82
3.57 3.57 4
3.33 3.36
4
2.83
3
3 2.13
2
INFORMACIÓN
CONFIDENCIAL 2
1
Estado: En proceso / Versión final
Unidad Administrativa: 1 0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Fecha de última actualización: 2019

2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Fecha de impresión (si aplica):

Source: Author’s own calculations, using data from INEGI and Banco de México. Note: The red line represents the average inflation in the 2003-2019 period (4.13%).
1/ CPI = Consumer Price Index Source: Author’s own calculations, using data from INEGI.
2/ Since 2003, a permanent inflation target of 3%, with a variability interval of +/-1%, was
established.

Mexican Economy: Recent Performance and Outlook 6

Absence of growth occurred since the second quarter of 2018.

Gross Domestic Product

Quarterly growth rate, %, s.a.
1.9 2.0

1.3 1.5
1.3 1.2
1.1 1.1 1.1
1.1 1.0 1.0 1.1
1.0
0.9 0.9 1.0
0.8 0.8 0.8
0.7
0.6 0.6 0.6
0.6 0.5 0.5
0.4 0.4 0.5
0.3 0.4 0.3 0.4 0.5

0.0 0.0
0.0
0.0 -0.1 -0.1
-0.2 -0.2
-0.1
-0.5

-0.7
-1.0
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019
s.a. Seasonally adjusted data.
Notes: The dotted red line corresponds to the average in the 2018Q2 – 2019Q4 period. For the fourth quarter of 2019 the growth rate is estimated by the author.
Source: Author’s own calculations using data from INEGI.

Mexican Economy: Recent Performance and Outlook 7

Why was there 0% growth in 2019?

a) Global context of weak economic activity.

b) Beginning of a new administration.

c) Some controversial public policy decisions.

d) Restrictive monetary policy.

Mexican Economy: Recent Performance and Outlook 8

Weak global economic conditions.

Global Activity Indicators

Annual % change of 3-month moving average and
deviation from threshold of 50
6
October
World trade December
5

Industrial
2
production
PMI: new orders
1

-1

-2
2015

2016

2017

2018

2019
Source: Banco de México using information from CPB Netherlands and Markit.

Mexican Economy: Recent Performance and Outlook 9

The Mexican economy is closely linked to the US economy.

Manufactures (US vs. Mexico) US Manufactures vs. Mexico´s Overall Activity

Annual percentage change from s.a. series Annual percentage change from s.a. series
15 15

Manufactures, Mexico
10 10

Overall activity (IGAE), Mexico

5 5

0 0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
-5 -5

Manufactures, United States Manufactures, United States

-10 -10
INFORMACIÓN
CONFIDENCIAL -15 -15
Estado: En proceso / Versión final Correlation Correlation
Unidad Administrativa: coefficient: 0.86 coefficient: 0.83
Fecha de última actualización: -20 -20
Fecha de impresión (si aplica):
s.a.\ Data is seasonally adjusted. s.a.\ Data is seasonally adjusted.
Source: Author’s own calculations using data from INEGI and Federal Reserve Economic Data Source: Author’s own calculations using data from INEGI and Federal Reserve Economic Data
(FRED). (FRED).

Mexican Economy: Recent Performance and Outlook 10

External conditions at the beginning of new administrations.

Mexico’s Gross Domestic Product (GDP) US Manufacturing Output

Index=1 for the last quarter before entry of each new administration, s.a. Index=1 in the last quarter before entry of each new administration, s.a.

1.03 1.04

1.03
1.02
1.02
2013: PAN to PRI
2013: PAN to PRI
1.01 1.01
2019: PRI to Morena
1
1 2019: PRI to Morena
0.99
2001: PRI to PAN
0.99
0.98
2001: PRI to PAN
0.98 0.97

INFORMACIÓN 0.96
CONFIDENCIAL 0.97
Last quarter before 0.95
Last quarter before
Estado: En proceso / Versión final entrant administration
entrant administration
Unidad Administrativa: 0.96 0.94
Fecha de última actualización:
Fecha de impresión t-4
(si aplica): t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t-4 t-3 t-2 t-1 t t+1 t+2 t+3

s.a.\ Data is seasonally adjusted. s.a.\ Data is seasonally adjusted.

Source: Author’s own calculations using data from INEGI. Source: Author’s own calculations using data from Federal Reserve Economic Data (FRED).

