Mexico Macroeconomic Review (2013)
(Global Macro | Latinamerica) We perform a macroeconomic analysis of Mexico to identify the economic growth dynamic, inflation and possible threats to the economy during the 2013 fiscal year. As a result of our study, we conclude that 2013 will see a slight deceleration in the economic growth rate and a turnaround trend for 2014. We consider it is too early to know for sure if the newly elected government will be able to make significant economic reforms to boost the economic growth potential in the short run. However, we tend to think that they will be able to do so in the middle run. On the downside we identify 2 weaknesses: the low productivity levels and the drug-related violence effect on investment and local development.
|Real GDP (%, y/y)||3.0%||3.0%||2.9%||2.9%||2.9%||n/a|
|Real GDP (Bloomberg consensus)||3.0%||3.2%||3.4%||3.5%||3.6%||3.5%|
|Sovereign Debt (% of GDP)||n/a||n/a||n/a||n/a||n/a||n/a|
|CPI (%, y/y, avg) / Proxy for inflation||4.3%||3.8%||3.7%||3.6%||3.6%||n/a|
|Policy Rate (%, eop)||4.5||4.5||4.0||4.0||4.0||n/a|
|USD/MXN forex rate||n/a||12.89 ~ 13.01 (a.s.)||n/a||n/a||n/a||n/a|
Inflation and monetary policy
As it can be seen in the graphic, so far inflation is well above the central bank's target. The communications sector has seen a sharp inflation rate rise, now at 3.55%. Overall, inflation was 0.49% higher in February. Mobile and telecom related services experienced a 27.88% increase, which is currently the main driver of overall inflation. We belive that in order to reach a moderate inflation, the central bank (Banco de Mexico) would change the policy rate from 4.5 to 4.0 in the next months. This measure, combined with other fiscal measures targeting at economic growth, could help to control inflation in 2013Q3 and 2013Q4.
The telecom reforms in Mexico could actually make a signifcant change in the overall inflation, were they to be succesful. The telecommunication sector has been highly monopolized since its inception in the 20th century resulting in disproportional high prices for users and poor infrastructure. The downside is that previous telecom reform efforts have all failed due to the power that the monopoly enjoys. At the same time, there are different laws for different telecom sub sectors, creating complications and various legal holes in the system.
For more about this point: http://www.economonitor.com/blog/2013/02/telecom-reform-in-mexico-curren...
We forecast a 3.0% economic growth for 2013. This is 1% less than the official forecast by Banco de Mexico. The bank governor Agustin Carstens believes that Mexico will grow at 4.0%. To achieve this, he points out the controled inflation (which makes us believe more in the feasibility of a change in policy rate for 2013), and the creation of approximately 600,000 ~ 800,000 new jobs in the economy, thanks to the labor reforms.
Even if the official forecast becomes reality, this is still lower from the 4.4% year to year average that the economy experienced in 2010-2012 period. Thus, the Central Bank admits that there is a deceleration the economic growth rate. What we disagree about is in the implications and the intensity of such deceleration.
Our main reason is cyclical: we think that the 2010-2012 period was abnormal in the sense that the economy was returning to a steady potential growth rate after the 2008-2009 U.S. crisis. Therefore, the speed intensified. However, as the economy is closer to reach its natural growth rate, the economic growth rate is expected to gradually decrease.
The bottom line is that Mexico can benefit a lot from a better than expected U.S. recovery, through exports. Therefore, there is room for more growth in 2014. 2013 will, however, be a period of transition. The reforms in 2013 will help the economy to probably achieve a higher growth rate in 2014, but the effects will certainly not be immediate.
A key point is the labor reforms that have already been approved by the Congress and the enegy reforms that are currently being discussed. Considering that PEMEX, the state oil company, has been experiencing a loss in production (currently at 2.4 million barrels per day, approximately) for the past 8 years, there is a high probability that Mexico will soon become a net energy importer
The Tax Problem
Only 9.8% of GDP were collected in taxes in 2012 and the government is expected to collect 9.7% of GDP in 2013. This is one of the smallest percentages of GDP in taes in most countries in the OECD, since the average OECD country collects about a third of its GDP in public revenue. To complement the low tax contribution to GDP, the government has traditionally put the burden on PEMEX, causing the finances of the company to be messed. The reforms could help to reduce the tax burden of PEMEX, add efficiency to the economy, expand the sales tax and create a fairer system; thus, enhancing economic growth in the country. However, we find it difficult to asses whether the reforms will see light or not this year.
For more about this point, see: http://www.economonitor.com/blog/2013/02/mexicos-tax-reform-in-the-works...