We have turned cautiously optimistic regarding Mexico's growth outlook, raising our average real GDP growth forecast for 2012-2021 from 2.7% to 3.3%. This view is underpinned by our expectation for robust credit growth, which is likely to bolster consumer spending, and the increasing likelihood for greater energy sector reform under the next president. We believe Mexico's central bank retains an underlying fundamentally dovish bias, underpinned recently by concerns about growth in the facing of rising external headwinds as well as the stability of the country's external account position. However, with the passthrough impact of a weaker peso as well as high corn and poultry prices boosting inflation, we believe the bank may be forced to delay easing until 2013. Cartel activity will continue to weigh on growth for the foreseeable future, though we believe the situation is unlikely to deteriorate further.
Major Forecast Changes
After a strong Q112 and the election of business-friendly presidentelect Enrique Peña Nieto (who will assume office on December 1), which will likely drive stronger investment inflows, we are revising up our real GDP growth forecast from 3.4% to 3.8% in 2012. Investment will continue to rise in 2013. However, we believe growth will slow as a weaker external environment begins to weigh on Mexican consumer confidence.
We are forecasting growth of 3.4% in 2013. We have pushed back our call for a policy rate cut on the back of higher than anticipated inflation. We are forecasting the policy rate at 4.50% (from 4.00%) as of end-2012. We see potential for economic and security-related reforms in the wake of Mexico's July 1 presidential and legislative elections. However, we note that these changes may be less rapid than initially anticipated given that the Partido Revolucionario Institucional failed to win a majority in parlia ment.
Key Risks To Outlook
Inflation came in above the Banco de México's 2%-4% target band in June, mostly on the back of supply-side pressures including rising corn prices and the impact of the bird flu outbreak. If inflation remains above the bank's target band, we could see rising pressure on the monetary authorities to hike the policy rate.
Table of Contents
Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Reform In Mexico: Possible But Challenging
In the wake of Mexico's July 1 presidential and legislative election that returned the opposition Partido Revolucionario Institucional to
power, we highlight potential for some economic and security-related reforms
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Strengthening, But Challenges Remain
The next decade looks set to be challenging for Mexico owing to a weak security situation, high levels of income inequality and endemic
corruption
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Investment To Bolster Growth
In the wake of Mexico's July 1 presidential election, we are revising up our 2012 real GDP growth forecast, from 3 4% to 3 8%, as the
victory of business-friendly Enrique Peña Nieto bolsters investment
TABLE: GDP BY EXPENDITURE, CURRENT PRICES BREAKDOWN
Monetary policy
Pushing Back Rate Cut Call
We expect the central bank of Mexico to hold the policy rate at 4 50% in the coming quarters, representing a change to our previous
forecast which had called for 50 basis points worth of cuts by end-2012 While we believe the bank maintains a dovish bias, elevated
inflationary pressures imply little scope for monetary easing through the end of this year
TABLE: MONETARY POLICY
Balance Of Payments
External Accounts Still Vulnerable
Weaker external demand combined with structurally large income and services trade shortfalls will ensure Mexico's current account
remains in deficit, at US$7 6bn (0 6% of GDP) in 2012 and US$10 4bn (0 8%) in 2013
TABLE: CURRENT ACCOUNT
Fiscal Policy
On Target For Fiscal Consolidation, Barely
Mexico looks set to gradually narrow its fiscal deficit to 2 4% of GDP in 2012, from 2 5% last year While in Q112, the country's shortfall
came in substantially under the budget office's projections, we believe the coming quarters will see elevated expenditures and modest
revenue growth, capping the extent of the fiscal progress in 2012
TABLE: FISCAL POLICY
Currency Forecast
MXN: Moderating Our Bullish Outlook
The Mexican peso looks set for a period of weakness in the short term After rallying from MXN14 38/US$ to MXN13 32/US$ in recent
weeks, the unit struggled to push higher, retracing to reach MXN13 41/US$ at the time of writing With momentum indicators on the daily
chart beginning to head higher, we see potential for the unit to fall to trendline support at MXN13 68/US$
TABLE: EXCHANGE RATE
Industry News
Long Term Growth Expected For Banking Sector
Mexico's commercial banking sector is well placed for strong expansion in coming years on the back of robust consumer loan growth
TABLE: BANKING SECTOR ASSETS, % OF GDP
Chapter 3: 10-Year Forecast
The Mexican Economy To 2021
2012-2021: Reform To Bolster Growth
We believe Mexico looks well placed to enjoy sustained levels of economic expansion over the next decade, forecasting average real
GDP growth of 3 3% between 2012 and 2021, well above the average 2 0% annual growth recorded between 2001 and 2011 Up
until recently, we had held a fairly pessimistic view of Mexico's economy, highlighting that despite sound macroeconomic policies, the
government's inability to pass key structural reforms was likely to weigh on economic activity
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
Infrastructure
TABLE: BMI LEGAL FRAMEWORK RATING
TABLE: LABOUR FORCE QUALITY
Market Orientation
TABLE: LATIN AMERICA, ANNUAL FDI INFLOWS
TABLE: TRADE AND INVESTMENT RATINGS
TABLE: TOP EXPORT DESTINATIONS
Chapter 5: Key Sectors
Pharmaceuticals
TABLE: PHARMACEUTICAL SALES INDICATORS,2008-2016
TABLE: OTC MEDICINE SALES INDICATORS,BODY 12008-2016
TABLE: PRESCRIPTION DRUG SALES INDICATORS,BODY 12008-2016
TABLE: PATENTED DRUG MARKET INDICATORS, 2008-2016
Executive Summary
TABLE: TELECOMS SECTOR – MOBILE – HISTORICAL DATA & FORECASTS
TABLE: TELECOMS SECTOR – MOBILE ARPU (MXN) – HISTORICAL DATA & FORECASTS
TABLE: TELECOMS SECTOR – FIXED LINE – HISTORICAL DATA & FORECASTS
TABLE: TELECOMS SECTOR – INTERNET – HISTORICAL DATA & FORECASTS
Other Key Sectors
TABLE|: INFRASTRUCTURE SECTOR KEY INDICATORS
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS
TABLE: OIL AND GAS SECTOR KEY INDICATORS
TABLE: AUTOS SECTOR KEY INDICATORS
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS
TABLE: MEXICO FREIGHT KEY INDICATORS
Chapter 6: BMI Global Assumptions
Global Outlook
The Cycle Has Turned
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 49