Mexican Economy: Recent Performance and Outlook 11

The beginning a new federal administration is typically costly for the economy.

Real GDP growth at the beginning of recently elected federal administrations

Annual percentage change, index 2013=100
4.9 4.5 5
3.6 4

2.3 3
2.1
1.4 2
1
0.0
0
-0.4 -1
-2
-2.2 -2.3 -2.1 -3
-4
-5
-5.3 -6
Difference

Difference

First year

Difference

First year

Difference
Previous year
First year

First year
Previous year

Previous year

Previous year
2001:
2001: PRIPRI to PAN
to PAN 2007: PANto to
2007: PAN PANPAN 2013:
2013:PAN
PAN toto
PRIPRI 2019:
2019:PRI toMorena
PRI to Morena
Note: The first year growth rate for 2019 is constructed using the mid-point of the GDP Growth Forecast interval from Banco de Mexico. See Quarterly Report July-September 2019.
Source: Author’s own calculations using data from INEGI and Banco de México.

Mexican Economy: Recent Performance and Outlook 12

Controversial decisions.

a) Mexico City Airport.

b) Pipe-lines contracts renegotiations.

c) No farm-outs (yet).

d) Some public investment projects.

Mexican Economy: Recent Performance and Outlook 13

The real interest rate is high.

Short-Term Ex-Ante Real Rate and Estimated Range for the Short-Term Neutral Real Rate1/
%
5

Short-Term Neutral Real Rate

4
Range in the Long-Term

0
Short-Term Ex-Ante Real Rate
-1
January
-2
2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
1/ The short-term ex-ante real rate is constructed using the Target for the Overnight Interbank Interest Rate and 12-month inflation expectations from Banco de México Survey. The dotted line corresponds to the
midpoint of the range. See box no. 4 in the April-June 2019 Quarterly Report: “Actualización de la tasa neutral de interés de largo plazo en México.”
Source: Banco de México.

Mexican Economy: Recent Performance and Outlook 14

The real interest rate is high relative to other countries.

Real Interest Rates across Countries/1

%
5

-1

-2

-3
Czech Republic

Brazil

Malaysia
Chile

Thailand
Poland

Russia

México
Australia
Hungary

Colombia

India
Peru

Korea

Turkey

Philippines

China

Indonesia

South Africa
New Zealand

1/ The real interest rate is calculated subtracting the expected inflation for 2020 from the current policy rate as of January 2020.
Source: Author’s own calculations using data from Banco de México.

Mexican Economy: Recent Performance and Outlook 15

Real policy rates and neutral rates estimates from IMF.

Obtained from IMF report “Regional Economic Outlook: Stunted by Uncertainty”, October 2019.

Mexican Economy: Recent Performance and Outlook 16

Consumption and investment have been weak since 2016.

Total Private Consumption Investment

Annual % change and 6-month moving average Index 2013=100, s. a. and 6-month moving average
7 120
Original Seasonally adjusted figures
6
115
5

4 110

3
105
2

1 100

INFORMACIÓN 0
95
CONFIDENCIAL
-1
Estado: En proceso / Versión final
Unidad Administrativa: October
Fecha de última actualización: -2 90

2013

2014

2015

2016

2017

2018

2019
2016

2017

2018

2019

Fecha de impresión (si aplica):

s. a. / Seasonally adjusted figures.

Source: Mexico’s National Accounts System (SCNM, for its acronym in Spanish), INEGI. Source: Mexico’s National Accounts System (SCNM, for its acronym in
Spanish), INEGI.

Mexican Economy: Recent Performance and Outlook 17

Credit growth for non-financial firms has decreased since 2016.
Performing Commercial Banks Credit to Non-Financial Private Firms1/ 2/
Real annual % change
16
November
Large Firms
14

12

10

6
All Firms
4

2
SMEs 3/
0

-2

-4
Apr-16

Jul-16

Jan-17

Apr-17

Jul-17

Jan-18

Apr-18

Jul-18

Jan-19

Apr-19

Jul-19
Oct-16

Oct-17

Oct-18

Oct-19
1/ Data adjusted due to exchange rate variations. 2/ It also includes financing granted by multiple-purpose non-bank financial corporations, regulated entities (sofomes
E.R.) subsidiaries of banks and financial groups. 3/ Small and medium-sized enterprises (SMEs)
Source: Banco de México.

