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United

States

Mexico

Chamber

of

Commerce,

Los

Angeles,

CA,

November

15,

2013

Mexicosmonetarypolicyandeconomicoutlook

ManuelSnchez


2/29

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 2


3/29


Since the middle of 2012 the Mexican economy slowed,

and in 2Q13 output fell

3

RealGDP

Quarterlyandannualchange,%,s.a.

s.a./Seasonallyadjusted

Source:INEGI

8

6

4

2

0

2

4

6

8

6

5

4

3

2

1

0

1

2

3

Q1

2007

Q3 Q1

2008

Q3 Q1

2009

Q3 Q1

2010

Q3 Q1

2011

Q3 Q1

2012

Q3 Q1

2013

Quarterly

Annual(leftaxis)


4/29


The origin of the declining growth seems to have lied first in softer

external demand and then in a contraction of domestic investment

4

Realaggregatedemand

Quarterlychange,%,s.a.

s. a. / Seasonally adjusted

Source: INEGI

3

2

1

0

1

2

3

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2

Exportsofgoodsandservices

Investment


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As for investment, rising purchases of machinery and equipment

have not compensated for the fall in construction investment

6

Totalfixedinvestment2008=100,s.a.

s. a. / Seasonally adjusted and trend

Source: INEGI

70

80

90

100

110

120

130

Jan

07

May

07

Sep

07

Jan

08

May

08

Sep

08

Jan

09

May

09

Sep

09

Jan

10

May

10

Sep

10

Jan

11

May

11

Sep

11

Jan

12

May

12

Sep

12

Jan

13

May

13

Construction

Machineryandequipment


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which mainly reflects lower expenditures in public works

and private housing building

7

Realconstructionoutput2008=100,s.a.

s. a. / Seasonally adjusted and trend. The seasonal adjustment and the trend were prepared by Banco de Mxico with

data from INEGI

Source: INEGI

40

60

80

100

120

140

Jan

07

May

07

Sep

07

Jan

08

May

08

Sep

08

Jan

09

May

09

Sep

09

Jan

10

May

10

Sep

10

Jan

11

May

11

Sep

11

Jan

12

May

12

Sep

12

Jan

13

May

13

Public

Privatehousing


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These shocks have weakened labor market conditions

8

38,000

39,000

40,000

41,000

42,000

43,000

44,000

45,000

46,000

47,000

48,000

80

85

90

95

100

105

Q1

2007

Q3 Q1

2008

Q3 Q1

2009

Q3 Q1

2010

Q3 Q1

2011

Q3 Q1

2012

Q3 Q1

2013

Q3

Realwagebill

Employees(left

axis)

Realwagebillandemployment

2008=100,thousands

Source: Own calculations with data from INEGI


9/29


Lower consumer confidence has coincided with the first

decline of consumption during the postcrisis period

9

Retailsalesandconsumerconfidence2008=100,s.a.

90

95

100

105

110

80

90

100

110

120

Jan

07

May

07

Sep

07

Jan

08

May

08

Sep

08

Jan

09

May

09

Sep

09

Jan

10

May

10

Sep

10

Jan

11

May

11

Sep

11

Jan

12

May

12

Sep

12

Jan

13

May

13

Sep

13

Consumerconfidence

Retailsales(leftaxis)

s. a. / Seasonally adjusted and trend

Source: INEGI and Banco de Mxico


10/29

Economic activity decelerated in spite of extraordinarily

favorable financial conditions in the first part of the year

10Mexicosmonetarypolicyandeconomicoutlook

Source: Proveedor Integral de Precios (PiP)

Yieldcurve

%

3

4

5

6

7

8

1

day

1

month

3

month

6

month

1

year

3

year

5

year

7

year

10

year

20

year

30

year

December30,2011

December31,2012

May10,2013


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11

The financial bonanza was shared with other emerging

markets

Emergingeconomies:accumulatedcapitalinflows1

BillionU.S.dollars

1/ Equity and debt

Source: Emerging Portfolio Fund Research

20

0

20

40

60

80

100

1 3 5 7 911

13

15

17

19

21

23

25

27

29

31

33

35

37

39

41

43

45

47

49

51

2012

2013

May



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13/29

Mexico has been one of the preferred destinations of

portfolio capital flows


Emergingeconomies:foreignholdingsoflocalgovernmentbonds1

Percentageoftotalgovernmentsecuritiesincirculation

1/Federalgovernmentdebtissuedonthedomesticmarket,inlocalcurrency

Source:Selectedcountries centralbanksandfinanceministries

0

10

20

30

40

50

60

70

Q4

2010

Q1

2011

Q2 Q3 Q4 Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3

NewZealand

Peru

Malaysia

Mexico

Poland

Turkey

Thailand

Korea

Brazil


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Since May, market anticipation of tapering translated into

lower asset prices for emerging markets, including Mexico


Source: Proveedor Integral de Precios (PiP)