Mexican Economy: Recent Performance and Outlook 18

Outlook for 2020.

a) Reduction in global trade tensions.

b) Approval of USMCA.

c) People are optimistic, which may increase consumption.

d) Margin for reduction in interest rates (unlike other economies).

e) More experienced federal administration.

Mexican Economy: Recent Performance and Outlook 19

Household survey shows there is unprecedented optimism in Mexico.

“During the last 12 months, economic conditions “For the next 12 months you expect that economic
have: ” conditions will: ”
% %
80 80
Worsened, for the country
Improve for the country
70 70

60 60
Improve for you

50 50
Worsened, personally
40 40
Improved, for the country
30 30

20 20
INFORMACIÓN Worsen for the country
CONFIDENCIAL Worsen for you
Improved, personally
10 10
Estado: En proceso / Versión final
Unidad Administrativa:
Fecha de última actualización: 0 0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018

Fecha de impresión (si aplica):

2019

2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: Household Survey performed by Parametría. Published as “¿Qué mide el Índice de Source: Household Survey performed by Parametría. Published as “¿Qué mide el Índice de
Confianza del Consumidor?” by Francisco Abundis at Milenio website. Confianza del Consumidor?” by Francisco Abundis at Milenio website.

Mexican Economy: Recent Performance and Outlook 20

Consumer confidence, the wage bill and remittances are reaching historical records.

Consumer Confidence Total Real Wage Bill Remittances

Response balance Index 2013=100, s. a. Billion of USD and of constant pesos, s. a.
50 115 3.5 65

45 110
3.0 55

US dollars
40 105

2.5 45

35 100

Mexican pesos 1/
2.0 35
INFORMACIÓN 30 95
CONFIDENCIAL
Estado: En proceso / Versión final
Unidad Administrativa: December Q3-2019 November
Fecha de última actualización: 25 90 1.5 25

2012

2013

2014

2015

2016

2017

2018

2019
2012

2013

2014

2015

2016

2017

2018

2019

2012

2013

2014

2015

2016

2017

2018

2019
Fecha de impresión (si aplica):

s. a. / Seasonally adjusted figures.

Source: Prepared by Banco de México with information from the National Survey of Occupations and Employment (ENOE, for its acronym in Spanish) 1/ Prices as of the second fortnight of July 2018.
and the National Survey of Consumer Confidence (ENCO, for its acronym in Spanish), INEGI and Banco de México. Source: Banco de México and INEGI.

Mexican Economy: Recent Performance and Outlook 21

Conclusions.

 Mexico has strong macroeconomic fundamentals.

 External conditions for this year seem more favorable.

 Monetary and fiscal policies might become less restrictive.

 There is widespread optimism among the general population.

Mexican Economy: Recent Performance and Outlook 22

 APPENDIX

INFORMACIÓN
CONFIDENCIAL
Estado: En proceso / Versión final
Unidad Administrativa:
Fecha de última actualización:
Fecha de impresión (si aplica):

Mexican Economy: Recent Performance and Outlook 23

Minimum wage relative to mean wage.

Minimum Wage Relative to Mean Wage, 2000-2019 /1

%
50

45

40

35

30

25

20

15

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

/1 Mean wages are obtained from IMSS data. Starting in 2019, the minimum wage in the northern border differs from that in the rest of the country. Thus, we take a weighted average between
the two regions for that year.
Source: Author’s own calculations, using data from Minimum Wage National Commission, INEGI and IMSS.

Mexican Economy: Recent Performance and Outlook 24

The output gap in Mexico has gone negative.

Total Output Gap Estimates 1/

% of potential output, s. a.
23 8

21 6
IGAE 2/
19 4

17 2

15 0
GDP
13 -2

11 -4
95% confidence interval 3/
9 -6

7 -8

5 -10
Q3-2019
3 -12
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019
s. a. / Seasonally adjusted data. 1/ Output gap estimated with a tail-corrected Hodrick-Prescott filter; see Banco de México (2009), “Inflation Report (April-June 2009)", p.74.
2/ Global Indicator of Economic Activity (IGAE, for its acronym in Spanish). 3/ Output gap confidence interval calculated with a method of unobserved components.
Source: Prepared by Banco de México with INEGI data.

Mexican Economy: Recent Performance and Outlook 25