Yieldcurve

%

3

4

5

6

7

8

1

day

1

month

3

month

6

month

1

year

3

year

5

year

7

year

10

year

20

year

30

year

May10,2013

September18,2013

November14,2013


15/29

15

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

16

107

108

109

110

111

130

135

140

145

Apr13

May

13

Jun

13

Jul13

Aug

13

Sep

13

Dollarvalueofexports

Production(leftaxis)

Manufacturing2008=100,s.a.


Source: Banco de Mxico and INEGI

93

94

Jun

13

Jul13

Aug

13

Constructioninvestment2008=100,s.a.


Source: INEGI

Servicesproduction2008=100,s.a.


Source: Mexican National Accounts System (SCNM), INEGI

112

113

114

115

Apr13

May

13

Jun

13

Jul13

Aug

13

GlobalEconomic

Activity

Indicator

2008=100,s.a.


Source: Mexican National Accounts System (SCNM), INEGI

108

109

110

Apr13

May

13

Jun

13

Jul13

Aug

13


17/29

17

The 2014 fiscal package will impact inflation, economic

activity, and the use of financial resources


Estimatedeffectsoffiscalpackagefor2014

Effects

Annualinflation(endofyear) 40basispoints

GDP

growth 0.2

percentage

points

Increaseinpublicsectorborrowingrequirements 1.2percentagepointsofGDP

Source:BancodeMxico(2013),InformesobrelaInflacinJulio Septiembre2013,November


18/29

18

The economy is expected to recover gradually in 2014 and

2015

GDPforecastAnnualgrowth,%

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 LatinAmericanConsensus Forecasts, October


0.9

3.0 3.2

1.41.7

4.0

4.5

4.2

5.2

1.2

3.4

4.0

0

1

2

3

4

5

6BanxicoSurvey1

0.5

2.5

3.4

BanxicoInflationReport

2013 2014 2015


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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

Mexicosmonetarypolicyandeconomicoutlook 19


20/29

During the last decade, monetary policy has been focused

on achieving a 3 percent permanent inflation target

Monetarypolicyinterestrate1

Annual,%


1 / Since January 21, 2008

Source: Banco de Mxico

20

3

4

5

6

7

8

9

Jan

08

May

08

Sep

08

Jan

09

May

09

Sep

09

Jan

10

May

10

Sep

10

Jan

11

May

11

Sep

11

Jan

12

May

12

Sep

12

Jan

13

May

13

Sep

13


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Annual headline inflation has consistently remained below

historical levels

Annualheadlineinflation

%

0

3

6

9

12

15

18

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source:INEGI


22/29

22

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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24

Source:BancodeMxico

Inflationexpectations%

The persistent gap between medium and longterm

inflation expectations and the target remains a challenge

0

1

2

3

4

5

6

7

Jan

11

Mar

11

May

11

Jul11

Sep

11

Nov

11

Jan

12

Mar

12

May

12

Jul12

Sep

12

Nov

12

Jan

13

Mar

13

May

13

Jul13

Sep

13

Next4years Next

58years



25/29

25

Shortterminflationrisksshouldcontinuetobemonitored


Secondround effects from

Higher than expected impact from tax changes

Higher financial volatility

Upward pressures from noncore price components


26/29


Mexico should tackle the most important problem that has

inhibited longterm economic growth

Mexico:growthaccounting1

Averageannualchange,%

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

19501980 19802012

GDPper

capita 3.4 0.8

Totalfactorproductivity 2.8 0.6

Capitalcontribution 0.6 0.7

Laborcontribution 0.0 0.6

Laborintensity 0.2 0.1

Proportionof

working

age

population

0.2 0.7


27/29

27

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 thequality 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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28

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



29/29

29Mejoranlasperspectivaseconmicasmundiales

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